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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