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OPINION: Americans deluding themselves about retiring

By Barry Ritholtz

A recent Gallup poll asked working Americans what they expected in retirement. “Half of Americans think they will have enough money to live comfortably after they retire.” This is the first time since before the financial crisis that a majority of Americans have felt this way.

The poll is very revealing about both investing psychology and consumer sentiment. It contains good news and bad news.

Let’s start with the good news: Since the March 2009 lows in the equity market, and the nadir in the economic data, there has been a painstakingly slow improvement in psychology across the country. We have seen fi ve years of gradual increases in employment, consumer spending, construction, exports and services. Although no one would say the U.S. economy in having a boom — we just had first-quarter gross domestic product that showed no growth — the gains have been impossible to miss. Things are getting better, albeit at a much slower pace than we would prefer. This is the nature of post-credit-crisis recoveries, as Carmen M. Reinhart and Kenneth Rogoff showed in “This Time Is Different: Eight Centuries of Financial Folly.”

I am not a big believer in what some have described as the Confidence Fairy approach to managing economies. If only we fi x the sentiment, goes this fl awed and backward-looking thesis, then everything will be OK. It is a classic case of confusing correlation with causation.

The slow shift in sentiment is a positive for the intermediate-term economic and market psychology.

The bad news is that America is still delusional as far as our long-term retirement issues go.

Most people aren’t saving enough to pay for retirement on their own. Social Security is funded for the next few decades, but has an anticipated shortfall after that. Unless we see significant demographic changes — another baby boom or a huge wave of immigration — some hard choices must be made. The debate includes means-testing, raising the retirement age or increasing the cap on contributions to the retirement system. The amount of gross wages that are taxed for Social Security is $117,000 this year. Keeping the system solvent at present levels probably will involve much heftier contributions. Don’t be surprised if that cap rises by $100,000 or more during the next 20 years.

We haven’t even touched on the costs of long-term medical care for retirees. It is high, and likely to get higher as boomers age.

— Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.