Monday, August 13, 2007

Freedom Fifty Five -- I Do Believe in Fairies

There is an interesting article today at MSN about the meltdown in the stock markets last week and its links to the aging population. In essence the article observes that with the aging of the population there is a desperate need for investments that will magically generate income for all those retirees who no longer work. As anyone who grew up in the 60's and 70's will recall (if they were paying attention) the premise of the idea of retirement in those days was that there was an ever expanding working population where ever widening tiers of workers would support a small pinnacle of retirees.

It all made sense until you looked at it and realized that in other environments -- say the neighborhood investment club -- that approach to investment return is known as a Ponzi or pyramid scheme and only works so long as the new marks, excuse me, I mean investors kept coming in. Once the new investors stop coming in the money stops flowing up and the tiers that have not already been paid out are out of luck. The new tiers that have not come into the scheme are ok -- they don't play and so they don't lose. The tiers that got out are fine -- they got their money. It is the group in the middle who paid their dues and now have no-one to pay their return that have lost.

Jim Jubak makes this observation in MSN on August 10, 2007 which really describes how the pyramid scheme of easy retirement at fifty-five is coming to an end:

This decay in the credit quality of corporate bonds couldn't come at a much worse time for the managers of pension funds, insurance company portfolios and, indeed, any portfolio designed to cover the huge costs of retirement in a rapidly aging world. By the middle of this century, demographers estimate, about 15% of the world's population will be older than 65, the traditional retirement age in the United States. That's a huge increase from today -- just 7% of the world's population is older than 65.

The retirement bulge is even bigger than that shift in percentages indicates. First, the developed world, with the bulk of the world's formally organized pools of retirement assets, is aging faster than the globe as a whole. In Japan, the oldster of the developed world, for example, 20% of the population is already older than 65; that percentage is projected to be 30% by 2025. And second, once workers and their spouses hit retirement age and start collecting their pensions, they are living longer. Of the 20% of Japan's population older than 65, half are older than 75. Longer life spans mean pension funds and other retirement vehicles have to pay out longer and more for each retiree.

While he uses this to describe a particular bump in the markets (one which may disappear tomorrow) the reality he describes is slowly but surely coming to pass for all of us. Common sense tells us that unless the burden of carrying the retired is made modest through widescale sharing, the workers of the world are not going to freely carry the voluntary non-workers out of the kindness of their hearts. This will be particularly true if the non-workers are able of body and mind and have no reason not to work other than a desire to hang out.

This will be doubly true in the United States where the fanatasy of Freedom Fifty-Five has been doubled with the concept of you don't have to invest in saving or in public infrastructure (say, the healthcare system) because future generations will be doing it. Is this going to be the other future generation than the one that is paying for your retirement?

While there will be arguments that foreign markets will save the day and so forth, just remember when you hear this -- it is a pyramid scheme and there is no bottom layer. The only real answer will be, to work longer, save longer and have somewhat more modest expectations of retirement ("what, no weekly skiing in the Alps?! That's ok, they melted anyway and the skiing sucks").

Well what were you going to really do with those twenty-five or thirty years following fifty-five anyway? Why not do something productive with it.

Here is the to the article:"

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