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The Retirement Bubble

Almost every asset funds a liability.  What gets pitched most frequently to the average American, investment-wise?  Save for your retirement.

And that’s good, mostly.  We need to save as a society, and we don’t do it.  Even our government, who claims to save for us through Social Security and Medicare, does not do it, but expends the money on current obligations of other programs.

But with so many among the Baby Boomers not saving, and with one lost decade behind us in stock investment terms, how will the Baby Boomers survive retirement?  Can they retire?  Or must they learn the phrase, “Do you want fries with that?”

I have written critically about retirement in the past. The ability of Baby Boomers as a group in the US to fulfill their dreams is limited.  They did not save enough, and asset markets offer little in the way of returns prospectively.  Interest rates are low, and P/Bs are middling.

When any bubble pops, there is a limited range of strategies.  Default, defer, reduce.

Default — things are so bad that I can’t make payments now, much less years into the future.  For practical purposes, I am broke.

Defer — things are bad, but if I wait and work longer, I can retire later than I hope for with reasonable outcomes.

Reduce — I can’t retire at the income level I thought I would, but I can retire at a lower level that I can live with.

Sadly, this is messy, with complications from inflation, and the productivity of the economy.  I expect that most older people will work to some degree in their old age, partly to make ends meet, and partly for social fulfillment, because “retirement” can be dull.

There should be no shame in this work, no matter how menial — hey, we were made to work, not relax.  There are no guarantees, and historically, no society has survived.  Thus relying on the present social compact to last is risky.  I write this as one that relies on the division of labor to support those who work in finance.  As one who has studied history, that is not the most stable place.

The concept of the retirement bubble simply means that the expectations of people exceeded their willingness to fund the future.  Also, the 80s & 90s made people conclude that retirement was free.  Put a little aside, and you have it made.

Ignore the distractions of financial assets.  If they didn’t exist, how would we live in our old age?

  • Our children would help us, though in the present day the incentive to have children is diminished by the low rates of marriage and fertility.  But in the present day, we imagine that we will have a retirement funded outside of ourselves.
  • We would save more in commodity terms, which don’t offer a lot of gains outside of inflation.
  • We would find places to work.  After all, we have reliable work histories, and can aid almost any enterprise because we have more knowledge than someone 40-50 years younger than us.

I could add in the idea that children might be less productive than we expect.  No great surprise for the US, given the educational trends here.  That said, we have a lot of capital investments that make our laborers far more efficient than in other countries.

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I don’t think retirement is realistic, and I am not planning on retiring, should I live so long. My Dad retired at 62, which was late in his industry, given the hard labor of installing sewers.  And that was after his brother (my uncle) died, contracting MS after a tragic accident.

In the present day, few have a hard time of it in their jobs  in North America.  For most of us, old age means limitations in our usefulness, but not an absolute limitation in our ability to work.

The US economy will retool to use the labor of older people, outside of what is considered retirement.  We’re the United States; we adjust while the rest of the world does not.

And that gives me some hope.  I expect to see older people in less skilled positions, and perhaps a greater amount of younger people unemployed.  Maybe the young people will emigrate, or maybe they will humble themselves and pick fruits and vegetables, or something like that.  I’m not trying to be mean, but so many criticize immigrants.  We would not have so many immigrants if we had children enough to do the tasks that immigrants do.

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If there is not enough income behind the growing population of elderly people to fund them in retirement, then retirement is a bubble, and shoul1d be abandoned.  Tell retirees to defer or reduce their retirement goals.  If they can’t even make on that level, tell them that they have to work until they die.  A sad concept, but true for most of humanity so far.

I’m not trying to be mean.  I am just looking at existing structures and asking how do we support the elderly in the US.  It is not an easy question.






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7 Responses to The Retirement Bubble

  1. Doug says:

    Sounds like Rogoff and Reinhart on a micro-scale.

  2. Mike C says:

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    I’m not trying to be mean. I am just looking at existing structures and asking how do we support the elderly in the US. It is not an easy question.

    This will probably be a somewhat disjointed reply but here goes.

    The more time I’ve spent over at pragcap.com the more I really come to accept the MMT view is the correct one. At the end of the day, the U.S. creates its own currency so the idea of going “broke” really makes no sense.

    We are an extremely productive and innovative society. The more I contemplate it I just don’t see the necessity of sending a 80-year old off to work until their dying day.

    That said, I do think we need a wake-up call that “retirement” doesn’t mean a bunch of vacations, traveling all over, dining out each day, etc.

    I guess what I am saying is the U.S. can create whatever “money” necessary so that the elderly can “retire” and have at least some minimal basic claims on the productive output of those working.

    I guess for those who don’t save enough during their working lifetimes, my thought is that amount should be just bare minimum amount to get you a modest living space (500 sq ft apartment), and enough calories each day.

    If you wanted a more affluent “retirement” lifestyle then you’d have to either work or have accumulated enough financial assets.

    More generally, I think it is just time for some out of the box thinking with regard to everything economically, retirement, employment, money. I think we are still too stuck in an overall philosophy and paradigm that doesn’t quite fit anymore.

    One thing I’d be interested in your take David as a religious man is the idea of a debt jubilee. It seems obvious to me that one of the top problems right now is simply the aggregate amount of debt everywhere. Countries like Greece, Italy with too much sovereign debt. Homeowners with too much mortgage debt. Unemployed young people with too much student loan debt. Money servicing debt isn’t going to employ someone else providing a good or service.

  3. Doug says:

    We already have a structure for a Jubilee. It’s called bankruptcy. In the US we did away with debtor’s prisons in the early 19th century, and most people recognize that they were a tremendous waste. But there were discussions of moral hazard back then as well.

    In the larger context of social insurance and retirement, unless you see significant growth in productivity, you just cannot support too many retirees as a society. Some of them will have to contribute goods and services. If we just granted every retiree shelter and food without workers in place to produce the shelter and food, the price of those goods wuld rise beyond the means of most retirees to buy them. Seignorage is not a solution to generational insolvency.

    David, I don’t think we will go backward on the specialization track for the same reason we won’t go backward on trade: it’s in everyone’s interest to keep it moving. We’re all better off. I get cheap shoes, a Vietnamese worker gets factory employment, and my clients get better financial advice.

  4. [...] On the “retirement bubble.”  (Aleph Blog) [...]

  5. Mike C says:

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    Excerpt from Mauldin’s weekly piece regarding Irish sovereign debt:

    “And that fact dawned upon them. They voted out the government that allowed the debt to be assumed. It was a clear message, but the government has not yet done anything to rid itself of the debt.

    There are those like McWilliams who simply want to repudiate the debt.“It should never have been done, so we will not pay it.” He is not alone; that view is becoming increasingly mainstream now.

    You mention bankrupcy. Ok, sure, yeah, but that is just the same old thinking and I’m trying to suggest something a bit more innovative and not so binary. Hussman has discussed this extensively in terms of restructuring existing mortgage debt.

  6. equimax21 says:

    I am 44, single, American and have lived a great life in Asia for the last 10 years. Here is a link http://www.liveandinvestoverseas.com/read-2011-articles/retire-to-nha-trang-vietnam-jan-13-2011.html that talks about retiring very cheaply in Asia. Mexico and South America are also interesting options. It’s a bit outside the sterile box that most Americans are stuck in, but it is a very practical solution to many an underfunded retirement situation.

  7. [...] Merkel had a great post up that he titled The Retirement Bubble. The post was thought provoking as were the comments on the Seeking Alpha version of the post. [...]

Disclaimer


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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