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Author: Subject: FEDs low interest screws seniors

Sublime Peach





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  posted on 4/4/2011 at 09:30 AM
Fed's Low Interest Rates Crack Retirees' Nest Egg
By MARK WHITEHOUSE

http://online.wsj.com/article/SB10001424052748703410604576216830941163492.h tml?mod=WSJ_hp_MIDDLENexttoWhatsNewsForth

PORT CHARLOTTE, Fla.—Forrest Yeager, a 91-year-old resident of this seaside community, had been counting on his retirement savings to last until he died. The odds are moving against him.

With short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.

"It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it."

Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.

A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.

Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.

In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003.

WSJ's Mark Whitehouse explains how low interest rates have meant big profits for banks, they are hurting small investors, including seniors who are seeing their cash earn minimal interest.

A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.

Most economists agree that the Fed's interest-rate policies, together with other measures, have helped avert a much deeper economic slump. Still, the situation for savers has become progressively worse since the Fed first lowered its interest-rate target close to zero in late 2008.

As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.
[NESTEGG_p1]

"Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee. "That state of affairs is not sustainable for a long period of time."

The pain inflicted on savers could have political repercussions. Retirees are among the country's most active voters, with the power to influence a wide range of issues, such as who will bear the burden of fixing the federal government's finances and whether politicians should rein in the Fed.

Over the past few years, seniors have taken a conservative turn: In the 2010 elections, Republican congressional candidates attracted 59% of the over-65 vote, compared to 48% in 2008, according to exit polls—a larger shift than that seen among the general populace.

To be sure, many retirees have no savings at all or don't recognize the extent to which interest rates affect them. The subject isn't at the top of their list of concerns, which include health-care costs and Social Security benefits, says David Certner, legislative policy director at the AARP. Still, he says, "we hear a lot of complaints from people who were counting on a certain return from their fixed-income investments."

Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts. Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946—except for 2009, when people actually pulled money out.

By contrast, the Commerce Department's broader measure of personal saving has risen, to 5.8% of disposable income in 2010 from a low point of 1.4% in 2005. That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings. For example, paying down a credit card with a 20% interest rate is a better way to save money than taking out a bank CD yielding 1%. But defaults, rather than saving, have driven much of the decrease in debt.

The financial strain is acute here in Port Charlotte and neighboring Punta Gorda. Located on Florida's southern Gulf Coast, the area has the nation's highest concentration of residents aged over 65. They live in disparate circumstances, from trailer parks and low-income housing to high-end homes in Punta Gorda Isles, a waterfront community on a point south of Charlotte Harbor.

Among the Isles' relatively affluent residents, low interest rates present more of an annoyance than a hardship. But many fret about their nest eggs, and some are frustrated with what they see as policy makers' failure to appreciate the costs of stimulus efforts, even if they agree that those efforts are necessary.

"It makes you kind of feel like the forgotten generation," says Roger Cohen, a 66-year-old who retired to the Isles from Boston, where he headed a national coffee-service company. He says he supports the Fed's efforts to stimulate the economy by lowering interest rates, but "you have a lot of folks who feel there's a lack of fairness."

John Lehman, a 70-year-old former hardware entrepreneur who lives on the other side of the golf course from Mr. Cohen, has less sympathy for what he calls "those idiots in Washington, D.C." He says he's keeping about 80% of his considerable investments in stocks, despite the shock he suffered during the financial crisis. He hopes his returns in equities will allow him to live without dipping into his capital.

"That's why most of us are in the stock market, because there's no place else to go," he says, noting that he would happily move into safer CDs if he could get a better rate. "I hope my assets don't run out before I die."

Mr. Lehman's taste for stocks goes against the traditional advice of financial planners, who urge older Americans to keep a majority of their assets in relatively safe, fixed-income investments. But more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele.

"The fear is palpable at this point in their lives," he says. "Given the low level of interest rates, you're hard-pressed to tell someone to get into bonds or 10-year CDs."

To stay on track, even the wealthy are cutting back on some luxuries, such as golf-club memberships. John Benande, a board member at the St. Andrews South Golf Club in the Isles, said the club has scrambled to attract new members as the number of people quitting each year has increased sharply. The club charges an annual membership fee of about $4,000 for families.

"You do spend money differently, even if you have it," he says.

Some people in the Isles are in deeper trouble, says Marianne Principato, manager of the Port Charlotte office of Consumer Debt Counseling Inc. In some cases, she says, retirees took out mortgages and ran up credit-card debt on the assumption that their interest income would help cover the payments. But then the payments on the debts went up, and their interest income fell.

"They're losing their investment income precisely at the time when they need it most," she says, noting that the area's older people tend to hide their troubles as long as they can. "People are very prideful. It's small-town stuff."

The Cultural Center of Charlotte County, a sprawling, collection of buildings nestled among the hospitals and housing complexes of central Port Charlotte, offers a picture of how the less fortunate are faring.

The nonprofit center, which includes a cafeteria, gym, theater, thrift shop and space for everything from income-tax preparation to crazy-hat bingo, gave refuge to hundreds when the area suffered a direct hit from Hurricane Charlie in 2004. Now, its 50-cent coffees and $2 breakfasts are a lifeline for local seniors trying to get by.

Donna Barrett, the center's marketing manager, says traffic keeps increasing as more people find themselves short of money. In January and February, revenue at the cafeteria was up about 15% from the same period last year.

Following a recent investment seminar at the center, Jim and Eileen Keller, a couple in their mid-60s, reviewed their finances. They had moved to the Port Charlotte area in search of a better lifestyle after both took early retirement from a Michigan phone company. Lately, their financial prospects have dimmed.

"I'm scared to death," says Ms. Keller. "At one point we thought we'd have a little money to leave our kids. That ain't gonna happen."

The couple's savings took a hit in the stock-market crash. And unless they can improve the return on their remaining $200,000, they're afraid they'll have to rely solely on Social Security.

Ms. Keller says they've been cutting their expenses as much as they can. She shops at the cultural center's thrift shop instead of department stores. She tries not to spend more than $20 on any single quilting project, as opposed to the hundreds of dollars many of her fellow quilters can spare. The couple avoids going to the movies.

"It bothers me, because we did all the right things," she says, noting that their $7,500 bank account paid $4.84 in interest last year. "We weren't frivolous. We saved our money. And still we get hit like this."

Later that day, Mr. Yeager was tucking into lunch at the cafeteria, where he eats about three times a week. Born and raised in Indiana, he says he served in the signal corps under General George S. Patton in World War II, and then spent 25 years working at Eastern Airlines in Miami, mostly as an airplane cleaner.

He says he retired in 1982 with ample savings, but he and his wife, Vivian, "lost our butt" in the stock-market crash of 1987. After that, they stashed their savings mainly in bank CDs, which yielded as much as 7% prior to the financial crisis. His wife died of a heart attack shortly after the 2004 hurricane.

Mr. Yeager says he's still betting on dying before his money runs out. He and a neighbor are planning a trip to Las Vegas in May.

"I'm too old to work," he says. "I don't think I'm going to make it that far anyhow."

 

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True Peach



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  posted on 4/4/2011 at 09:47 AM
Forrest should have bought silver.

I don't think I'll be worrying about interest rates when I'm 91.

 

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  posted on 4/4/2011 at 10:27 AM
quote:
Forrest should have bought silver.


Yes he should have. Up 233% in two years. He wouldn't be in the spot he is in now if he had.

But you can get that kind of return on practically anything, right?








[Edited on 4/4/2011 by jerryphilbob]

 

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  posted on 4/4/2011 at 11:01 AM
Seems some are missing the point here. Sure, silver would have been a good investment but there are people who did everything right and then the rules changed on them. I cashed out about 60K in stock and the broker was going to see what it would earn on a CD for six months.....about $20. Someone relying on their interest or dividends to survive is just screwed these days and then the politicians are talking about taking on social security. Why don't they just send the old people packs of poisoned koolaid and get rid of them quickly instead of dragging out their misery.

 

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  posted on 4/4/2011 at 11:09 AM
quote:
Seems some are missing the point here. Sure, silver would have been a good investment but there are people who did everything right and then the rules changed on them. I cashed out about 60K in stock and the broker was going to see what it would earn on a CD for six months.....about $20. Someone relying on their interest or dividends to survive is just screwed these days and then the politicians are talking about taking on social security. Why don't they just send the old people packs of poisoned koolaid and get rid of them quickly instead of dragging out their misery.


Death panels?

 

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  posted on 4/4/2011 at 11:11 AM
quote:
Someone relying on their interest or dividends to survive is just screwed these days and then the politicians are talking about taking on social security. Why don't they just send the old people packs of poisoned koolaid and get rid of them quickly instead of dragging out their misery.

It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future. Any changes to social security will be phased where they don't dramatically affect those who are already at or near retirement age, but if the younger generations don't plan for their own financial futures they'll be in a world of hurt. There's been a cultural shift. it's not just social security, it's also company pension plans, medicare, and other social programs. But on the other hand, by taking advantage of the self directed savings plans such as 401(k)'s and IRA's it's possible to be quite comfortable in retirement if one begin's planning early enough in life. It's our responsibility to instill that sense of financial responsibility in our children.

 

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  posted on 4/4/2011 at 11:19 AM
What is a younger person to do? The stock market is the plaything of the wealthy and one can't really count on dividends to carry them through old age...the banks have screwed over people right and left and the government plays loose with the money they control. If I was advising anyone, I'd suggest investing in real estate.

 

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  posted on 4/4/2011 at 11:34 AM
quote:
What is a younger person to do? The stock market is the plaything of the wealthy and one can't really count on dividends to carry them through old age...the banks have screwed over people right and left and the government plays loose with the money they control. If I was advising anyone, I'd suggest investing in real estate.

Real estate is probably not what I'd recommend, but it could be part of portfolio and is certainly better than having no strategy whatsoever.

I disagree about the stock market being the plaything of the wealthy. The cost of entry is low, with many mutual funds having minimum initial investments as low as $50. And despite the activity of the last couple years if you take the long view, which you should when planning at an early age for retirement, the stock market continues to outperform most investments. But regardless of the investment vehicle, my point is that it is imperative that younger people learn principles of planning, saving, and investment, and be taught to have the discipline to forgo the joys of instant gratification in favor of future security. It is our responsibility to teach that. Those who deal with this issue by hand-wringing and complaining will not do too well for themselves, nor are they setting the right example for their children and grandchildren.

 

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  posted on 4/4/2011 at 12:09 PM
quote:
It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future. Any changes to social security will be phased where they don't dramatically affect those who are already at or near retirement age, but if the younger generations don't plan for their own financial futures they'll be in a world of hurt. There's been a cultural shift. it's not just social security, it's also company pension plans, medicare, and other social programs. But on the other hand, by taking advantage of the self directed savings plans such as 401(k)'s and IRA's it's possible to be quite comfortable in retirement if one begin's planning early enough in life. It's our responsibility to instill that sense of financial responsibility in our children.
Great post, Bob. We move our children through the school systems making sure they understand stuff like x + y = z but what about some practical financial life lessons? (and yes - lessons like this should begin in the home but there is no reason that the school system can't also serve as a vehicle for providing this valuable information). I guess I can't speak for current curriculum but based on my primary school years - LONG time ago - and that of my children - 13+ years ago - there did not seem to be anything offered that might help in understanding personal finance.

Like you mention, Bob, the company pension/social security formula that has served our parents can no longer be considered an answer to managing a retirement life that contains any level of comfort so long-term financial planning needs to become the responsibility of the individual v.s. the employer and the government. Even some of us close to retirement who have pension plans should not assume that this benefit along with social security dollars will last our lifetime (although I've gotta admit ... I certainly hope I'm able to take advantage of a pension after years of working with the 'benefits package plus salary = total compensation' formula ... the question being whether to take that up-front cash value or bet on it remaining intact for the long run...)

 

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  posted on 4/4/2011 at 12:26 PM
quote:
If I was advising anyone, I'd suggest investing in real estate.
Depreciating liabilities?!?!?!

 

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  posted on 4/4/2011 at 01:46 PM
quote:
quote:
Someone relying on their interest or dividends to survive is just screwed these days and then the politicians are talking about taking on social security. Why don't they just send the old people packs of poisoned koolaid and get rid of them quickly instead of dragging out their misery.

It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future. Any changes to social security will be phased where they don't dramatically affect those who are already at or near retirement age, but if the younger generations don't plan for their own financial futures they'll be in a world of hurt. There's been a cultural shift. it's not just social security, it's also company pension plans, medicare, and other social programs. But on the other hand, by taking advantage of the self directed savings plans such as 401(k)'s and IRA's it's possible to be quite comfortable in retirement if one begin's planning early enough in life. It's our responsibility to instill that sense of financial responsibility in our children.


Teach them the fundamentals? Yeah but everything is so crooked and corrupt, it won't work. You could teach him how to handicap races, but then there are the crooks who have someone give another horse that intra-abdominal boost ('give that boy a milkshake') before the race and he's cranked up more than a Beacon attendee on opening night; so his training doesn't help him cause the fix is in. He could study investing and trends and analyses and the inside traders cause all his knowledge to be useless. The corruption has gone sooooo far, fundamentals don't pan out anymore.

 

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  posted on 4/4/2011 at 01:52 PM
quote:
quote:
quote:
Someone relying on their interest or dividends to survive is just screwed these days and then the politicians are talking about taking on social security. Why don't they just send the old people packs of poisoned koolaid and get rid of them quickly instead of dragging out their misery.

It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future. Any changes to social security will be phased where they don't dramatically affect those who are already at or near retirement age, but if the younger generations don't plan for their own financial futures they'll be in a world of hurt. There's been a cultural shift. it's not just social security, it's also company pension plans, medicare, and other social programs. But on the other hand, by taking advantage of the self directed savings plans such as 401(k)'s and IRA's it's possible to be quite comfortable in retirement if one begin's planning early enough in life. It's our responsibility to instill that sense of financial responsibility in our children.


Teach them the fundamentals? Yeah but everything is so crooked and corrupt, it won't work. You could teach him how to handicap races, but then there are the crooks who have someone give another horse that intra-abdominal boost ('give that boy a milkshake') before the race and he's cranked up more than a Beacon attendee on opening night; so his training doesn't help him cause the fix is in. He could study investing and trends and analyses and the inside traders cause all his knowledge to be useless. The corruption has gone sooooo far, fundamentals don't pan out anymore.


Oh?

Teach people about finance.

Teach people that the interest rate and the APR is not the same thing.

Teach people how interest works.

Teach people the difference between an Adjustable Rate Mortgage and a Fixed-Rate Mortgage.

Teach people how to be their own advocate and realize that the they have more power than they realize granted to them by law when it comes to mortgage transactions.

Maybe if more people had known that, the real estate bubble would have been mitigated to a much smaller size. Maybe people wouldn't have racked up that giant mountain of consumer credit debt.

Sorry, but Americans by and large (certainly not all) are horrible when it comes to their money, and, IMO, it's mostly because of willful ignorance.

 

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  posted on 4/4/2011 at 02:15 PM
quote:
Teach them the fundamentals? Yeah but everything is so crooked and corrupt, it won't work.

Gina, that is untrue. If you truly believe that you are putting yourself at a financial disadvantage.

quote:
Americans by and large (certainly not all) are horrible when it comes to their money, and, IMO, it's mostly because of willful ignorance.

Very true, Bhawk. In the past one could get by ignoring long term financial planning. For most retirement planning consisted of counting on Soocial Security and pension programs, neither of which required active participation and management by the individual. That is no longer the case.

 

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  posted on 4/4/2011 at 02:15 PM
quote:
quote:
If I was advising anyone, I'd suggest investing in real estate.
Depreciating liabilities?!?!?!


Sorry, someone came to the door when I posted and I forgot to specify 'rental real estate.' My grandmother had five houses she rented out for years. The renters paid the notes and when the notes were paid off, the rent supported her...plus, she could have sold them at any time if she'd needed the money.

 

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  posted on 4/4/2011 at 02:22 PM
quote:
Teach them the fundamentals? Yeah but everything is so crooked and corrupt, it won't work. You could teach him how to handicap races, but then there are the crooks who have someone give another horse that intra-abdominal boost ('give that boy a milkshake') before the race and he's cranked up more than a Beacon attendee on opening night; so his training doesn't help him cause the fix is in. He could study investing and trends and analyses and the inside traders cause all his knowledge to be useless. The corruption has gone sooooo far, fundamentals don't pan out anymore.
Hopefully you are not in a position that has anything to do with young people and their education. I would not ever want my own child taught that nothing is better than something and that the world is hopeless and his life useless. Knowledge is power and can only be positive if it sends someone into a venture with their eyes open and some type of clue as to what they are embarking in (and I'm talking about reality here when I say 'knowledge' ... not horse milkshakes )

 

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  posted on 4/4/2011 at 02:24 PM
quote:
quote:
quote:
If I was advising anyone, I'd suggest investing in real estate.
Depreciating liabilities?!?!?!


Sorry, someone came to the door when I posted and I forgot to specify 'rental real estate.' My grandmother had five houses she rented out for years. The renters paid the notes and when the notes were paid off, the rent supported her...plus, she could have sold them at any time if she'd needed the money.
LOL!! Sorry ... couldn't resist for reasons you are probably aware of. I figured you were speaking of investment opportunities (and yes - I consider it opportunity).

[Edited on 4/4/2011 by lolasdeb]

 

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  posted on 4/4/2011 at 02:38 PM
quote:
It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future.


Yes, because it worked out so well for everyone that bought the preferred stock of GM

Keep playing by the old rules, they love it.

Most 401ks have not recovered from the crash and America has seen 23% of its wealth vanish almost over night. The fed continues to print money and devalue the dollar and your savings won't be able to keep up with the rate of inflation. On top of that, you are giving your money to the crooks on wallstreet to gamble with? Why not just go to Vegas and put it on black or red? When you invest in a 401k it will cost you about 30% to get your money out early? Why would you put yourself in that spot? On top of that, you don't know what the tax rate is going to be when you pull it out?

Robert Kiyosaki
Why savers are LOSERS !!!
http://www.youtube.com/watch?v=tzZt7DgzAo4&feature=related

 

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  posted on 4/4/2011 at 02:45 PM
My 401k has bounced back quite nicely.......

 

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  posted on 4/4/2011 at 02:45 PM
Gold is up today and so is silver.

 

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  posted on 4/4/2011 at 02:50 PM
quote:
My 401k has bounced back quite nicely.......
Mine, too
quote:
quote:
It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future.
Yes, because it worked out so well for everyone that bought the preferred stock of GM
So what would be your suggestion, JPB? Keep the young ignorant and in the dark and let them just 'find out for themselves'? And you are a parent, right?

 

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  posted on 4/4/2011 at 03:01 PM
quote:
quote:
quote:
My 401k has bounced back quite nicely.......
Mine, too.

Mine has as well. Between the dollar cost averaging effect over the long term, matching employer contributions, and tax deferred status it has grown substantially. In fact, it is my 401(k), not a pension, social security, or silver, that allowed me to retire at 55 with no debt.
quote:
quote:
quote:
It would probably be better to focus on teaching younger people the fundementals of saving and investing for their future.
Yes, because it worked out so well for everyone that bought the preferred stock of GM
So what would be your suggestion, JPB? Keep the young ignorant and in the dark and let them just 'find out for themselves'? And you are a parent, right?

JPB, you could teach them to put all their money in silver, but I'd suggest a broader approach, just like I'd suggest a broader approach to anyone who was thinking of putting all their money in GM stock. But you bring up a good point that investing involves risk, and it's important to understand and manage that risk.

 

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  posted on 4/4/2011 at 03:18 PM
quote:
bounced


That is the key word.

 

____________________
"If everyone demanded peace instead of another television set, then there'd be peace."



- John Lennon

 

Zen Peach



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  posted on 4/4/2011 at 04:13 PM
set them out on the ice flow. that 's the policy of this country for seniors.

They don't count fuel, medicine and food in the cost of living indexs and this
is what is killing the seniors savings. and this keeps the gov't from giving increases in social security.

More cuts coming in Medicaid which is ridiculous with the costs of healthcare still
spiraling out of control.. This is what happens when the health care lobby writes
the new healthcare laws.

best gov't money can buy.



 

____________________
Keep on Smiling


 

World Class Peach



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  posted on 4/4/2011 at 05:24 PM
Pork Rinds Futures.

traded on the Chicago Mercantile Exchange

Ticker symbol: GBP-PR

 

Zen Peach



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  posted on 4/4/2011 at 05:39 PM
quote:
set them out on the ice flow. that 's the policy of this country for seniors.

They don't count fuel, medicine and food in the cost of living indexs and this
is what is killing the seniors savings. and this keeps the gov't from giving increases in social security.

More cuts coming in Medicaid which is ridiculous with the costs of healthcare still
spiraling out of control.. This is what happens when the health care lobby writes
the new healthcare laws.

best gov't money can buy.




You put your finger on the problem. Social security hasn't increased for the second year in a row and yet the cost of medicare, part C and part D have all gone up. Don't get me wrong, it's still a good deal if you get sick, but the cost of drugs has gone up so even with part D the co-pay is more. Seniors don't have a choice but to buy into a plan if they want to even pretend to keep any assets if they get sick but with expenses eating up more of a fixed income, it doesn't look good. I don't see how anyone with a conscience can put seniors and kids at the front of the line when it comes to budget cuts.

 

____________________
Sometimes we can't choose the music life gives us - but we damn sure can choose how we dance!


 
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