The Falsity of Saving for Retirement

[mishalak]

I am not saying that you should not save for retirement, or whatever else you might choose to save for. But savings cannot pay for a retirement in the absence of a base of workers willing to take up those savings in exchange for their work. Savings are the same as government programs like social security at one step removed.

Do this thought experiment with me. Say a worker's savings are in the hardest of hard investments, gold. In this thought experiment gold could be replaced with anything of value that almost never goes down in value and is pretty imperishable. The worker has saved real gold all his life, putting away and average of one ounce a month from the age of 20 until retirement at age 67. That is 47 years or 564 months and 564 ounces of gold. Today's price on gold puts its value at $869.20 that represents a dollar value of almost half a million dollars.

But that is only if there are workers on the other end willing to buy the saved gold. Let's not assume this worker is unique, but is part of a generation of retiring workers who all saved bigger or smaller piles of gold in this nation and expect to live well in retirement off of these savings. If the nation has not been investing in new workers, teaching them the skills they need to run their society then even though gold is the best commodity we know of for holding value over time it will not go as far if there are not enough people working to produce the transitory goods we want to buy with gold or any legal tender.

Less severely, what if younger workers don't buy up the gold as fast as the retires are unloading it? This could be for whatever reason. From there simply not being enough of them to not earning enough to put away a full ounce of gold every month as their parents did. The natural outcome is the gold won't go as far for the retirement as the people saving it all those years expected.

Ideas like saving for retirement are dependent on the ratio of workers to non-workers. It does not matter why or how people are not working, only that they are not. Unmotivated, unskilled, disabled, or simply non-existent does not make a difference in the outcome, only in what might be done about it.

To some extent the system is self correcting. Not enough workers? Perhaps wages will rise and with prosperity they may choose to have more children. But that is a may and a might and it depends on child rearing being as attractive as anything else a person might do with time and money. And it ignores the hardships of the imbalance between people working and non-workers.

Savings or social security, we were going to have to adjust the way things work with the impending retirement of a very large block of workers and the failure to create their replacements. All social security does is short circuit the process and make it obvious who's actually paying for retirements. It has always been and will always be the younger workers. In the past it was just a lot easier because there were always so many more young workers (and ones with good paying jobs too) than there were people retiring.

Comments

[selenite.livejournal.com]

I'm working on the supply end. :D

[mishalak.livejournal.com]

Good on you. I'm an example on the other end though. It is both more expensive for someone in a sames-sex relationship to have and raise a child (legal costs, higher adoption barriers, surrogate costs if we went down that route) and as I'd want a more stable and higher paying job situation for the sake of the relationship and the children. So unless things change in a way that I cannot see happening right now I doubt I'll ever raise a child, though I'd like to.

[nancylebov.livejournal.com]

The most obvious adjustment is that most people aren't going to be able to retire if they can work.

Health extension would lower medical costs (both financial and labor) and increase the number of people who can work.

[mishalak.livejournal.com]

To some extent. But that probably can only ease the pain rather than ending it.

And, as you don't need me to tell you, we're also wreaking the other end of the equation by sending off young people at the start of their careers to be partially or fully disabled in a foreign war, failing to educate poor children, and throwing away poor young men (and an increasing percentage of women) in the prison system.

[don-fitch.livejournal.com]

Talk about Economics makes my teeth itch, and exposes my ignorance (as well as that of Economists, sometimes), but I kinda suspect that the introduction of gold, here, is a red herring (though not an intentional one). Hardly anyone saves cash for their retirement, any more -- even paper money makes the mattress lumpy & uncomfortable -- they _invest_ the money.

With luck, whatever they invest it in increases in value more than enough to compensate for Income Taxes (special accounts that defer these until withdrawal are important, here) and inflation. I don't know the current figures, but seem to recall that it used to be that a sum of money, invested reasonably conservatively, could be expected to double in value, as its income was added to it, approximately every 15 years, so a regular investment program, continued for 45 years (one's working lifetime), could be expected to yield a comfortable income, indefinitely, by the time one reached the age of 65 -- if the payments into it were substantial (i.e., on the order of 1/4 of one's income).

It sounds to me as though you're saying that invested money doesn't do work, and earn its interes; that the whole monetary system is a kind of Ponzi scheme pyramid. I don't think that idea will float, in the real world. (Mind you, I seem to be of the opinion that Economics, as a "science", is about on a par with Astrology.)

[feonixrift.livejournal.com]

You still need somewhere to spend it.

[don-fitch.livejournal.com]

Yup. But, strangely enough, I've never had any difficulty finding places to spend money, and even finding the things I want to spend it for has only rarely been a problem. If the situation Mishalak is setting-up involves the idea of a substantial number of people ceasing to accept the concept of "money", we're getting into an area beyond my ability to suspend disbelief. (Societies that never developed that concept are perfectly credible, but the idea of using some kind of token to represent obligations or values appears to be too useful for people to abandon, even though they may recognize that there's a significant fictional aspect to the particular tokens they're using.)

[mishalak.livejournal.com]

Gold can stand in for any other investment in this thought experiment. You still need someone to buy the investment for it to have value. Everything is relative in finances. An investment that has increased in value and produces a tidy return will only mean there will be that much more inflation when the retirement group all starts spending money without enough workers to soak it up. Or, the investments all go down because not enough people working will lead to a general malaise in the economy and not enough people with income to by the investments, thus forcing people to keep working.

The direct way in which this thought experiment breaks down is if somehow through investing you can get young people in other countries to stand in for young people in your country by buying the investment instruments/gold/dollar/wampum/etc intended to save for a retirement.

The indirect way in which this thought experiment breaks down is by some people will aways have done something different that results in their getting a better deal. There are always individual winners in a market based system. The few for who the Carleton Sheets system worked despite the majority for whom it is a disaster.

Investing is just like entropy. You can't win, you can't even break even, and you can't get out of the game. The only way to get ahead is to add more energy (labor) to the system.

[inqueery.livejournal.com]

Practically speaking, "breaking even" or "winning" or "losing" is a pretty broad undefined term. Not entirely sure what they mean in context or out.

But yes you do hit on the fundamental nature of financial markets and interest: You only see the "windfall", if you do the right something that is not what everyone else is doing. (and typically isn't the easiest thing to do or else more folks WOULD do it thus undermining the value of the gain) Its the source of the root ECON101 question: Why don't banks give the Prime Rate as checking account interest levels? Answer: they could, but it wouldn't matter since the market would just balance to the new levels.

Likewise, if you are saving up for retirement via a 401K, Bonds, CDs, etc "just like everyone else", then your financial instruments will just do "just like everyone else" as an average. Perhaps that could be called "breaking even?" Conversely, if you fail to invest, you'll certainly do more poorly. True if the economy weakens, you short term will do worse - but then again so will everyone else, and it will level out medium to long term.

Regarding "the only way to get ahead is to add more energy(labor)". Sure that might feel right but its not the only reality - take this true story:

If I took, lets say, $10,000 and invested it in my employer's stock when they IPOed at $40s and sold in the $600s last year, I'd be quite wealthy. (Fucketty fuck fuck - certainly thought about it - but chickened out) That's investing - and that didn't take much work if I had the knowledge that the risk was worth it and had access to the short-term cash via some avenue. That wouldn't be much effort either so there are certainly notable exceptions - and not just for millionaires - but yes by the very nature of the economy they have to be that - exceptions.

I would agree that for most people, and the way the economy HAS to work in the grand scheme, is to provide incentive($) for the masses to inject labor to keep things moving - but not too much incentive or else people will just stay home and watch TV - which couldn't actually happen or else there would be no TV! :-D But that doesn't imply a "falseness", just knowing the fundamental basis for how the world works.

It was true in the 1800s with farm culture just as it is today - only money is the incentive, not directly food and shelter.

[inqueery.livejournal.com]

Oh and you are right - the Baby Boomers aren't going to help things. Sure they upset the apple cart a bit by having less labor in the workforce for a couple decades. Social Security as we know it today certainly will be a goner as a result. Whether that will notably disrupt the economy is an uncertain question. Possibly far more significant are the massive loans and severely cut internal federal spending (devaluing the dollar) we've put in place to pay for the "war".

[mishalak.livejournal.com]

I would define breaking even as being able to save today's labor for tomorrow without losses or additional labor. But that's impossible, even with gold. For if the gold isn't protected it very soon evaporates and protection costs. Regular cash inflates, bank accounts depend upon the rest of the economy, etc.

But this does lead to the great thing about capitalism (from the point of view of someone who does not like to do heavy lifting) is that the labor added to the system does not necessarily have to be one's own or even human. But there is, of course, a moving limit of how much labor saving/multiplying devices can do and it is all relative. So the shrinking of the workforce due to the babyboomers moving into retirement is/was going to cause trouble for the economy no matter what. Just as a stable or shrinking human population is going to cause trouble as it starts to come into being around the middle of the century.

[mishalak.livejournal.com]

And, yes, money very much is a sort of very modest ponzi scheme. It does not need to grow nearly as quickly and sometimes labor saving/multiplying devices can substitute for adding more individual people, but at heart all investment depends upon work, not the mythical intrinsic value of the investment.

Put it another way. If the population was shrinking by half every 47 years we'd all be twice as rich when we retired as when we started working, right? Twice as much land, twice as much gold, twice as much of everything? Wrong! The amount of food relative to the population stays the same so twice as much of the fixed assets will only go about half as far against things that need to be renewed regularly like food, all structures, metal stocks that are consumed rather than horded, etc, etc. It only helps if there was a shortage of something that could not be increased before.

The real world scenario is not as dramatic or dire as a halving of the population in a short time. It is more of just a general tightening. Immigration is partially offsetting it and so on, but nonetheless it is real.