Can the idea of retirement continue?

February 19th, 2009

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The global financial crisis (GFC) had brought many cans of worms for governments. One of them is the idea of funding your retirement through superannuation. The idea of retirement is relatively new in the entire history of human civilisation. Up till a 120 years ago, it is either you work till you drop or your children will look after you when you are too old to work. It was the German Chancellor, Otto von Bismarck, who introduced the idea of old-age social insurance program in 1889. Initially, the retirement age was set at 70. However, since life expectancy at that time was well below that, it was pretty much work-till-you-drop. You can imagine how cheap that program was for the government.

As the decades went by, people lived longer and longer. As a result, the public cost of old-age social insurance grew more and more prohibitive for governments. With the introduction of defined contribution schemes, the risk of funding retirement was transferred from the state/employer to the individual. That went well until…

With the financial panic of 2008, the retirement savings (actually, the word ‘savings’ is conceptually wrong- see The myth of financial asset ?investments? as savings) of many people were decimated because of major losses suffered by their superannuation funds in the stock markets. Some people had to contemplate postponing their retirement and returning to the workforce. To make matters worse for these people, they had to do so at a time when the whole world is facing a synchronised recession (or maybe even a depression) when jobs are becoming more scarce.

This put a very big question mark on the idea of compulsory superannuation. In June 2007, as we wrote Epic, unprecedented inflation, when the world was experiencing a synchronised boom in all asset classes in all regions of the earth, it seemed like a good idea. Today, with synchronised price deflation in most asset classes (except gold and US Treasury bonds) in all regions of the earth, does it mean that the whole idea of the superannuation system is a mistake?

With deflation, the tide turns and we all know who had been swimming naked. The problem is, it turned out that most people are swimming naked! It turned out that many of the ‘assets’ that we hold are not reliable store of wealth after all. Most of these assets are in the form of paper (financial) assets. From what was happening overseas, even physical, tangible and fixed assets (e.g. property) are suspect. In other words, there was a divergence between the nominal price of these ‘assets’  and the economic value of their underlying businesses and usefulness. What greased that divergence? The answer is, inflation of credit. In the days, months and years ahead, governments will try to inflate the supply of money and credit while the free market will wake up to the extent of the divergence between the price and value.

We suspect that for this current cohort of working people, the idea of retirement planning will be radically changed. Perhaps cultivation of relationships and friendships, networking with people of specific skills, reconciliation and sacrifice of independence will gain more prominence in your plans for retirement?

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  • Pete

    Spot on Ed.

    I do feel sorry for upcoming retirees in that their ideal of retirement is crumbling every day. However, that said, I believe it was that same generation that ignorantly expected things to be exactly the same as the generation before.

    Funny thing about baby boomers – they are exactly that. A boom in the population after WWII. So when the generation before the boomers retired, they were catered for by the sheer taxes and inflation of asset values that the boomer population provided.

    So does that mean for the retirement paradigm to continue, the boomers would also have to have 10 kids each, to increase the population to such a level that taxes can pay for the boomers retirement, and so on?

    The irony is that in some other countries (no reference provided), they try to have many children in order to better sustain the family unit and also provide themselves with someone to look after them in retirement. And by irony I mean that this same population boom that provides for their retirement, is what is needed to provide for ours aswell. It just so happens that things don’t quite work like that in Western countries.

    It is an interesting topic Ed. In this topic you get opinions from people who believe in extremes like ‘total social welfare’ and then ‘no retirement ever’. I think the real point is that as you have pointed out, Bismarck’s ideal is unrealistic if it is not modified to suit the times. It worked for him because, as you mentioned, retirees were a small percentage of the population as a whole. For his ideal to continue, retirees need to continue to be a small percentage of the population – which means Gen X and Y might need to work until they are 85!

    That is…unless we have another World War to decimate populations and start another baby boomers generation.

  • Pete

    Spot on Ed.

    I do feel sorry for upcoming retirees in that their ideal of retirement is crumbling every day. However, that said, I believe it was that same generation that ignorantly expected things to be exactly the same as the generation before.

    Funny thing about baby boomers – they are exactly that. A boom in the population after WWII. So when the generation before the boomers retired, they were catered for by the sheer taxes and inflation of asset values that the boomer population provided.

    So does that mean for the retirement paradigm to continue, the boomers would also have to have 10 kids each, to increase the population to such a level that taxes can pay for the boomers retirement, and so on?

    The irony is that in some other countries (no reference provided), they try to have many children in order to better sustain the family unit and also provide themselves with someone to look after them in retirement. And by irony I mean that this same population boom that provides for their retirement, is what is needed to provide for ours aswell. It just so happens that things don’t quite work like that in Western countries.

    It is an interesting topic Ed. In this topic you get opinions from people who believe in extremes like ‘total social welfare’ and then ‘no retirement ever’. I think the real point is that as you have pointed out, Bismarck’s ideal is unrealistic if it is not modified to suit the times. It worked for him because, as you mentioned, retirees were a small percentage of the population as a whole. For his ideal to continue, retirees need to continue to be a small percentage of the population – which means Gen X and Y might need to work until they are 85!

    That is…unless we have another World War to decimate populations and start another baby boomers generation.

  • HiredGoon

    From Global House Price Crash Forum

    (building up wealth via asset speculation may allow you to) ….not claim a pension, which is a straight forward transfer of money from younger people to you in your retirement. But instead, you participated in borrowing money and driving up house prices. If indeed house prices remain high so that you retire as you believe you will – where did that money come from?

    It comes from young people having to pay a lot more for their shelter. The money is transferred from young workers => old non workers anyway, as with the pension, but since the young buy houses with borrowed money – any money you recieve they must also pay interest on. Since Australia has low savings rates, much of that money comes from overseas. Interest is a very large component of our negative balance of paymetns.

    So the net result is actually you cost the country more as before the pension was a 0 sum game, but interest overseas turned it into a negative sum game for the country.

    Meanwhile, the speculators do everything they can to minimise their tax during their high earning years, so the idea that they are trying to do the taxpayer a service is just a joke.

    The correct way to save for retirement is:

    -invest such that you increase future productivity so that future workers have more money they can spend on supporting the old. But meanwhile most speculators jsut bid up existing assets, and hoard productive land by land banking – causing people to live unnecessarily far from work or pay a lot more of their income in interest or rents

    -decrease consumption now, so that you can save for later years. But this generation heading into retirement has stopped saving and has actually increased their debt (and consumption from “equity mate”)

  • HiredGoon

    From Global House Price Crash Forum

    (building up wealth via asset speculation may allow you to) ….not claim a pension, which is a straight forward transfer of money from younger people to you in your retirement. But instead, you participated in borrowing money and driving up house prices. If indeed house prices remain high so that you retire as you believe you will – where did that money come from?

    It comes from young people having to pay a lot more for their shelter. The money is transferred from young workers => old non workers anyway, as with the pension, but since the young buy houses with borrowed money – any money you recieve they must also pay interest on. Since Australia has low savings rates, much of that money comes from overseas. Interest is a very large component of our negative balance of paymetns.

    So the net result is actually you cost the country more as before the pension was a 0 sum game, but interest overseas turned it into a negative sum game for the country.

    Meanwhile, the speculators do everything they can to minimise their tax during their high earning years, so the idea that they are trying to do the taxpayer a service is just a joke.

    The correct way to save for retirement is:

    -invest such that you increase future productivity so that future workers have more money they can spend on supporting the old. But meanwhile most speculators jsut bid up existing assets, and hoard productive land by land banking – causing people to live unnecessarily far from work or pay a lot more of their income in interest or rents

    -decrease consumption now, so that you can save for later years. But this generation heading into retirement has stopped saving and has actually increased their debt (and consumption from “equity mate”)