The global economy continues to struggle under the weight of slow growth, a weak housing market, and high unemployment.
Not only that, the chances of a repeat recession have grown substantially in 2011, affecting how people plan for their retirement, a CUNA Mutual Group retirement expert told Online Discovery Conference attendees Tuesday.
Scott Knapp, CUNA Mutual Group’s director of investment strategy, said the economy is still struggling because of the type of recession we’re recovering from: a debt deflation spiral similar to the Great Depression.
“This happens when public and private debt reaches a bubble level,” he said. “Then credit gets choked off in the financial system and that leads to a credit crisis and a rapidly slowing economy. It’s by far the worst category of recession and is the hardest to exit.”
The only remedy for a debt deflation spiral is time, so our patience will be tested for an extended period as excess debt gets paid down.
The Federal Reserve believes recovery will be slow as indicated by its warning that interest rates will be kept low until 2013. “Translation: Don’t except any meaningful growth for the next two years,” Knapp said.
As price inflation outstrips wages, consumers are moving backward—but corporate profits are excellent, Knapp added. That’s good for everyone because it supports the overall economy.
The financial crisis, however, has taken its toll on retirement planning. According to a 2008 Employee Benefit Research Institute survey, almost four in 10 workers said they will retire after age 70. Plus, only 20% of current retirees were very confident about their retirement security.
“The U.S. doesn’t lack a willingness to provide for baby boomers in retirement, but it doesn’t have capacity to live up to all the promises that have already been made,” Knapp said. “As a result, benefits are currently funded through issuance of debt, and that’s not sustainable. Having modest expectations about the government’s role in providing retirement security is prudent. Those preparing for retirement must take full control of their future circumstances.”
Total lifecycle planning and outcome-based strategies are taking the lead when preparing for retirement.
“Having enough assets accumulated at retirement isn’t enough,” Knapp advised. “Pension-like benefits must be also available during the post-retirement income phase, even from 401(k) plans. The industry needs to innovate in the post-crisis era, and achievement of retirement security must become less dependent on investment returns.”