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 off 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.