A perspective on retirement

[6 Iron]

I found this article quite interesting:

http://www.efficientfrontier.com/ef/103/hell4.htm

In an era when a small number of people lived past sixty-five, society could easily support them for the very few years they survived beyond that point. Now that citizens are routinely living two decades longer, it is simply not mathematically possible, let alone politically feasible, to expect each worker to support 0.67 retirees, no matter how many coconuts, dollar bills, stock certificates, or Krugerrands they save up in the meantime. It is also not reasonable to expect productive younger individuals to support large numbers of healthy older non-workers.

He has five parts to his discussion on retirement at:

http://www.early-retirement.org/forums/ ... 32828.html

[Quasimodo]

I really enjoyed the article. Thanks for posting it, 6 Iron.

John

[MediumTex]

This issue really goes to the heart of the fundamental matter of how society is going to be structured.  I think that right now we are at the stage of industrial capitalism where a lot of delusional notions have yet to be purged from the system, simply because this modern system of rapid economic expansion, dramatic productivity increases, and rising standards of living across much of the world have only been with us for a couple of generations.

The whole concept that large chunks of the world population could live lives of leisure while depending upon an ever-decreasing pool of workers who are actually creating new wealth is an idea that people may look at one day in the future and say "DOH!!!" 

People will, however, cling to this delusion for as long as they are able to, since the prospect of living much of life without the need to engage in productive activity is very enticing.

OTOH, through some miracle of productivity gains and other voodoo it may indeed be possible for much of the world to live over half of their lives in a state of "retirement", though I wouldn't bet on it long term.

What did Herb Stein say about these things:

"If something cannot go on forever, it will stop."

Watch the demographic trends.  They will be the canary in the coal mine.

[pplooker]

Just to vent:

I'm 29.  I am substantially less likely to:

A.) Become as wealthy as I could be otherwise
B.) See a leisurely retirement in my lifetime

Due to the fact that a large block of "Boomers" which has superior numbers, capital, and political influence is continually pissing selling my future away via the magic of democracy.  The AARP membership is going to be dead by the time I have to really deal with the problems they're delaying.

I don't see any solution forthcoming either.  I believe if you're under the age of 50 right now, you have got to be very financially savvy or your life's work, whatever it may be, will wither away under the drought of a cash hungry government.

I also believe that the government is going to change the rules so it can more easily take whatever you have saved or earned.

I just feel like sometimes I am going to spend my entire life paying for government checks and medical services and other goodies for other people and have none of those things myself.

I disagree with one thing in the link too: I do not believe it will be very hard to have comparative advantage in retirement savings vs. most of my generation.  I've made mistakes, make very meager earnings, and I'm still well ahead of most of them.

[MediumTex]

Just to vent:

I'm 29.  I am substantially less likely to:

A.) Become as wealthy as I could be otherwise
B.) See a leisurely retirement in my lifetime

Due to the fact that a large block of "Boomers" which has superior numbers, capital, and political influence is continually pissing selling my future away via the magic of democracy.  The AARP membership is going to be dead by the time I have to really deal with the problems they're delaying.

I don't see any solution forthcoming either.  I believe if you're under the age of 50 right now, you have got to be very financially savvy or your life's work, whatever it may be, will wither away under the drought of a cash hungry government.

I also believe that the government is going to change the rules so it can more easily take whatever you have saved or earned.

I just feel like sometimes I am going to spend my entire life paying for government checks and medical services and other goodies for other people and have none of those things myself.

I disagree with one thing in the link too: I do not believe it will be very hard to have comparative advantage in retirement savings vs. most of my generation.  I've made mistakes, make very meager earnings, and I'm still well ahead of most of them.

Note that the knockout punch is normally the one you don't see coming.

If you see these things coming, you have an immense advantage over most of your peers.  You also have the luxury of time to act on this advantage.

Don't complain that the world is screwed up--it's always been screwed up.  Rather, work within the structure you are given (however flawed or unfair it may be) to meet your own personal goals.  Remember, too, that however messed up the conditions are in which you find yourself (or your generation finds itself), consider how insignificant they are compared to the circumstances into which 99% of the world population is born.

All political structures tend toward tyranny and delusion--you are just seeing the latest large-scale iteration of this phenomenon.  Don't let it discourage you. 

Also, don't let the media determine the type of internal dialogue you have with yourself as you move through life.  This is the objective of all propaganda, and resisting it should be the goal of anyone who aspires to be a free person.

Read Benjamin Franklin's "The Way to Wealth" for a bit of inspiration.  It's about 10 pages long and is available for free if you google it.

[craigr]

I think the issues Bernstein is bringing up have been known for a long time. Savers are constantly threatened by those that don't save at least back to Aesop's time and well earlier. The idea of social security was broken from the very beginning. No matter what the government projects, there is very little chance it's going to work out in the long run. If it does, great! You can just count that as icing on the cake. But it's best to save for yourself and just expect that someway, somehow, you'll be denied most of the benefits you were promised as a payee into the program.

As a saver it's important to be vigilant about threats to your wealth, but also it's impossible really to know how or if it will come about. That's why part of the permanent portfolio strategy is to have an allocation to hard assets like gold and to diversify so widely even across asset class providers/custodians that no one failure in the portfolio can wipe you out.

As Tex points out, the world has always been screwed up and will continue to be so in the future. The reason the Permanent Portfolio advocates such wide diversification and even holding assets outside the country is not just an academic exercise. The idea is that no matter what happens you'll have the best chance of preserving your wealth across a multitude of unknowable events.

[Pkg Man]

Great comments.  Craigr, it is discussions like this, which would probably not be permitted on the boglehead forum, that make us appreciative of your efforts to set this up.

I think the biggest "crime" is that some folks don't have the foresight to realize that those promises made in terms of SS and other benefits can't possibly be fulfilled, at least at the current benefit levels and barring some unlikely productivity breakthrough.  By delaying the inevitable we simply make the adjustment process that much more painful.  Better to pass reform now which could give people more time to prepare.  It's either that or continue to kick the can down the road and have our own crisis a-la Greece.

[pplooker]

It's true, the world's always been screwed up.

But here's the other side of my pessimism about how I might fare in the future: I am actually oddly optimistic that it's all going to pan out and here's how.

First, remember I am terrible at international sociogeopoliticialeconomic analysis.  But here's how I call it anyway: the U.S. will use its leverage of the largest military in the world to keep selling its debt and then inflating it away.

One of my finance professors is Cantonese and originally from mainland China.  One of her areas of research is how the U.S. is actually profiting from the Chinese holding its debt.  Basically it boils down to this:  Say one American money buys five China monies in 2010, which is worth 5 apples.  A Chinese citizen then buys 1 American money unit's worth of debt.  Essentially my professor's paper argues that in 2020, after the interest, the Chinese citizen may very well be holding 2 American money units, but it will still only be worth 5 apples, maybe even only four apples.  This is very oversimplified as her paper is much more complex than this, but it demonstrates the point that in nominal terms, our debt actually isn't increasing.

Second, I believe that they'll use this mechanism to "fix" SS.  They won't so much cut benefits as not increase them from the levels we're used to, and lo and behold inflation will take care of it for them.  I do think we'll see the ages one becomes eligible at increase.  I also think we'll see many impoverished older citizens.

Third, I don't think there's going to be outright confiscation beyond an increase in tax rates.  But what I do think is going to happen is that if you have a Roth IRA, any money saved in a savings account, or you sell gold, etc. you're going to have to declare it as income for purposes of stricter means testing.  The argument's going to be "You have $4000 in the bank you should have to spend it before you can get SSA payments."  I believe that these rules will be passed with many holes and escape provisions however, and we'll just wiggle through them exactly like most wealthy people wiggle through the tax code now (which they should, just so we're clear on that point).

I am terrible at predictions however.

[MediumTex]

Here are a few different perspectives:

It's true, the world's always been screwed up.

But here's the other side of my pessimism about how I might fare in the future: I am actually oddly optimistic that it's all going to pan out and here's how.

First, remember I am terrible at international sociogeopoliticialeconomic analysis.  But here's how I call it anyway: the U.S. will use its leverage of the largest military in the world to keep selling its debt and then inflating it away.

Inflating it away relative to what?  Everyone is trying their hardest to inflate right now and no one is having much success.  See Japan.

One of my finance professors is Cantonese and originally from mainland China.  One of her areas of research is how the U.S. is actually profiting from the Chinese holding its debt.  Basically it boils down to this:  Say one American money buys five China monies in 2010, which is worth 5 apples.  A Chinese citizen then buys 1 American money unit's worth of debt.  Essentially my professor's paper argues that in 2020, after the interest, the Chinese citizen may very well be holding 2 American money units, but it will still only be worth 5 apples, maybe even only four apples.  This is very oversimplified as her paper is much more complex than this, but it demonstrates the point that in nominal terms, our debt actually isn't increasing.

Many similar arguments were made about Japan and the U.S. in the 1980s, though it didn't turn out the way anyone predicted (note, too, that the Japanese hold a gigantic amount of U.S. debt, but for whatever reason no one talks about this anymore).  I'm sure the China/U.S. story will have its share of twists and turns moving forward, but I don't think there is any way of predicting what will actually happen.

Second, I believe that they'll use this mechanism to "fix" SS.  They won't so much cut benefits as not increase them from the levels we're used to, and lo and behold inflation will take care of it for them.

SS benefits are indexed to inflation, so it's much harder to do what you describe than it sounds.  Of course, Congress could change the COLA methodology for SS benefit increases...if they all wanted to be voted out of office in the next election.  Old people vote, and they like their entitlements.

I do think we'll see the ages one becomes eligible at increase.  I also think we'll see many impoverished older citizens.

A phase-in of increased retirement age is already under way (it started last year and will be fully phased in in coming years).  Historically, such increases in retirement age don't become effective for many years after enactment (to minimize electoral blowback), which is what happened in the last round of SS "reform" in the early 1980s. 

Science is coming up with ways to make people live longer faster than the political mechanism has of realizing the structural problems longer life expectancy creates.  It's not a simple problem to solve.

Third, I don't think there's going to be outright confiscation beyond an increase in tax rates.

An increase in tax rates is outright confiscation (and you will never find a more elegant form of confiscation).  That's what the founding fathers were upset about as property owners.

But what I do think is going to happen is that if you have a Roth IRA, any money saved in a savings account, or you sell gold, etc. you're going to have to declare it as income for purposes of stricter means testing.  The argument's going to be "You have $4000 in the bank you should have to spend it before you can get SSA payments."  I believe that these rules will be passed with many holes and escape provisions however, and we'll just wiggle through them exactly like most wealthy people wiggle through the tax code now (which they should, just so we're clear on that point).

You're just describing a system of progressively larger scales of corruption.  Such systems are never able to correct structural financial problems.  Look at Greece and the rampant tax evasion there.  More onerous rules will simply create another set of unintended consequences--see FDR's policies in the 1930s for a wonderfully detailed example of unintended consequences.

I am terrible at predictions however.

Me too, but realizing this can save you a lot of grief and is one reason that I like the PP.

[pplooker]

Inflating it away relative to what?  Everyone is trying their hardest to inflate right now and no one is having much success.  See Japan.

See, I don't think the relative to what really means what it should because of many non financial, non mathematical factors we can't quantify.  Whether we like it or not, the US FRN is the premiere thingy we use for money in the world.  Money is of course a shared fiction us human beings agree to abide by to facilitate a universal barter exchange medium.

What meaning this has, I really don't know.

Many similar arguments were made about Japan and the U.S. in the 1980s, though it didn't turn out the way anyone predicted (note, too, that the Japanese hold a gigantic amount of U.S. debt, but for whatever reason no one talks about this anymore).  I'm sure the China/U.S. story will have its share of twists and turns moving forward, but I don't think there is any way of predicting what will actually happen.

Agreed, this may be completely wrong.  I just think it's not improbable, if that makes any sense.  It’s just one professor’s speculative research.  Lots of very smart people with high levels of expertise in specialized subjects have been wrong before.

SS benefits are indexed to inflation, so it's much harder to do what you describe than it sounds.  Of course, Congress could change the COLA methodology for SS benefit increases...if they all wanted to be voted out of office in the next election.  Old people vote, and they like their entitlements.

My counter to that is people are stupid and bad at simple math while politicians are very creative and prolific liars.  There’s an awful lot of wiggle room here if one just messes with the structure of the program.

What they could do is continue COLA under its current formula for people already on SS, and change the formula for future beneficiaries, for example.  If you were to make such a rule to affect people currently under the age of 35, well, no one affected is going to complain very much save for a few people who pay attention, and you aren’t going to lose the senior citizen’s votes for it.

There’s a million other speculative possibilities.  But again, I just think they have lot more creativity and wiggle room than you do apparently.

A phase-in of increased retirement age is already under way (it started last year and will be fully phased in in coming years).  Historically, such increases in retirement age don't become effective for many years after enactment (to minimize electoral blowback), which is what happened in the last round of SS "reform" in the early 1980s. 

Science is coming up with ways to make people live longer faster than the political mechanism has of realizing the structural problems longer life expectancy creates.  It's not a simple problem to solve.

See I disagree slightly.  I think since they have gotten away with it before, they know they can do it again, and will get bolder and make more drastic cuts.  You’re right, it won’t be enough on its own and it won’t be that bold relatively speaking, but I feel between this and my previously discussed “wiggle room”? they’ll water SS benefits down to more sustainable levels.

What I think will happen is SS and other entitlements will stay.  However, the politicians will find a way to make it so that the payments are so small it does no individual recipient any real good.  Just to pull an example out of the air, a crafty politician might realize hey, 1 million people getting a thousand dollars a month in checks ($1,000,000,000) is something we can’t afford.  So what I’ll do is offer 3 million people, including the original million people, three hundred dollars a month instead ($900,000,000).  So long as the political capital gained by offering 2 million people money they didn’t have before offsets the political capital lost by decreasing benefits for the original million that came before, the politician has “fixed”? the problem.

So in other words it’s not that I think our leaders are so smart they’re going to really solve the problems, I just think they’re very very good at wealth redistribution, lying, trickery and dishonesty and will address the problem in that way, which I feel will prevent a cataclysmic disaster but it will still hurt society greatly.

An increase in tax rates is outright confiscation (and you will never find a more elegant form of confiscation).  That's what the founding fathers were upset about as property owners.

I agree with you which is why I phrased it as I did.

You're just describing a system of progressively larger scales of corruption.  Such systems are never able to correct structural financial problems.  Look at Greece and the rampant tax evasion there.  More onerous rules will simply create another set of unintended consequences--see FDR's policies in the 1930s for a wonderfully detailed example of unintended consequences.

Exactly!  This is exactly what I am thinking will happen.

Some people predict a complete stock market meltdown or a sovereign debt default, and while that may happen, I see this right here as being the most probable outcome by a long shot.

The sad part is that’s optimism compared to some of the other predictions.

[MediumTex]

pplooker, my point is simply that we are dealing with a gigantic number of variables which could play out in an almost infinite number of ways.  Even things we are certain will happen may happen years or decades later (or earlier) than we predict.

I simply suggest that the PP covers you no matter what happens, and that's why I like it.

As for SS benefits, just fully internalize the idea today that you will never receive a cent in benefits and then anything you do receive will be a happy surprise.  In the meantime, prepare your own resources based upon this understanding and you are unlikely to experience future regret.  HB touched on this point in "Fail Safe Investing" and I think it is an easy way to avoid a lot of hand-wringing.

[pplooker]

Oh I've internalized that.  It doesn't do much to sate my anger however ,for all the good it does to be angry which is none.

I am more optimistic than I sound here.  I think having a plan and sticking to it will improve the future.  I also figure no matter what happens, the smart people will outpace the parasites in the end and there will be more to be had in the future than there is now.

Really, if I were so resigned to the future being crappy, would I have any portfolio at all?  I'd be like this joker:

http://www.getrichslowly.org/blog/2010/ ... ent-439501

You can call me Chicken Little if you want, but I think we are headed for a global financial collapse. So there is little point, at least in the near future, in trying to accumulate any sort of wealth.

I'm just venting and speculating.  If am dead wrong in 20 years or 2 minutes it's of no consequence.

[macclary]

Pplooker, I am sure you know this but I'll say it anyway: military might comes from economic might. The military can't force our economy to get better at other's expense even if it really wanted to.

Here is a 'fun' fable about the plausibility of everyone earning 'enough' money at the same time:

"I Want The Earth Plus 5%"
http://www.relfe.com/plus_5_.html


Regarding SS here is a plan I have circulated before:

"How to End Social Security"

1) End the SS payroll deductions.

2) Refund SS contributions to everyone who has only contributed a small amount.

3) Fund current and future SS benefits that have already accrued from the general budget.

4) Refuse to accept any additional social security liabilities.

This plan would mean that those who had contributed a lot to SS and are counting on it for retirement would still get their benefits. Young people would not have to worry about whether to count on SS at all. Those people in the middle would pursue a hybrid approach saving money for retirement outside of SS to supplement the SS benefits; much like today.

Even though everyone knows that SS is not economically viable yet it is very politically difficult to fix: because it was designed to be so!! Here is a telling quote from FDR: "Those [payroll taxes] were never a problem of economics. They are politics all the way through. We put those payroll taxes there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no d--- politician can ever scrap my social security program."

Therefore, ending the payroll deduction is step #1 to breaking SS's spine.

[Pkg Man]

Here is a telling quote from FDR: "Those [payroll taxes] were never a problem of economics. They are politics all the way through. We put those payroll taxes there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no d--- politician can ever scrap my social security program."

Perhaps that's why my grandfather detested FDR...

My proposed "fix" to SS is to simply pass a law today that says we will only pay out as much as is paid in, and lock in the current payroll tax rate.  That would immediately wipe off the books a lot of the unfunded mandate.  Of course it wouldn't stop the pols from inventing other ways to redistribute our money. 

[MediumTex]

Here is a telling quote from FDR: "Those [payroll taxes] were never a problem of economics. They are politics all the way through. We put those payroll taxes there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no d--- politician can ever scrap my social security program."

Perhaps that's why my grandfather detested FDR...

My proposed "fix" to SS is to simply pass a law today that says we will only pay out as much as is paid in, and lock in the current payroll tax rate.  That would immediately wipe off the books a lot of the unfunded mandate.  Of course it wouldn't stop the pols from inventing other ways to redistribute our money.   :(

The trouble (and I'm not telling you something you don't already know) is that people don't seem to grasp the basic idea that the government can never give more back to society than it takes in the form of taxes because interest on the national debt and the cost of bureaucracy must be absorbed before any redistribution of wealth can occur (never mind the inherent inefficiency in any coercive redistribution scheme). 

Thus, the harder the government tries to give more free stuff to the populace, the poorer the overall society becomes.  That's the basic problem with communism.

It's so simple, but it goes against the "something for nothing" ethos to which many people have become accustomed.

[pplooker]

Here's something else: a great many of the people I talk to who tend to be of a certain political party affiliation believe the government invests our Social Security payroll taxes, producing profits which pay for the benefits.

[MediumTex]

Here's something else: a great many of the people I talk to who tend to be of a certain political party affiliation believe the government invests our Social Security payroll taxes, producing profits which pay for the benefits.

As Ross Perot would say: "Now that's just sad."

I suppose, though, that there is some truth in the idea that the payroll taxes have been invested, but they have been invested by the government in simply buying more government.