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Ancient and Modern: The Retirement Tripod

Note to readers — I have fallen behind.  Sigh.  I want to write more, but business, church and friends dig into my time.  My apologies for not having written much recently.  Does it help that I may have saved organizations/businesses in the process? ;)

I have always viewed the modern retirement tripod with skepticism.  What makes modern man so different from his ancient great-great-grandfathers?  There are a few things:

  • We live longer.  Most of this is due to improvements in sanitation and nutrition, and some of it due to health care improvements, particularly with the young and the old.
  • We marry less frequently (not counting marriages after divorce), and have fewer children in marriage.  That said, a greater percentage of children survive to adulthood, balancing out the fewer children.  (Note: this might be true in the US, but not in Europe and Japan.)
  • The government is a larger factor in the economy.  Say what you will about democracy, it tends to produce a bigger government than the old days of having Kings.
  • Currency debasement is easier.  The treasury of the King no longer has to file and clip coins in order to steal value from the masses; now it can be done by computer.
  • Global trade is a much larger portion of total economic activity than ever.  If the global division of labor breaks down through trade wars, it could get really ugly, especially for deficit nations like the US.

But what is similar?

  • Those that are old and cannot work largely rely on those that can work to survive.  Perhaps they greet at WalMart today — it’s not much different from watching the little ones while everyone else is out in the fields.
  • The pressure to produce and save during the most productive years is still there, with the tension that exists in the middle years between producing, training children to become productive, and caring for the elderly.
  • With saving, there is the question of what will produce value over the long run.  In ancient times, land or an animal could be useful.  Today, stocks and bonds… there are no guarantees.
  • When times are good, everyone benefits.  Vice-versa when things are bad.  The boom-bust cycle is a constant in human affairs.

The modern retirement tripod is Social Security, pensions, and private savings.  Let’s call it government prudence, employer prudence, and personal prudence.  Given the shift from defined benefit to defined contribution plans, even pensions boil down for many to personal prudence.

What of government prudence?  The US government is running huge deficits at a time that it should be retiring debt (or even saving) to enable it to meet the promises made for Medicare and Social Security.  There is no prudence here, only politicians playing for advantage in the short run.

Personal prudence?  Well, we are saving now in the US, but only out of fear.  The US has always been a debtor-friendly place.  Perhaps 5% of the US has truly prepared for retirement, given the faulty assumption that portfolios can grow much faster than nominal GDP growth plus 2%.  Ask your financial planner to run his asset earnings projections at 6%, with inflation at 4%.  If you can retire on that assumption, you are in decent shape.

Corporate prudence?  Corporations have been terminating defined benefit plans (as I predicted 15 years ago) because they can’t afford them.  Now, blame the IRS for a large part of this, because they didn’t let companies prefund in the good years, because  it cut down on their tax take.  That said, many corporations could have made contributions, but did not, because it would have hurt earnings.

Okay, so we haven’t been very prudent.  What’s the alternative?  The alternative is the ancient retirement tripod: continued work at a slower pace, help from children, and savings/assets.

The only commonality is the savings/assets component.  The types of assets vary, but the idea is the same — what can produce income annually.

Continued work at a slower pace is  a good thing for many people.  Not only does it give them money; it gives them a purpose in life.  Older people are often more thoughtful than younger people, and are willing to spend more time on customer problems.  There is real value in being connected to the current problems of the day, rather than the idleness of “retirement.”

Children are problematic.  Some succeed, some don’t.  Some are loyal; some aren’t.  In general in the US, we encourage individualism, not loyalty to parents.  That makes any aid in old age problematic; the consumer ethic is selfish, versus an ethic that cares for those that have cared for you.  All that said, those with more children are likely to do better, even if it is only that you will have advocates in old age.  Health care systems can be cruel to old folks that have no one watching out for them.

What if we go through an era where government systems fail, and people  must rely on local resources?  I suspect that will happen; there is no way that the US can support its obligations in current purchasing power terms.

Those with strong social arrangements (often, loyal children) will survive well, as will those that have saved/invested well.  Additional help will come from continued work — personally, I hope to be doing investments until I die and go to be with Jesus.  But work is a benefit to anyone; it connects us with the realities of our world.

A final note, and one that is slightly controversial: you can tell that I favor the ancient retirement tripod.  But why?  The modern tripod stemmed from an unusual demographic bulge which made it easy for oldsters to ride on the backs of the Baby Boomers.  The Baby Boomers will have no such help.

Here’s my easy prescription: raise the retirement age to 75.  Now.  Shatter the idea that in old age you can have an easy time of it, while one is still relatively healthy.  Instill an idea that says work is valuable, and those that do not work are sponging of of society.

In a time where government intervention is growing, it is all the more important to tell people that they can’t rely on the government.  The government is broke.  So will be those that exclusively rely on it.






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6 Responses to Ancient and Modern: The Retirement Tripod

  1. F says:

    Agreed to some extent, but there are a few problems/considerations you may have missed.

    First, to have your children support you, you need to have many of them; i.e. you need to have them at more than the replacement rate, especially as death rates have dropped. Regardless of how much of a problem you think overpopulation is, it is clearly unsustainable in the long term.

    Second, in the past early retirement was not about “having and easy time of it”, it was about having worked a life of hard labor and being unable to continue past a certain age. Now this has changed quite a bit; many fewer people have those kinds of jobs these days, but what about those who do?

    However, you are clearly correct about the difficulty of funding pensions/SS in a world of less rapidly expanding population. So how do you solve that problem in a population neutral fashion?

  2. AllanF says:

    Excluding immigration, the US is in no better demographic shape than Europe or Japan. Or China, S. Korea, and Russia for that matter.

    The marginal cost of children in a modern urban society is huge both in terms of direct financial costs and intangible opportunity costs to socializing. Obviously the latter is is not true for everyone (such as the Merkel’s :-), but the data suggest this is true for more than most.

    I don’t know where we go from here, but it’s probably going to be a tough transition. I don’t know of a historical precedent for an inverted demographic pyramid. Perhaps Japan is telling us something in this regard?

  3. F: On average, society has to have children at the replacement rate. Aside from immigrants, Mormons, the wealthy, Orthodox Jews, and perhaps evangelicals, we are not there in the US, and Japan and Europe are worse. Even Turkey and Mexico are below replacement rate.

    My guess is that global population peaks in 2050, and starts shrinking. Aside from a few African and Arab countries, few nations are significantly above replacement (for me, defined as 3 kids per woman completing her childbearing years).

    But to the degree that populations shrink, retirement ages have to rise, maintaining ratios of those working to those supported by work. It’s that simple.

  4. PS — 5 of my 8 kids are adopted. Many of my friends have adopted kids as well. Adopting kids has its share of challenges. But it is an aid to society — raising kids means work, but it means that there will be that many more children coming out of productive families, leading to a healthier future society.

  5. A.S. says:

    Another aspect is the loss of purchasing power of our savings, the most direct and painful legacy of the way fiscal problems are solved by our elected officials. Current deflationary aspects aside, money simply doesn’t buy what it used to, and that trend is likely to accelerate in future.

    Woe to any retired person who doesn’t take this into consideration, starting with the cost of essentials like utilities, cost of transportation, and ending with trends in property taxes. The state I live in (NJ) has devastated retired people of even moderate means in that respect. Since property taxes are a major portion of municipal/state revenue, what will happen down the road? Nobody seems to be talking of the impact of property tax on the marginal home owners teetering on the edge. How many are pushed into foreclosure when property tax becomes the final straw?

    I see taxes of all and any kind rising for as far as the eye can see. Not a happy scenario for retirement or our kids.

  6. Chris says:

    Great post as usual. I was wondering if you could elaborate when you say:

    “Global trade is a much larger portion of total economic activity than ever. If the global division of labor breaks down through trade wars, it could get really ugly, especially for deficit nations like the US.”

    I was surprised that you thought trade wars would be especially bad for deficit countries. Although trade wars hurt everyone, I usually think of them hurting the trade surplus (i.e. exporting) nations the most, since they are so dependent one exports for economic activity. Whereas, trade deficit countries are not dependent on imports in nearly the same sense.

    Is there some effects of trade wars on trade deficit countries that I am missing?

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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