Baby Boomers vs Generation X

Sometimes it seems like saving for retirement is an impossible mission. We are constantly being hit with bad economic/investment news such as " social security to run out by 2037" or "stocks take a nosedive as unemployment rises" or "still no recovery in housing". This got me wondering, how different (if at all) saving for retirement has been for generation X than it has been for the baby boomers?

Though dates seem to differ from website to website, generally baby boomers were born from 1946 to 1965 and generation Xers from 1966 to 1982.

Since the stock market is typically a large part of a retirement portfolio, I first looked at the performance of the S&P 500 from 1965 to the present.


If we make the assumption that most people do not really start saving for retirement until they are at least 25 then the youngest boomer doesn't start saving till 1971 and the oldest until 1990. During this time period stocks were mostly flat from 1971 to 1981 then more than doubled from 1981 to 1990. Also, this is a period of little volatility. Of course there are small rises and dips but for the most part things are fairly calm.

Using the same assumption above, the first gen-Xer doesn't start saving until 1991 and the last one until 2007. In contrast to the period where the boomers were entering the market, here we see great volatility, as the S&P sharply increases and sharply decreases. It really does look like a roller coaster ride.

So far, the boomers have really made out a lot better than the Xers, especially the older ones. The older boomers who started investing in the 1970's had over two decades to buy stocks at consistently lower prices between 100 to 450. In contrast, the first Xers began saving for retirement in 1991. From 1991 to 2000 the S&P moved from about 340 to just over 1500. This sounds good but remember that Xers are just starting to save for retirement during this period so each time they make a contribution to their retirement accounts, they are buying at higher prices. In 2000 the tech bubble burst and the S&P drops like a lead balloon for two years down to almost 800. This two year period was of course a good time to buy but the psychological effect of the sharp prolonged drop caused many people to temporarily stop contributing to their retirement accounts (Dalbar QAIB 2004). In 2003 the S&P again began a steep five year climb reaching over 1500 only to have it nosedive down to below 800 over the next two years due to the housing crisis. We are once again making another climb back up with the index currently at 1330.

To sum it up many boomers were able to build up their portfolios in their early years due to a long period of market stability with stocks at relatively low prices. Xers started contributing during a long period of volatility, often buying at highs and pulling back on retirement contributions during declines (loss aversion).

For better or worse, another major part of many retirement portfolios is our homes. To analyze this I used the Case-Shiller index.



I got the graph here

According to this article, first time home buyers are on average 33 years old. Perhaps boomers bought their first house at a younger age so lets just use 30 years old to keep it simple. Using the same analysis as above we find that the first boomers start buying houses around 1976 when the case-shiller was at about 108. For the next twenty years the index moves up and down moderately somewhere between 108 to 125 before it starts a very steep climb around 1996.


1996 is also the year that the youngest members of generation X begin buying homes.

Again, it looks to me as if the boomers have made out much better that the Xers. Most boomers bought their first homes some time during a twenty year period when prices where relatively low and they have had a great deal of time to pay down or off their mortgages. In contrast, over half the genXers bought their first homes during the housing boom between 1996 and 2006. This means that many of them were entering the market when prices were incredibly high. Since during the early years of a 30 year mortgage most of your payment is going toward interest, these genXers had very little equity in their homes when the housing bubble burst in 2006. This left many of them in a situation where they owed more on their homes than they were worth. Of course the oldest genXers that are just now entering the market should fair much better as many believe we are at or near the bottom.

In summary, most boomers were able to buy low and then enjoyed good economic times where they were able to build up equity while a majority of Xers bought high and now have little to no home equity.

On top of the difficulties discussed above is the fact that social security doesn't look so secure for us, but that is a topic I have already delved into with my federal debt entries. So the future isn't looking too bright for genX. What do you think, is it time to panic yet?

Argument From Ignorance

The argument from ignorance (also known as ad ignorantium or appeal to ignorance) is the argument that a proposition is true because it has not yet been proven false or that it is false because it has not yet been proven true. The basic form of the argument is either:

P1. Statement A is not known (proved) to be true
C. Therefore it is false

or

P1. Statement A is not know (proved) to be false
C. Therefore it is true

For example:

 "We do not know that there is life in the universe outside of that found on earth. Therefore, it does not exist."

This example can be seen as a fallacy of irrelevance in that the premise refers to our lack of knowledge which does not provide support for the substantive conclusion that there is no life outside of earth. The fact that we do not know one thing is not a relevant reason for believing another.

Yet there are occasions when a failure to find evidence can be seen as significant evidence in itself. For instance, if you were to search carefully in a small park for a bulldozer and fail to find one, you could argue:

 "There is no evidence that there is a bulldozer in the park, therefore there is no bulldozer in the park."

The difference between the life outside of earth example and the bulldozer example has to do with what is sometimes called negative evidence. Negative evidence (or evidence of absence) is evidence that can be used to infer the non-existence or non-presence of something. The difference between the fallacious use of arguments from ignorance (an absence of evidence) and negative evidence (evidence of absence) can be nuanced and at times difficult to establish but in general it has to do with whether or not a careful, thorough search has been made. A bulldozer is a conspicuous object you'd expect to easily detect in a small city park if you conducted a search. The negative evidence of having conducted the search and not finding the bulldozer would be considered strong evidence that it is not there.




A Practical Study of Argument
Wikipedia: Evidence of absence
The Appeal to Ignorance or Argument Ad Ignorantiam

The Unemployment Problem

I re-read a NY Times article I came across sometime ago regarding Denmark Shrinking its Unemployment Benefits. Denmark lowered it's unemployment benefits period from four years down to two years after studies indicated that many people will wait until just before benefits run out before getting a job. The green line on the graph on the left shows that during the four year period from 2005 - 2007, some people got jobs within the first few months of being unemployed but then the percentage drops and stays flat for the next few years. Then just before and just after the fourth year, when benefits run out, there is a huge spike in the number of people finding jobs. The red line shows a similar pattern from a study back in 1998 when Denmark's unemployment benefits period was five years. This seems to confirm what anecdotally I have observed of the behavior of friends and acquaintances that were on unemployment. Some of them found jobs shortly after being laid off but the ones that didn't tended to only find jobs either just before their benefits expired or just afterwards.

I can think of a number of possible reasons why this pattern exists. First, many people on unemployment tend to procrastinate. Some of these people use the time as a long paid vacation. Some are mentally tired of trying to find a job and become discouraged. Others take a real hit to their self-esteem and spiral into a state of depressed non-action.

I suspect another reason is that people do not want to take jobs which they perceive is be below them. It might be a position which they feel is beneath them, a job which they foresee will be dissatisfying, or a wage which is lower than what they made in their prior job. The incentive, especially in the earlier part of the benefit period, would be to pass up these jobs, holding out for something better. Only when the benefits are about to expire do they accept the less than ideal jobs.

So how long should the unemployment benefits period be? How should the program be structured to get people back to work as quickly as possible? I really dont have any answers and only brought it up because I find it to be an interesting puzzle. What do you think?

Reason tv's Nanny of the month

I love vacations. It is the one time during the year I feel that I can truly relax. Cancun is beautiful as always. Frolicking on the beach, laying out by the pool, shopping, eating, catamaran, catching up on my reading, and hanging out with my girl. Doesn't get much better than this. Since the hotel has an Internet connection in the lobby, it is also a chance for me to do a little blogging. So with Jennifer sleeping upstairs and my trusty iPad in hand, here we go.

Being somewhat libertarian minded, I really enjoy reason tv. They do a short piece they call "Nanny of the month" where they showcase various government officials proposing silly things to keep you from being able to make you own decisions. Below are a few that I pulled from YouTube which I thought were pretty entertaining:

Harry Reid vs Prostitution

Super nanny Carl Kruger’s hatred of iPods

Loser control freaks on city council vs live entertainment?

Idiot police chief vs flags which could be used as deadly weapons?

San Francisco food cops

Veggie haters

Commissioner of human rights vs ladies nights

Major moron NY State Representative proposes BAN on Salt

Financial Crisis...1789

I was listening to a history audio book the other day which was discussing the conditions in France which preceded the French Revolution. Some of the major points included political conflicts, antagonism between the aristocracy and the rising bourgeoisie, and the spread of enlightenment philosophies. But the one I found most interesting was the economic situation. Due to the lavish spending habits of the monarchy and a series of wars ending with the seven years war and the American revolution, the french economy was in terrible shape. To fund it's wasteful spending, the French accumulated massive amounts of debt, most of it borrowed from noblemen at high interest rates. By 1785, France teetered on the verge of bankruptcy as they found neither noblemen nor other nations would lend them any further amounts. To make matters worse, the government was already taxing its people to the max. (When I say people, I should point out that I am referring to the peasants, middle class and upper middle class. The wealthiest part of French society, the nobility and clergy, were legally exempt from paying tax.) By 1789 the country was effectively bankrupt, leading to the meeting of the Estates General and then, revolution.

I think there are some interesting parallels between the situation preceding the French Revolution and the United States today. Record high levels of debt and a series of wars have left us in a fragile economic situation. If history has taught us anything it is that economic chaos can lead to radical responses by the populace. And these radical responses often turn out quite badly.

Guilt by Association as an Ad Hominem

Just saw this one used on facebook. Guilt by Association is type of ad hominem which attacks a person's argument by comparing it's similarity to the views of other (generally disfavored) people or groups. The intention of the person using this fallacy is to have the argument rejected due to this association instead of facing the actual argument.

The basic format can be seen as; Person A argues for position 1. Unsavory person (or group)B also argues for position 1. Therefore position 1 must be wrong. Here is a silly example which makes the fallacy easy to grasp: Steve says "I believe a vegetarian diet is the healthiest diet". John replies "Vegetarianism is wrong, you know that Hitler was a vegetarian". Another example: "Stalin was an athiest. Stallin killed millions of people. Therefore athiest are evil".

This is a powerful and persuasive argument in that people do not want to be associated with those they do not like. The more disreputable the person being compared to is, the more psychologically powerful the argument. For this reason, it is important to be able to identify its use in order to avoid its influence.

Idiocracy

I came across this clip from the movie Idiocracy. I had seen bits and pieces of it on cable but had missed the intro. The movie is essentially a satire about how the stupid people of the world are outbreading the intelligent ones, leading to an eventual future earth populated entirely by morons. Though the clip is hillarious, it is also scary proposition. Though I admit I have considered this possibility in the past, I haven't done any research to see if it truly has any merits. Perhaps someone can point me in the direction of any legitimate research on the topic. Anyway, I just wanted to throw it out.