Retirement Saving and the Crises of 2030

By   /   December 5, 2014  /   31 Comments

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It is widely believed that people should save for their retirement, and some people believe that such saving – voluntary or compulsory – could or should be ‘instead of’ rather than ‘as well as’ a ‘pay-as-you-go’ tax-funded scheme such as New Zealand Superannuation.

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It is widely believed that people should save for their retirement, and some people believe that such saving – voluntary or compulsory – could or should be ‘instead of’ rather than ‘as well as’ a ‘pay-as-you-go’ tax-funded scheme such as New Zealand Superannuation.

Many people are concerned about the financial sustainability of New Zealand Superannuation (eg Patrick Nolan: Baby Boomers could drive us bustNZ Herald 2 Dec 2014). This concern tends to be a kind of reverse alchemy; imagining we will not have enough money to sustain our future elderly, as if money were stored wealth much like squirrels’ acorns, though (unlike acorns) miraculously subject to compound interest. The popular fiction is that with saved money (rather than taxed money) we can all live in a comfortable retirement, and without saved money we must live very modestly in retirement.

It is economic sustainability that matters, not the accumulation of money. Money is a circulating medium; not a resource. Will we have the resources to produce sufficient goods and services to allow both the over 65s and the under 65s to live in an appropriate level of future comfort? The potential for economic unsustainability is at least as great a problem – probably a greater problem – if we rely on savings schemes rather than a tax-funded scheme to provide goods and services to our over 65s in 2030.

The only general argument in favour of retirement savings schemes would be that real GDP per person (essentially productivity) would be higher in 2030 than it would be in the absence of retirement savings schemes. But retirement saving schemes raise other issues: inequality within the retirement cohort, inequality between the retirement cohort and working-age households, debt overhang, and inflation.

The inequality that most affects prevailing living standards is spending inequality (inequality of enjoyment), and not income inequality (inequality of entitlement). While both concepts of inequality matter, I have noted (in my previous posting) that, at present, spending inequality is less than income inequality. Consumer debt is the equalising factor. An important distinction here is between purposeful and purposeless saving. Purposeful saving is saving with the intent of spending later (saving for a sunny day). Purposeless saving is saving that savers have no plan to spend (saving for a rainy day); it serves more as a form of insurance than as an intent to defer enjoyment of goods and services.

 

Inequality within the retirement cohort in 2030.

If we save purposefully for retirement then spending these savings will accentuate pre-retirement inequalities. Counterbalancing this is New Zealand Superannuation, benefits relating to publicly funded health care, and rest home subsidies. Thus the extent of inequality of living standards within the retirement cohort will be closely related to the ratio of spending funded by retirement savings to spending funded by taxation.

We must also be aware that the financial assets that we call retirement savings represent the debts of other people. When a 55-year-old saves in 2015 and redeems her saving in 2030, she becomes a creditor. The corresponding debtor(s) have the obligation to service that debt by relinquishing the requisite amount of goods and services in 2030 in the form of debt redemption or new saving.

We should note that many retired people in 2030 will also have purposeless savings. Their receiving of New Zealand Superannuation is unlikely to make them consume more in retirement than they otherwise would. Purposeless savings create financial imbalances that, unchecked, lead to financial crises; that is another issue however. Unspent New Zealand Superannuation paid to these people does not add to the economic burden faced by society as a whole.

In addition, significant numbers of people in the retirement cohort will be working fulltime or parttime, or will be in receipt of private capital income such as rents, company dividends, and interest. Many will have implicit rental income on account of owning their own homes. And many will sell assets, meaning that much of their spending will be funded by the purchasers of those assets. These people may not need to have a fund of retirement savings to draw on. Their New Zealand Superannuation will largely go unspent (it will become purposeless savings), and will not represent an economic burden to others.

 

Inequality in 2030 between the retirement cohort and the rest of the population.

The central issue about retirement finance is the ratio of spending by those aged over 65 to the spending of those aged under 65. While substantial taxes will be paid by both age groups, we are presuming that (and especially with universal New Zealand Superannuation in place) that the proportion of taxes paid by the under 65s will be greater in 2030 than it will be in 2015. We also presume that the proportion of tax-funded entitlements payable to those over 65 will be higher in 2030 than it will be in 2015.

These presumptions are not as certain as we imagine. We base them on the supposition that people will live longer, and that they will be facing significant health issues while they are living longer. An alternative scenario is that, while people will be healthier for longer they will not be unhealthier for longer. And, while they remain healthy they will continue to contribute to the economy, though not necessarily through paid work. So the tax ratios mentioned only represent part of the economic story.

The wider issue is the balance between tax-funded entitlements and debt-funded entitlements. Saving creates debt-funded entitlements which, as we have noted, are more unequal than tax-funded entitlements.

When people over-65 collectively spend their savings in 2030, that means people under 65 must forego spending; they must save. However the over 65s’ spending is funded, the people aged under 65 must forego consumption to accommodate the increased consumption of people over 65. Foregone consumption in 2030 by the under 65s may mean either higher future taxes or higher future savings.

The argument that New Zealand Superannuation is unsustainable is really an argument that younger people in 2030 should forego consumption more through saving and less through paying taxes. Which of these sacrifices – more saving or more tax – will be better for, say Generation Y (born in the 1980s)?

The familiar social contract is that each working generation concedes taxes to fund the retired generation, and that the following generations in turn will pay taxes to fund them in retirement. The variant contract is that each working generation saves today to fund most of the retirees’ spending, and in turn relies upon the following generations to save to fund them as they spend their savings.

The variant contract based on debt exchanges (saving) is flawed because some people will save and some cannot or (‘free riders’?) will not. The option of compulsory saving is economically equivalent to taxation, though more unequal in retirement because the retirement benefits reflect prior inequalities. (Of course the taxation system also may be abused by free-riders; otherwise known as tax avoiders.)

Overall, because of the inequalities and obligations of debt-funding, the total burden of Gen Y tomorrowwill be greater the more the Baby Boomer (1946-55) and Jones (1956-65) generations save today. The best way to minimise the future economic burdens of Gen X and Gen Y would actually be to  discourage retirement saving today while retaining a strong universal tax-funded retirement income. Under this scenario the Boomers and Joneses would live more modestly (and more equally) in retirement in 2030, leaving more consumer goods and services for Gen X and Gen Y and Gen Z (and their families) to enjoy.

 

Debt Overhang

Tax funded spending equality is much more efficient than debt-funded spending equality. (‘Equality’ here means equalisation of spending relative to pre-tax incomes.)  Since the 1980s, the liberal capitalist world has shifted substantially from tax-funded intergenerational support to debt-funded support; that’s probably the greatest untold story of our age, the number one legacy of neoliberalism.

The calls to further limit tax-funded means of intergenerational support do nothing to address the demographic issue that we face in the 2030s. Rather the switch to debt-funded retirement – retirement spending funded by selling the debts that retired people own – will accentuate the problem by creating more inequality within the retirement generation. Rather, reduced tax-funding will substantially boost demand for financial services, and it will boost the demand for welfare bureaucrats whose job is to separate the qualifying retired poor from those expected to largely fend for themselves.

We already have a substantial problem of intergenerational debt. Generations Y and X are the most indebted ever. If we require Joneses to save more today, then they will be joining with the Xers who are already contracted to save in the form of debt servicing. The present decade’s growing savings glut will be compounded, and an economic crisis in 2030 beyond the scale of the Great Depression becomes even more likely.

 

Inflation or Deflation?

The 2030s are shaping up as a clash of global economic crises. We may just be lucky and have the two crises cancel each other out (just as anthropogenic global warming may be being offset this decade by acooler sun).

First, it is not clear that we truly have global demographic imbalances this decade, or even will have such imbalances in the 2020s. Economic opportunities in the 2020s will not be in the parts of the world where our young mostly are. So we can expect the next 10-15 years to be the decade (or so) of the denizens; people (such as New Zealanders in Australia) living in other countries who are integral to the economies in which they work, but having no citizenship rights in those countries.

However I believe that China will tip the balance. In the 2030s the age imbalance in China will have global consequences. So I think it is safe to say that the 2030s will be a decade with an unusually high proportion of elderly people in the world.

If it were not for our global demographic imbalances, we could be heading for an economic crisis around 2030 that would dwarf the Great Depression of the 1930s. The debt overhang will be huge, and people with credit balances will be largely afraid to spend. This would become, like the early 1930s, a period of quite substantial  deflation, and that would accentuate the financial imbalances. (It was in the 1930s that Irving Fisher published his debt-deflation theory of depressions; Fisher was an optimist who believed that massive quantitative easing of money could easily reverse deflation.) This would represent a gridlocked  demand-constrained  global economy. (See my posting Constraining Credibility.)

If it were not for our huge and growing financial imbalances, we would be looking at a one-off  inflationary crisis centred on the 2030s. Combining normal spending by working-age people with the spending of the world’s retirement savings funds, aggregate demand would shoot through the roof to unsustainable levels, creating a classical crisis of scarcity. This would represent a gridlocked  supply-constrained global economy.

If the two crises come together around 2030, then huge spending by retired Boomers and Joneses may be enough to offset contracted debt repayment and precautionary saving on the part of Xers and Yers. The ‘problem’ of affluent retired Boomers may turn out to be the solution to a problem of parsimonious spending by their working-age youngers. If this is so, the less we do to resolve today’s retirement conundrum the better. Rather, we will be looking to the oldies as the consumers needed to save the world economy.

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31 Comments

  1. Korakys says:

    You’re living in a fantasy world.

    —————–
    Also I now suspect the only reason you are allowed to post on this site is that Bomber no longer reads you posts. I thought you had to be at least a little bit “left” to post here.

    Not quite. Korakys. I’m assisting ‘Bomber’ to moderate comments. We welcome a range of views, though anything perceived to be trolling, ad hominem, repetitive, etc, will be consigned to the Trash. Ditto for racist, sexist, and homophobic comments. It’s by no means a “free for all”. -ScarletMod

    • Keith Rankin says:

      It’s extremely difficult to respond to non-specific criticisms; I have no idea what you are referring to.

      I realise that there are two distinct economic concerns about Baby Boomer retirement. One is that Boomers might lead a sparse retirement because there will be more old people living longer on average. The other concern is that Boomers might lead an affluent retirement despite the demographics, but at some cost to younger generations.

      Retirement savings per se resolve neither concern. They will mainly add to future inequality and certainly to future debt. The more Boomers purposefully save today the more goods and services must be ceded by other generations to them tomorrow. But it will be mainly the already rich Boomers who benefit.

      If Boomers run large financial deficits in retirement, then other generations will be obliged to pay by running large financial surpluses. I have spared you numbers, but I write more from a mathematical than from an ideological point of view. Can maths be left-wing or right-wing?

      My plea to leave things as they are – to not meddle with NZ Superannuation – is hardly a right-wing rant.

      • Korakys says:

        It was more to ensure that you understood that my last comment to your previous article was highly sarcastic. I have no specific criticism to offer here and, indeed, I am very surprised that you decided to reply to my bout of childishness.

        Since you bought up maths though… here is an old comment I’ve posted before:

        Economics is a science, not a branch of mathematics. The sooner economics embraces the concept of evidence and provable theories the better.
        https://xkcd.com/435/
        Economists like to think that they stand between Maths and Physics. The sooner they get their heads out of their arses and realise that they are on the other end of the scale the sooner it will be respected.

        • Keith Rankin says:

          There’s maths and there is maths. I will not support the excessive application of algebra and econometrics to simplistic assumptions and inappropriate data.

          My maths here is the simple maths of subtracting a number from itself: x-x=0 (always). For example, the amount lent minus the amount borrowed equals zero, always. This is because the two amounts are the same by definition.

          • Korakys says:

            Ah, but in the real world I think you will see that the amount lent is not the same as the amount paid back. They are only equal up to the point that the money is transferred (or created in the case of a bank loan).

            • Keith Rankin says:

              I never said that the amount lent is the same as the amount paid back. I said that the amount lent is the same as the amount borrowed.

              Another similar truism is that the amount bought equals the amount sold. It means that if some people judge economic success as selling more than they buy in their lifetimes, then such success can only be achieved if some other parties buy more than they sell.

              • Korakys says:

                I thought you would say that. You can’t see beyond your equations.

                Does total debt equal total credit? No. Will people giving away their unneeded money increase the velocity of money? Yes. Will an increase in the velocity of money increase GDP? Yes. Will an increase in GDP lead to an increase in positive outcomes (longer lives, better health, lower crime, better environment, more education, etc)? No, there is no correlation for developed countries.

                • Keith Rankin says:

                  Who does a debtor repay if there is no creditor?

                  Is the total amount lent equal to the total amount borrowed?

                  • Korakys says:

                    Of course, I’m not arguing against the dictionary. I guess nuance is lost on the internet.

                    My point is that your basic concepts don’t support your arguments.

                • Keith Rankin says:

                  Who do debtors repay, in addition to creditors, when total debts exceed total credits?

    • Korakys says:

      Commenting is not what I meant, sorry for the unclear wording.

      I meant the writing of the actual main articles. Does Mr Bradbury even read those any more (the ones submitted by Keith Rankin to be precise) is what I was wondering.

      Rankins views do seem quite inconsistent the those of ever other blogger here. I know there’s nothing inherently wrong with that, but it does seem a bit weird.

  2. Nic the NZer says:

    Yeah, losing a lot of credibility by using Anthony Watts as a source for climate information.

    • Keith Rankin says:

      I know nothing about Anthony Watts, and I certainly did not deny anthropogenic global warming. Nor did I discern any such argument in that article. It is one of the ironies of life that sometimes two separate events may, possibly only for a short period of time, cancel each other out.

      I understand that the sun getting quieter is a fact. But feel free to offer evidence that it is not getting quieter. I’m quite open-minded.

      • NicTheNZer says:

        Well FYI Keith, Anthony Watts has been in the climate change denial game for around a decade. He regularly miss represents research papers on his blog and draws conclusions not supported by the original authors. Now you know.

        • Keith Rankin says:

          Thanks for that. Do you think that he is overstating the significance of a quieter sun? Or do you think that the claims of a quieter sun are factually incorrect?

          • Korakys says:

            Overstating significance, but the graph is factually incorrect wrt the prediction segment.

            This 11 year cycle is the weakest in 100 years, but 11 year cycles have little to no effect on climate because they don’t last long enough. It doesn’t seem possible to predict solar activity beyond 11 years (example: many astronomers predicted this cycle would be strong right up until the measurements came in).

          • Nic the NZer says:

            I suspect (without having looked at this particular trope) that he is overstating the importance of solar cycles to influence the climate. Most of the credible stuff I have looked at doesn’t take much notice of solar output as a major driver, this is probably because the fluctuations are not that large and they are fairly un-predictable. Though its important to point out that the solar output reaching earth is measured (by satellites) and fluctuations in it definitely don’t account for most of the global warming measured in the lower atmosphere (e.g changes in solar output have clearly been ruled out as a major cause of global warming).

    • Korakys says:

      Indeed it is not always the case that everything climate change deniers say is incorrect, but in that case why didn’t Keith Rankin just cite an unbiased source.

      • Keith Rankin says:

        My article is about the possible consequences of increased retirement savings, not about climate change. The aside about global warming was no more than a simple analogy that it is possible for one causal factor to offset another, making it look as if there is no problem when in reality there are two problems.

        However, for my interest, I would appreciate hearing from someone about evidence that the sun is not moving into a more quiet phase. I believe that I first heard about the sun getting quieter on a BBC or similar doco.

        • Korakys says:

          Indeed, I got interested and had a look at the veracity. The current solar cycle is the least active since 1906. However solar cycles are 11 years long (+/- 25%) and I highly doubt the next one will be as weak as this one. The 200 years things is being misconstrued. Also sunspots apparently influence only up to 20% of observed climate change.

          As far as I can see it is not possible to predict solar activity further than 11 years in advance, let alone 200 years.

          • Korakys says:

            Ah, the problems of reading up more when you are halfway through writing something.

            I don’t doubt that the next cycle will be lower, in concordance with my last sentence I don’t know whether it will be stronger or weaker.

  3. Dan says:

    Funny how so many left of centre despise anyone trying to get ahead, whether it be owning a rental house, working for a living, not expecting a hand out, opposing the encouragement of international trade, buying shares in SOEs and so on.

    • It’s funny how so many right-of-centre make such inane generalisations about those on the left… *rolls eyes*

    • Korakys says:

      My theory about the left and right:

      As people grow up they find out at some point that the world isn’t fair. One group decides that the world should be fairer and the other decides that they want to be the beneficiaries of the unfairness.

      • cleangreen says:

        1000000% Korakys,
        “the other decides that they want to be the beneficiaries of the unfairness.”

        That is right wing to a tee”

        Feed off the misfortune of others is what they (right wing) are all about as I have seen all my life.

        I grew up under Egalitarianism and loved it with equality and no self interest over others to speak of or crime and no suicide as we see today lots of hardship and inequality and lack of compassion that seems we are turning into animals.

        But now at 70 we are being felt as we are as Rankin infers us as a drain on the rest by citing Patrick Nolan’s herald article “Baby Boomers could drive us bust”

        Yes Koraky Rankin should get his head out of the sand, and spend some time out in the real world seeing the rest of us have to live on Super now we are receiving less for our $289 a week with very few subsidies for Dental, and other medical needs not covered on the public health.

        National has gutted spending on the elderly and Rankin is driving home the coffin nails afterwards.

        ,

        • Keith Rankin says:

          As one of the most vociferous defenders of universal superannuation in at least its present level of ‘generosity’ and as a strong opponent of raising the age of entitlement, it’s very hard to imagine where this comment is coming from.

          Any article commonly starts by citing a reference to the point being contested. My reference to Nolan could not conceivably be taken as some kind of support for Nolan’s position.

          • Dan says:

            Its simple. The less constructive of the left moan about anything and everything.Unfortunately, the rest of the left gets tarred with the same brush. I really think some people prefer being in opposition and secure in the knowledge that they will never have to really make a decision.

      • Liberty4NZ says:

        My theory about the left and right:

        As people grow up they find out at some point that the world isn’t fair. One group decides that the world should be fairer and the other decides that as life has been kind to them, and they are o.k, they need not give a crap about anyone else. Yes you reap what you sow and sometimes you reap what you didn’t sow.

  4. cleangreen says:

    Keith Rankin’s response to my senior citizen’s criticism of his bland statements as we are a drain on society was made even worse but his insulting reply in inferring he supports his “present level of ‘generosity”

    I am appalled at his brash remarks stating the current entitlement as “Generous”

    This firstly is not a handout as Rankin infers.

    Superannuation is an entitlement payment made back to me for paying into a Government run savings for retirement fund for all my Kiwi working life.

    You should be a solid supporter of the mandatory superannuation scheme.

    We all (hopefully) pay into superannuation for the very same reasons we also contribute to our several insurance policies – to receive a safety net and to receive that income to retain our life support and insurances in our retirement.

    This character sure knows how to offend the elderly does he.

    You need to be on the other end of your high thinking dream world themes and hopefully you will see the error of your ways then..

  5. Brian says:

    Our economic sustainability depends on environmental sustainability.The govt.can always afford to purchase goods and services demoninated in N Z dollars.The taxes we pay do not raise revenue per se. They give the Govt. the room to spend in an non inflationary way.The govt. does not need to issue debt to match its deficit spending.The govt. could offer a govt. guarantee job at a living wage to all those willing and able to work.Provide those who cannot work for what never reason a guaranteed minimum income.Provide free education up to university level.The govt. should create a public bank that can provide cheap credit to those that most need it. If we want to met the needs of our future population then we need to jettison our love affair with neo liberal dogmas.Our that we are entering a period of what as being labelled inverted totalitarianism .[i.e.every natural resource and every living being is commodified and exploited to a point of collapse, as the citizenry are lulled and manipulated into surrendering their liberties,and their participation in govt.through excess consumerism and senationalism.]We are well way on the way,so our expressions of dissent are rendered pointless as the elites don’t even have to acknowledge there is a problem.Things are just going swimmingly for them.
    Just as aside the last crash was preceded by a plunge in oil prices.