Posted on Monday, November 11, 2024

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by Outside Contributor

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Inflation has pulverized Americans’ finances over the last four years, and a new study shows that’s especially true for the nation’s seniors, whose retirement accounts have been walloped.

The losses have been so severe that would-be retirees need to work an extra six years on average before they can hang up their work boots—and they can blame Washington for this financial disaster.

Much of the damage to senior’s retirement accounts has been hidden by the stock market rally of the last several years. The S&P 500 increased 45% from the first quarter of 2021 through the third quarter of this year, but almost half of that was just inflation driving stock prices higher, not an increase in real value.

The inflation-adjusted increase over that same period is 22%. Still, that’s not a bad rate of return. The problem is that people don’t put all their retirement savings into the stock market, especially as they get closer to retirement. They rely more on fixed income assets, like bonds, which have been decimated recently.

The rapid rise in both inflation and interest rates has been a one-two punch to bond returns, which have had their worst four-year run in at least a century. Ironically, seniors who thought they were being responsible by shifting their retirement savings into bonds as they got older ended up taking the worst losses.

Although positive stock returns have technically countered negative bond returns over the last three and a half years, that doesn’t factor in the lost purchasing power of retirement savings due to inflation.

Because prices have increased roughly 20% in less than four years, everyone’s dollar doesn’t go as far as it used to. Now it’s only worth 80 cents. That’s forcing seniors to reevaluate their retirement plans or risk outliving their savings.

If a person was planning on retiring with a net worth of $1 million, they now need to add almost $200,000 to their savings if they want the same standard of living they previously planned on enjoying. The typical senior nearing retirement will now have to work longer to rebuild the lost value in his or her nest egg.

Sadly, many people aren’t aware of this problem because they confuse dollar amounts with fixed value. The worst inflation in four decades is a stark reminder that the dollar is not guaranteed to hold its value at all. For example, the average 401(k) balance has risen more than $11,000 over the last three and a half years, but it’s worth $12,000 less because of higher prices.

People with pension plans are in no better shape. In fact, inflation is driving many funds to insolvency. Although total pension plan balances increased about $2.3 trillion over the last three and a half years, their inflation-adjusted value fell by $2.5 trillion, or more than 9%.

Pension plans that pay out defined benefits to retirees with a cost-of-living adjustment are now shelling out more benefits than previously forecasted but have fewer assets. That’s the fast track to bankruptcy and the dissolution of the pension plan, leaving young people who paid into the fund nothing to show for it.

It did not have to be this way, but reckless politicians in Washington created the perfect storm that sunk senior’s retirement savings.

The big spenders in Congress and the Biden-Harris administration spent the better part of the last four years spending trillion of dollars the nation didn’t have, while the Federal Reserve created the money to cover all that excess spending. That devalued the dollar and spawned 40-year-high inflation, which in turn drove up interest rates—also at the fastest pace in 40 years.

Until the profligate spending is reined up, people’s life savings will continue being pummeled by violent changes in prices and interest rates. Sadly, there’s no relief in sight right now as the Treasury just announced they anticipate borrowing more than $800 billion in the first three months of 2025 alone.

Seniors should be furious that they’re having to work years longer to foot the bill for Washington’s financial dissipation.

EJ Antoni is a public finance economist and the Richard F. Aster research fellow in The Heritage Foundation’s Grover M. Hermann Center for the Federal Budget.

Reprinted with Permission from The Daily Signal – By EJ Antoni

The opinions expressed by columnists are their own and do not necessarily represent the views of AMAC or AMAC Action.