This is really scary. The whole western world is in for a rude awakaning in the coming years with regards to retirement.
Retirement is the golden carrot dangled in front of us for all our working lives, an embodiment of Protestant work ethic - "work hard and you will be rewarded in the end". However, very much has changed since retirement and pensions were designed. I can't find a good source, but (in Sweden) when pensions were introduced after WW2 people worked from their late teens until they died (40+ years of productivity), produced 3 or more children per woman (good population age distribution, the classic "pyramid") and the average lifespan was 64 years (1 year before retirement).
Nowadays, many of my peers don't get a "real" job until their early/mid-thirties (work for 30 years of producitivty), produce 1.7 children per woman if they reproduce at all (leading to a top-heavy population where fewer and fewer young people must support more and more old people) and life expectancy is much, much higher. Now, these things are in of themselves good, but they break the original design horribly. I really, _really_ hope that we can cross the chasm to a robot-centric/base-income society before it all breaks down.
"Nowadays, many of my peers don't get a "real" job until their early/mid-thirties (work for 30 years of producitivty), produce 1.7 children per woman if they reproduce at all (leading to a top-heavy population where fewer and fewer young people must support more and more old people) and life expectancy is much, much higher."
With increases in productivity, this could be sustainable, but as this article points out, wages have basically stagnated in comparison since ~2000.
This is the basic issue. Liberal capitalism made a de facto deal in 80s. Lower taxes for business, create more jobs but with less benefits, resulting in lower intake for governments but the losses will be made up through income taxes through higher wages. Except that deal has turned out to be rubbish, businesses continued to find ways to lower taxes (Ireland, BVI, Netherlands, transfer pricing etc). At the same time wages were held down. The gains of course were largely grabbed by the top 1 percent.
I'm a capitalist but I know that this is no longer sustainable. Fundamentally there comes a point were failure to raise wages means your customers can longer afford to buy your stuff. So your biting the hand that feeds you. Then you end up with the customers creating a credit bubble to try and replace what they have lost through low wages, resulting in sub prime crash, US student debt etc etc
The situation was never sustainable from the beginning as the economy has actually been rigged and obfuscated since the collapse of Bretton Woods.
It comes down to a confluence of r vs K effects on politics (and it's knock on effect on higher education and student debt), the Fed being a private bank masquerading as a US Government institution, fiat currency, and fractional reserve banking. This is the actual cause for inflation (which erodes the purchasing power of wages), and the so called "business cycle" of boom and bust (e.g. the credit bubble). Globalisation has also further exacerbated wealth transfer and increased the risk of systemic failure.
But this is not actually liberal capitalism's fault. Crony capitalism and Government intervention is to blame. There is nothing "liberal capitalism" about tax payers selectively underwriting shareholders. Under a "liberal capitalism" doctrine, the market is allowed to reward winners and punish losers.
If anything liberal capitalism is the only way to save the system but it will be an extremely rough transition.
> (good population age distribution, the classic "pyramid")
I would say that this is part of the problem: relying on something that is basically a ponzi scheme. Of course the European social systems work if you can constantly increase your population. But this doesn't work in the real life - the area of the country doesn't increase, therefore you can't increase your population infinitely. The reason young folks nowadays don't have 3 kids is that it's just not economically feasible any more. Add the fact that the top of the pyramid is getting wider every year (life expectancy is increasing) and here we are. The system was flawed since the beginning and now we are hitting the limits.
Ponzi schemes are much more common in nature than humans like to think. The default population dynamics for most species are feast-or-famine: population grows exponentially until it exhausts all available food sources, and then mass numbers of individuals die off all at once, leaving more resources for the survivors. Hell, life is a ponzi scheme: our cells divide, accumulating genetic mistakes (= technical debt) each time, until our body's ability to repair the damage is overcome by the accumulated mistakes. And then we die, hopefully having produced a fresh new individual to repeat the process.
Assuming no great technological breakthrough, the same thing will happen on a societal level: we'll die. But then, we knew there was 100% chance of that happening from the beginning.
> The whole western world is in for a rude awakening in the coming years with regards to retirement.
No kidding. Who will pay for all the people who didn't save? The people who did. I have very little expectation of keeping most of my money as I get older.
>Who will pay for all the people who didn't save? The people who did.
Correct. It is generally a good idea to consider all of the money being paid into Social Security to be completely wasted. I am in my early-mid 30s and I do not expect to see a dime of it. I think it will either be insolvent or subject to some ridiculous tax structure if people have earned X dollars in their lifetimes or spent too many years in high tax brackets (which I expect to in my late 30s and 40s).
Taxes will also go up dramatically as the years go by. I have a maxed-yearly Roth IRA but I also don't expect the government to keep their promise on letting me take out 100% of it tax-free despite all my contributions being post-tax. I expect to be double taxed on that, because, well, why not?
Retirement is ridiculous. It's just generally safe to assume all of your money is going to be taxed at a much higher rate and through loopholes/broken promises by the government. We face a really huge shortfall in the next few decades in public welfare programs, Social Security, and other tax-advantaged vehicles that I doubt will be honored down the line.
Just out of curiosity, what's preventing the US from implementing changes to Social Security that are sustainable? I read up on this for Norway a few months ago, and was actually pleasantly surprised at the thought that's gone into the sytem.
Norway's public pension system is now funded by every employee having 8% of their salary taxed away and earmarked to retirement. The money is placed in a broad stock and bond fund. In retirement, the earmarked amount of money for each employee is paid out in a monthly amount that matches the life expectancy of the retiree.
E.g. if the employee has paid $150.000 to the system over a lifetime of work, retires at 65 and the life expectancy for this age cohort is 10 years, the annual payment will be $15.000. The state covers for retirees that live longer, keep the money for retires that live shorter and provide a guaranteed minimum for people who reach 67 without saving up a minimum amount. To offset this, the possible monthly payment is capped with a maximum for high earners. There is also some inflation adjustment built in.
In effect, this provides a living wage for all retirees, with additional private savings required if you want to maintain a higher standard of living. The system is self-contained and is not based on younger workers paying the pensions of older workers.
>Norway's public pension system is now funded by every employee having 8% of their salary taxed away and earmarked to retirement.
Social Security payroll taxes are ~15% of salary per employee, so assuming Norway doubles the 8% (employee responsible for half, employer responsible for the other half) that's not much higher than the United States' system.
>The money is placed in a broad stock and bond fund.
Social Security is not privatized in the United States and efforts to do that by Republicans are regularly shot down. Social Security is an annuity that is tax-free and inflation-adjusted. The average ROI is about 2-4% for single, average salary employees who work full-time.
EDIT: Forgot to add, the United States excess funds in Social Security are loaned to the government for use for non-SS purposes. The government owes the Social Security program something on the order of $5+ trillion right now, which makes up over 25% of the national debt. Yes, you are reading this right. No, it is not a good thing.
You could argue that Social Security could do a lot better if citizens were allowed to control that money or if it was simply invested in a total stock/bond market index fund, but then you'd be incurring significant risk as well.
>In retirement, the earmarked amount of money for each employee is paid out in a monthly amount that matches the life expectancy of the retiree... The state covers for retirees that live longer, keep the money for retires that live shorter and provide a guaranteed minimum for people who reach 67 without saving up a minimum amount.
This is basically how it works in the United States, except:
> To offset this, the possible monthly payment is capped with a maximum for high earners.
This is likely to happen in the United States as the country moves more economically liberal (current administration excluded, but even Trump has some economic policies that old-timer conservatives would never agree to). We currently don't have this. But taxes and fees and other such efforts will be successful against the rich soon enough here.
>The system is self-contained and is not based on younger workers paying the pensions of older workers.
This doesn't really make sense. Your example describes this to a T.
Tell me: What happens when the "broad stock and bond fund" collapses in a thirty-year low for a period of six years and pension promises far outpace receipts? Who will pay for this? The state will cover, correct? Well, that's younger people paying for older people no matter how you slice it.
>>Norway's public pension system is now funded by every employee having 8% of their salary taxed away and earmarked to retirement.
In general this how any pension scheme is supposed to work. Except that it doesn't. When you start to add things like exceptions whole scheme starts to come apart after a while.
Pensions are one of those things which are ripe for abuse. Also you need to start looking at other benefits that come along with it like health care. Then there are unions that graciously award over time work to employees to drive up their compensation in the last few years of work.
There are also other things going on like inflation adjusted pensions.
In India there was a recent drive to include One Rank One Pensions for armed forces, which demands pension revisions every single year based on last highest pension paid in that rank for that year.
It's not retirement that's ridiculous, it's that old people have a vote in this and because that vote is so overpowering, no-one will even try and fix the issue until it's too late.
Double taxation is extremely unlikely, and would likely have to be of the form of applying a tax to earnings in the Roth IRA or something like that. Which is how other investment-related income is taxed anyways so, I don’t know.
Additionally, SS pays out at 75% of projected levels at the height of the retiree crunch, so assuming the program will just vanish is not something a lot of financial advisors are going to consider. Given the universe of possibilities, the one that doesn’t result in people with pitchforks is probably the one that we will go with. We could also solve this problem today with a 1.8% addition to the payroll taxes, removing means testing, etc. It’s a problem to be solved but expecting the world to burn in the process of solving it, the magnitude just isn’t there. Makes for good fan fiction though :-).
>>and would likely have to be of the form of applying a tax to earnings in the Roth IRA or something like that. Which is how other investment-related income is taxed anyways so, I don’t know.
Correct, this would be a huge breach of trust by the federal government. Which is nothing new, obviously, but....
There's some business-related reasons why I don't (I don't yet make enough money in salary for it to matter wrt deductions) but also because I think taxes will be very high when I retire and that my Roth will be taxed at a relatively low rate, subject to some "fees" or something.
I think the Roth will still exceed the value of a traditional IRA (plus it's only $5500/year, hardly huge as I get older and my net worth increases), but I would be willing to bet that the Roth IRA will not exist in the form it does in 20-30 years, and that existing ones will be subject to a tax/fee to make it "fair."
Depends how history plays out in the future. If people who save end up paying for people who didn't, it implies one of three things: 1) financial panic 2) inflation or 3) taxation.
All of these are fairly likely, but looking back at history, there are a number of other possible futures that would take care of the problem. Mass plague, where all the old people die off. Mandatory euthanasia, where the government kills all the old people. War or anarchy, where both young and old die indiscriminately. Colonizing other planets, which opens up vast new resources. Mass automation of health & elder care, so the robots pay for the people who don't save.
The depressing thing is that most of these are pretty horrible, and the two that aren't - automation and spaceflight - are probably the least likely. But then, history is filled with black swan events that open up human frontiers that nobody could've imagined. Maybe one of them will save us.
Or like it worked in most socialist economies which gradually migrated to free market in the 90s.
Older people make painful sacrifices to merely survive. Younger population doesn't care, and largely thinks the old deserve it for not being serious about their retirements in young age.
Social security in that situation will largely depend on continuing to work in old age, and surviving on bare minimum money and at worst depending on kids and friends.
War and anarchy aren't feasible in old age, when you get knee pain for walking across the street. The whole thing will be bad, its just people have to deal with it and move on.
It wouldn't actually matter. The problem is demographic, not financial.
Ultimately, somebody has to produce the resources, goods, and services that every person on earth needs to survive. If people live an average of 5 years after retirement, work for 50 years, and the population is at a steady-state, then every elder is supported by 10 workers. If the population has doubled in the last generation, then it's 20 workers. If the population is still doubling but people are now living for 10 years after retirement, then it's still 10 workers/elder. If the population returns to a steady-state but people now live for 20 years after retirement, though, we're down to only 2.5 workers/elder. Suddenly everybody feels the pinch.
Pensions, 401ks, stock market growth, and all other forms of retirement savings are just different ways of lying to ourselves. Ultimately, goods have to be produced, services have to be rendered, and money is just a way to track who has done that and reward them appropriately. If you have fewer people doing the work and more people depending upon it, standards of living will fall.
If I had to bet on a (peaceful) solution, it would be automation. Do more with less and a given number of workers can support a much greater number of dependents; the only challenge then becomes redistribution in a way that people find adequately fair. But elder care has proven stubbornly resistant to automation: if you've ever had a family member in their 90s and tried to take care of them at home, you may be doubting that it's even possible for 2.5 workers to take care of one elder, even if their own needs were completely automated away and they had no children.
"It wouldn't actually matter. The problem is demographic, not financial."
It's interesting how many people don't understand (or don't want to understand) this.
Money is just a number, is real resource what is important.
Never mind how many savings the people have, if there are not enough people or resources to do the necessary jobs.
And, the other way works too, never mind how many old people there are without savings, if the productivity is enough to take care of them easily.
The obvious conclusion is that, instead of caring about money "saved", we should be caring about getting more productive. That would mean improve technology, increase knowledge and training.
My problem with "getting more productive" is that the gains nowadays are achieved through automation (capital investment in general) which pretty much guarantees that the gains from the increased productivity are captured by the capital owners. So even if we double the productivity of the economy, there is no guarantee that this will improve the lives of most people who depend on salary or pension. There must be some form of redistribution to allow sharing the gains of productivity but this has been a taboo in the US (and many more places) since the 80s and I don't see this changing anytime soon.
Even if it were a problem or resources, the solution is invest now in creating more resources, not in "saving money".
I think that part of the reason it's a taboo, is because the officially pushed narrative is designed to hide that, in many instances, is a problem of redistribution more than a problem of resources.
For instance, in USA, the "public debt crisis problem", that it's mainly meaningless, distract from a honest debate of the real issues.
> That kind of runaway automation that could pay for this kind of a party isn't close
Automation is already here, and has been for a long time. The whole point of the industrial revolution is about automation: Machines that support or replace human workforce.
The explosion in availability of computing power in the last two decades put automation into overdrive, and I don't see it slowing down.
Meanwhile, the gains of automation do not directly translate in inproved wealth for all members of society.
For example, if a company replaces 50% of its workforce with machines, they might make more money because they save on salaries, but effectively worsen the situation for the pensions of the layed off people.
This idea is not without drawbacks. Mandatory pension systems have a history of being wiped out by extinction events both governmental (USSR et al) and corporate (Kodak and other midcentury megacorps).
It's at least something I guess, but retirement planning is a really really long forecast horizon and is inherently risky.
In Germany the retirement system is far from perfect - but it at least keeps (most) people from being homeless or starving.
The lack of universal health insurance in the USA is basically traceable to the same societal shortcomings. Why should a rich banker support with his premium health insurance for a woman who gets pregnant - as he's not getting pregnant anyway. That's a very egoistical way to look at communal cooperation but at the end of the day the reason for why ACA is being sabotaged by many politicians.
I assume by "woman" you meant someone who is at or below poverty line, if so, I (and most people) don't have a problem chipping in.
The point you are missing is that right now, 90% of the US population cannot afford to pay for child-birth (or any other medical procedure) themselves (out of pocket), as they typically cost $20K and up.
With a reasonable market- (or single-payer-) based health-care system, most people (except for the poor and almost-poor) would be able to pay for their own health care. The current "system" in the US is a scam of major proportions.
> Retirement is the golden carrot dangled in front of us for all our working lives ..
And then:
> .. and the average lifespan was 64 years (1 year before retirement)
Wouldn't it be more rational to try to get as much happiness and fullfillment from the years you spend working and healthy, instead of waiting for those few years you might have after your retirement? And maybe, if you don't have much money to spare, it would also be more rational decision to spend your money now instead of saving it for an age which you might never even reach ..
You make some good points. Working yourself to the bone until retirement is probably not the best approach. Spending ALL your money is maybe a bad idea though.
My plan is in the middle somewhere. I earn a decent living, and have a modest pension. The plan though is to save enough for a large piece of land in a cheap but stable country (inasmuch as THAT's possible - current thinking is Austria or South Africa), with a house, and then become self-sufficient on that land. Until I cash in my chips.
>The whole western world is in for a rude awakaning in the coming years with regards to retirement.
Most Western countries have mandatory pension systems in place. In my country, NL, everyone has to pay money into pensioen funds that invest it for you.
Sadly, in most of the Western countries, your pension payments go to paying the pensions currently being handed out. By the time you'll need yours, unless something changes, there won't be enough money to pay it.
That's why you're now encouraged to enlist in private pension saving plans and all those things.
We only do that for the government part of the pension. your additional pension is saved up and invested for you. Currently there is about 2 trillion USD in the Dutch pension system.
>Retirement is the golden carrot dangled in front of us
Not exactly. The 1% keeps pushing the "demographic time bomb" trope through the media precisely to make us believe that that this "golden carrot" is a vain hope.
300 years ago, 80% of the population had to work in agriculture just to keep the country fed and alive. Now, less than 5% work in agriculture and we produce so much food, that supermarkets have to throw more than half of what they buy.
Productivity has been growing in a exponential way since the beginning of the industrial revolution. Automation will allow many of the products we consume today to be produced almost without human intervention.
My point is that we, as a society, will be able to maintain the same standards of living (or increase them) while the workforce shrinks.
The only issue here is how the wealth produced by the automation will be distributed, but I can imagine a future where people is actually employed during less than half of their lives and still live well enough.
An alarming number of people I know who had high flying careers and who retired with huge pension funds died within a relatively short time of retiring.
Maybe its something weird about my extended family....
What makes me angry about this is that politicians in industrialised nations have no qualms with bailing out current retirees (because those will save them their next few re-elections) and shoring up mindless consumption at the expense of those who try to live more frugally.
Yet at the same time the very same politicians claim there's not enough money for implementing a universal basic income right here, right now.
I have 3 kids. I earn a decent wage but nothing excessive and my wife doesn't work (she looks after the kids). We live in a city, don't own a car and walk or bike most places.
They don't cost that much more if you're willing to be sensible (each kid doesn't need a TV and a games console or even their own bedroom). We're very moderate on how we spend our money - we don't blow thousands at Christmas just to give kids tat they won't play with, we keep clothes and re-use them as the younger kids grow up. We eat at home as a family, don't take extravagant holidays etc etc.
It's most expensive to have 1 child - then each child after the first is cheaper to raise, especially if they are of similar age. Once you get to 3+ kids it almost makes no difference. But, it depends very heavily on your lifestyle. If you think that every child needs their own bedroom, they all have to go to private schools, they all have to go to Disneyland every year, if you have to pay for healthcare and/or kindergarten, then yeah, the costs are exponential. But if you live in any modern country with good social care(this does not include US) and you think kids can survive without luxuries, then yeah, it's actually completely doable.
In France a large part of childcare is subsidized : kindergarden (the less you earn the less you pay, but there is not enough spots), schools since 3 (free for everybody), good public health centers if you want (PMI).
Also prenatal care is free (you don't pay thousands of euros to have a baby.)
That result in good numbers for a western country: in comparison with Germany for example, women tend to have more children (2.3) and have them younger with less impact on their career and revenue.
>in comparison with Germany for example, women tend to have more children (2.3) and have them younger with less impact on their career and revenue.
Indeed. Interestingly the differences between western and eastern states of Germany are huge. Childcare and prenatal care are in general much better in the region of former East Germany. Currently we are short on nearly 300,000 places for children in childcare (Kindertagesstätten/Kitas) but only 30,000 of them are in eastern states. The mother's mean age at first birth in those states is younger (27 years vs. 30 years in West Germany). Now the problem is that unemployment rates are higher in eastern Germany.
Some numbers:
>MOTHER'S MEAN AGE AT FIRST BIRTH
>France 28.1 years (2010 est.)
>Germany 29.2 years (2012 est.)
I have 7 kids, my wife stays at home and homeschools them. We live frugally. Outside of enormous COL areas like San Fran, NYC, LA, etc. it can absolutely be done.
The first couple kids are the most expensive, by the way. And thrift stores are my best friends.
Very broadly speaking (UK, Sweden at least since I live(d) there and know the rules); more kids = more income if you're living on income support.
So you have linearly increasing support depending on the number of people who depend on you.
There is no such linearity in work- you get paid and you pay whatever you need to pay, the company and the state do not make things easier.
I'm not saying that if you have kids on welfare you're better off- I'm saying that it's an easier cross to bear when you may not be as significantly worse off as you would be if you had a flat income.
If it makes you feel any better I was raised on welfare in the UK and am not insinuating anything negative. This is the reality of living on income support- if it is _not_ then please provide evidence instead of hitting the disagree button needlessly.
Retirement is the golden carrot dangled in front of us for all our working lives, an embodiment of Protestant work ethic - "work hard and you will be rewarded in the end". However, very much has changed since retirement and pensions were designed. I can't find a good source, but (in Sweden) when pensions were introduced after WW2 people worked from their late teens until they died (40+ years of productivity), produced 3 or more children per woman (good population age distribution, the classic "pyramid") and the average lifespan was 64 years (1 year before retirement).
Nowadays, many of my peers don't get a "real" job until their early/mid-thirties (work for 30 years of producitivty), produce 1.7 children per woman if they reproduce at all (leading to a top-heavy population where fewer and fewer young people must support more and more old people) and life expectancy is much, much higher. Now, these things are in of themselves good, but they break the original design horribly. I really, _really_ hope that we can cross the chasm to a robot-centric/base-income society before it all breaks down.
EDIT: Found this after posting: https://en.wikipedia.org/wiki/Pensions_crisis