|
|
The Housing Crash and the End of Granny Bashing
By Dean Baker,
talkingpointsmemo.com
June
24, 2008
Today, David Walker, the former Comptroller General of the Government Accountability Office, is testifying before Congress about the need to clamp down on entitlements (i.e. Social Security, Medicare, and Medicaid). As everyone should know by now, the focus on "entitlements" is part of a dishonest effort to transform the country's health care crisis into a demographic problem.
Health care costs in the United States are out of control. We already pay more than twice as much per person as people in other wealthy controls and get worse outcomes. This gap is projected to expand in the decades ahead as our costs are projected to keep rising relative to those of other countries. Because we pay for close to half of health care through the public sector (primarily Medicare and Medicaid), the health care crisis, if not addressed, will create a budget crisis. We then lump Medicare and Medicaid in with Social Security, and voila!!! We have an entitlement crisis.
Today, we also received new data on house prices, with the Case-Shiller index (the best available house price index) showing that real house prices have been falling at 26 percent annual rate over the last quarter and are now down by 19 percent over the last year.
While David Walker's testimony on entitlements and plunging house prices may seem unrelated, the latter will soon make the former completely irrelevant.
The basic story is actually very straightforward. The granny-bashers are arguing that the country is paying more than it can afford to support retirees. Therefore they want to cut Social Security and Medicare, the main benefits that these retirees receive.
However, the implicit assumption behind these cuts is that retirees will have enough money to support themselves, even if these programs are cut. While this would not have been especially true even before the collapse of the housing bubble (Social Security already provided more than half of the income for two-thirds of the people over age 62), it is certainly not true in the wake of the housing crash.
The crash of the housing bubble has already destroyed almost $5 trillion in housing bubble wealth, more than $60,000 per homeowner. As a result, the generation of workers who are approaching retirement will have almost nothing to support themselves in retirement other than their Social Security.
Working from the Federal Reserve Board's Survey of Consumer Finance, we found that if real house prices drop 10 percent from their March 2008 level, then the a typical family in the age group from 45 to 54, will have just $98,400 in wealth in 2009, counting the equity in their home. This is a falloff of 34.6 percent from 2004. (This number does not include wealth in defined benefit pensions.) Since the median income for this group is over $62,000, this will not go far toward maintaining living standards in retirement.
The basic problem is twofold. When these families saw their houses exploding in value, they didn't think they had to save. They assumed that house prices would just keep rising.
The other problem of course is that house prices not only didn't rise, they collapsed. This collapse was entirely predictably, and those who were concerned about the country's long-term financial situation should have been out in the forefront warning of the dangers posed by an $8 trillion housing bubble.
More Information on US Health Issues
|
|
