The Dependent and the Independent

Predicting the future is at best an educated guess.  The one trend that can be reasonably reliable, absent some significant external shock, is that of age demographics.

In the year 2050, experts predict more than 80 million Americans will be over the age of 65, or double current levels. In the same timeframe, the number of “working age” Americans – those between 18 and 64 – will rise just 17%.

In other words, the problem we have today of too few workers trying to support too many retirees is going to get worse – much worse – in the decades ahead.

This, of course, is not a problem only in the United States, but throughout the west and even much of the rest of the world.  When I think about the ultimate victory of the laws of economics, it is to this issue that I lean.

However, the problem is much more significant than that of “working age” vs. those “over the age of 65.”

How many of working age are on some form of government support?  How many of working age are employed by the government?  How many of working age are employed in industries (such as banking or military contractors) that exist in their current form only due to government support?  How many are in the 1% solely due to personal and corporate proximity to the Fed and the Treasury?

In other words, how many of working age are working in areas that are not valued by the market – either in whole or to a large degree?  And more important, are these numbers growing or shrinking relative to the past?

These are the dependent.  It isn’t just retirees that must be supported.  In every way they are being supported by the independent – those who produce goods and services that are valued in a relatively free market in quantities supported by a relatively free market.

There are only two solutions to this (and one of these two isn’t much of a solution for the independent):

One possibility is a step function increase in productivity unlike any seen in the industrial age or the communication boom.  Of course, this “solution” will not bring much solace to the independent.  Any such gains will be siphoned off to the dependent – both at the top and the bottom of the income scale; both to the 1% in near proximity to the Fed and Treasury and to the stereotypical welfare mom. 

This is precisely what has happened in the last 30 years. In the midst of the greatest boon in technological progress since the industrial revolution, the standard of living for the average worker has remained more or less stagnant.  Almost all of the gains have been siphoned off by the 1% closest to the seats of power; the crumbs have been tossed to the lower half in order to keep things calm.  (The middle class gets crumbs as well; believing these are valuable without counting the cost of stagnation.)

So a new, step-function improvement in technology might help relieve the situation, but it won’t help the large majority much, if at all.

The second possibility is default – and default in many forms.  Most importantly will be default on promises: retirement benefits, medical benefits, etc.  This will include private retirement and medical plans – after all, these can only earn real returns by leaning on the (shrinking number of) dependent.

There will be default through a continued and ongoing push at inflation, in hopes of further chipping away at the problem.

There will also be real, no kidding defaults.  Debts will be written off and restructured.

My guess is that the second possibility will prevail.  After this, any gains in productivity due to whatever is the next technological boom will accrue somewhat more to the independent, productive class.

Retirement: Always a Dream

The dream of retirement as it has been sold in the West is gone.  It is not quite accurate to say it has vanished in a puff of smoke; for it to have thusly vanished requires that there was a time that the dream was possible.  It did not vanish – the dream was never real because the dream was never plausible.

What was the dream?  The government would provide a safety net of income – social security as it is called in the U.S.  The government would provide medical care for all retirees.  But even the programs not directly tied to the government were a dream – pensions from your employer; private retirement savings in the form of 401(k) and IRA plans; stock market investments, mutual funds, bonds for income, real estate booms.

On top of this retirement dream was the idea that the government would also take care of the poor, through welfare of all forms: public housing, food stamps, support payments, unemployment benefits.

Everyone could live off of some combination of savings and transfer payments.  This idea might work for a time as long as the number living from savings and transfer payments remained relatively small as compared to the number involved in producing the goods and services necessary.  I recall thinking during the late ‘90s tech boom, “who is going to do all the work when we all get to retire at age 30?”  I almost grasped the problem…but not quite.  I understand it a little better today.

Dr. North recently wrote a piece that captures this – in this commentary he specifically points to the promises of the U.S. federal government: Social Security and Medicare.  Underlying Dr. North’s commentary is an analysis by Prof. Lawrence Kotlikoff of Boston University, demonstrating the true rate of growth of the U.S. government’s debt and deficit – with unfunded liabilities the amounts are staggering, and impossible to overcome: over $200 trillion debt, and an annual deficit of over $10 trillion.  These numbers represent the present value of the promises made by government towards its constituents.  As is obvious, the promises are much more expensive than the current out of pocket cash expenditures.

The issue is not that the amounts will someday become reality (they cannot), but that there is no way possible for the promises behind these amounts to be kept.  Dr. North’s point, and it is a correct one, is that mass inflation or hyperinflation will not solve the problem of this debt.  Implement inflation, and this will certainly lesson the burden of repaying the on-the-books debt.  However, remaining on the other side of the destruction of inflation we will still find government promises to provide a retirement and medical lifestyle.  A significantly devalued currency does not change this fact.  A new currency does not make it more possible. 

I will add that the problem is compounded as a) the rolls of welfare recipients and otherwise un(der)employed grows, b) the involvement in and allocation of economic activity by the government continues to increase, and c) as the rolls of retirees with legitimate savings grows – expecting to use the savings to buy product from those still in the productive workforce.

The issue is a simple one, and one I have suggested several times in the past: there are too few productive supporting too many non-productive, and the ratio is worsening as time marches on. 

What do I mean by productive and non-productive?  This requires some clarification, as often people read these phrases and believe I am making a value judgment.  I make no value judgment: I do not mean to suggest that all working people are productive while all non-productive people are lazy bums.  I am speaking completely in terms of economic production.  To clarify, I will offer some examples and further comments.

Productive: individuals performing tasks (providing goods or services) that would be valued in a free or relatively free market, and valued at a level of compensation more or less equivalent to what is realized today.  The best way to elaborate further on this is to move on to my definition of non-productive….

Let’s start with the easy one: anyone receiving state aid, equivalent to the net amount of state aid received.  Welfare, food stamps, unemployment benefits, etc. 

Next on the food chain would be government jobs, held in quantities that would either not exist or even be non-existent in a free-market environment.  Federal Reserve economists, drone pilots, anyone participating in overseas military and covert operations, staff in welfare and most other state offices.  The list is quite long, given the amount of state intervention in the economy.  Pensions received by retirees from these positions would also qualify.

Another rung up the ladder would be individuals who work in private industry, but in such industries that mostly if not completely exist in their current form due to government intervention in the market.  Banking and finance and military contractors are two such industries, as examples.

Now we come to your everyday retiree – even the one who properly saved money and is funding his own leisure lifestyle.  Certainly such a person had a very productive life; however, now that he has “gone fishing,” he is counting on someone else’s productivity to feed him in his leisure. 

It is in this manner that I am thinking when I group individuals in either the productive or non-productive category.  Those who are currently engaged in a productive activity and in a manner that would have a similar remuneration as it would in a free market as opposed to those who are not.

Hopefully it is clear that I do not view all non-productive as leaches – those who have rightly saved and planned demonstrate a good example for us all.  Yet they are no less dependent on the productivity of society to support their leisure than is the welfare recipient.  I can even hold some sympathy for those dependent on Social Security given that the government has stripped most people of the possibility to save, due to a lifetime of taxes and especially inflation.  Finally, it should be clear that I do not view all those who draw a paycheck as productive.

With this categorization, I come back to the idea of retirement.  For one to retire or live on transfer payments someone else must be willing to work and be able to produce for more than his own immediate needs.  This is true whether the non-productive individual is a welfare recipient or a 60 year old with a $10 million portfolio.  The idea that the baby boom generation could retire or retire early thanks to the dotcom boom or the real estate boom or in the “market” was never plausible: as I asked myself at the time of the dotcom boom, who will do the work? 

Even worse, the problems presented by the increasing costs of the government commitments of current and future retirees – Social Security and Medicare, as indicated in Kotlikoff's figures.  On an accrual basis, this liability has increased over $10 trillion in one year!

Finally, the numbers of unemployed, welfare, food stamps, disabilities, etc., are increasing – at a pace far greater than the general population.  From where will these receive support?  The proportion in the truly productive class is shrinking.  (As an aside, I consider that one reason the West became so amenable to China and India was in an attempt to improve the ratio by bringing in hundreds of millions of new “productive” into the mix.  At best, the politicians might have bought a few years, nothing more.)

This brings me back to Dr. North’s commentary:  mass inflation and hyperinflation cannot solve this problem.  The numbers are so staggering that even the magic of “growth” cannot solve it – where will the opportunities come to invest $200 trillion today and earn a 5% or better return, such that the annual deficit can be funded?  Even if the numbers were half of the projection, such numbers are overwhelming in a country with an annual GDP of approximately $15 trillion. 

The West has never seen a sustained period of 5% growth, and certainly not in a time horizon of 75 years as covered in Kotlikoff's analysis.  And to make the numbers work, the investment of $220 trillion must be made today – every year of delay only adds to the mountain of liabilities to be climbed tomorrow.  The United States is an economy of $15 trillion.  Where will such large investments be made with sustained returns never experienced before?

Ignore money and the value of the currency: in order for one to live without working, someone else must produce enough to support both himself and someone else.  It is not a question of value in money – it is a question of production given an ever-shrinking productive base, in relative (and perhaps absolute) terms.

Think about the image of Atlas shrugging; however replace Atlas with an ever-shrinking percentage of the population providing productive output.  Eventually, the weight of the non-productive will prove overwhelming.

The problem is in the ratio of non-productive to productive – and this ratio does not change even if inflation adds six zeroes to every Federal Reserve note in circulation (and to every digital account).  What is important to the retiree is not the nominal value of the FRN, but that it can buy food and shelter for the month.  What is important to the elderly is the ability to have access to health care.  More zeroes do not solve this problem – both the income and expense becomes inflated, and sadly for most, the expense side seems to inflate more.

The government promises will break because the ratios do not work and are getting worse.  There is no way around the fact that the promises for retirement and medical care will not be kept – certainly not for those who look to government to provide these benefits, and even to many who have saved privately toward this end.  There are not enough productive in proportion to non-productive to provide the excess production necessary to support the retirement and / or the welfare of this growing class.  Sadly, this problem will also impact those who have properly saved for retirement as well.  They are competing for resources with those who are also receiving government support.

Government can hyper-inflate away the current on-the-books debt – this amounts to perhaps $15 trillion or so in the U.S.  Given that the present value of the liabilities is increasing at almost this amount EVERY YEAR, this is no solution other than perhaps the one final kick-the-can.  And, as previously mentioned, hyperinflation does nothing to change the ratio.

There will be a reset – but the big reset will not be in the currency, it will not be in the banking system.  Yes, these will reset and the reset will be painful.  The big reset will be in the expectations that so many can live at the expense of so few – whether those “so many” have honestly saved or are living on the back of a government promise.

Too many non-productive hoping to live off of too few productive, with the ratio only worsening.  This is the ultimate problem, and there is no solution possible other than to hit the reset button – the big reset button of completely rewriting the rules regarding the social welfare state that has come to represent virtually all Western states.

This day of reckoning is coming.  

Soon Coming to a Retirement Plan Near You

Millions of workers lose pension battle with government

http://tinyurl.com/87cozmf

The linked commentary by Richard Evans at The Telegraph is addressing a specific government pension battle in the UK.

The case relates to Work and Pensions Secretary Iain Duncan Smith's decision to use the consumer price index (CPI) instead of the normally faster-rising retail price index (RPI) to measure price increases influencing pension upgrades.

The unions say the CPI route will see the value of pensions cut by up to 20pc over a normal retirement, costing every affected worker thousands of pounds.

They accused the Government of unlawfully attempting to reduce pension costs in the battle to cut the UK's financial deficit. The change from RPI to CPI is expected to save almost £6bn a year by 2014.

Throughout the Western and developed world, this is the reality faced by retirees and soon-to-be retirees. It is most certainly true for those dependent on government pension schemes – the promises will be broken. An examination of the tax and spending trajectories of these countries makes clear that the trends cannot continue. Further examination of the “promises” for retirement schemes, social security, medical care, etc., reveal an even more dire picture.

The future “promises” in the US have been estimated at anywhere from $60 trillion to well over $100 trillion. For a $15 trillion dollar economy (almost one-third of which is government spending), such promises will prove impossible to keep. Similar trajectories are projected in much of the developed world.

The promises will be broken. Inflation will erode the purchasing power of the retirement benefits. Or, as in the UK, the formula will be adjusted to reduce the future benefits. This is already true in the US, if one looks at the adjustments made to CPI both regularly and historically. Adjustments favorable to government budgets will be made, because they must be made. Economic law will allow no other answer.

…the Court said that where there were two different indexes, either of which could properly be used for the purpose of uprating public sector pensions, it was permissible for the Government to take into account the effect on the national economy when choosing between them.

The court (employed by the government) could come to no other answer. Members of the court are also relying on their livelihood from the same government. Is it possible these court members would jeopardize their future livelihood for the sake of other retirees?

Many of these government “promises” are not backed by contract, only legislation and regulation. These can be changed. Courts will back these changes. There is no contractual reason not to do so. Even if a contract stands in the way, political muscle will trump contract law.

Government and Retirement Plans

http://thedailybell.com/2019/Tibor-Machan-The-Story-of-Entitlement-Addiction.html


Posted by Bionic Mosquito on 4/10/2011 7:56:58 PM

@Jeannie Queenie

"I am not a NON productive citizen as a retiree.... I DID MY JOB AND A DAMN GOOD ONE"

When I use the term "non productive" I use it in a quite value-neutral manner. A productive person produces goods and services desired in a free market. A non productive person does not.

So non productive can include individuals for whom being productive is not an option, due to some physical or mental shortcoming. It can include someone who is no longer active in a productive capacity, after a lifetime of being tremendously productive. I make no negative statement regarding such people.

On the other end of the spectrum, non productive can include professions that would not exist, or to nowhere near the extent they currently exist, absent the coercion of the state: military personnel, defense contractors, university professors, lawyers, most government positions, etc., are some examples.

Or professions that would exist without the state, but without the excessive compensation made available only due to state involvement: the most egregious example is what passes today for bankers. But you could include lobbyists as another example.

So, by my definition, retirees are, at least to a large extent, non productive. There is nothing wrong with this, as long as they saved over a lifetime (or are supported by family) and do not demand sustenance via coercion.

Non productive as I define it is value neutral. The number of people producing goods and services desired in a free market is shrinking, or not growing as fast, as the number of non productive people that are not producing such goods and services.

So no need to yell at me!

"Are you saying that most boomers are so bereft in brains that they will just lay down and play dead after putting monies into their 401Ks for 10, 20, 30 and even 45 years...."

They will volunteer the next time the stock market falls by 50% or more, and the government offers the chance to come in to the government endorsed investment option at your previous high-water mark.

Start with defined benefit pension plans. These are administered by boards with a fiduciary duty. A typical plan might have hundreds of millions to hundreds of billions in assets. With the next market correction, they will lose half the value. Now the government says: "give us the assets, and we will credit your beneficiaries with the high water mark as the coming in position." As a board member with fiduciary duty and potentially personal liability for taking the "wrong" decision, how would you respond? If they give the assets to the government, there is no way they will be held liable for the decision in a government court. But if they don't? How will they defend themselves in those same courts? They did not take advantage of making the beneficiaries whole? A no-brainer for these board members. They will hand the assets (and obligations) to the government

Now, as an individual with a 401K or an IRA, how would you respond? Three years from retirement, and your assets fell from $500K to $200K. Or, five years into retirement? The government will give you credit for $500K, the previous high water mark.

Most will convert voluntarily. It will buy a few years time for the state, once again delaying the required bust, and ensuring it will be even larger.

The Myth of Retirement Savings

http://www.thedailybell.com/1780/Where-are-the-Baby-Boomer-Nest-Eggs.html


“The myth underlying these attacks (including Simpson's misogynist bovine metaphor) is that most old people don't need their entitlements — that they are affluent pickpockets fleecing younger Americans. – LA Times”

Actually, the myth underlying the attacks is that the money is there, waiting to be paid to retires. By “money”, I don’t mean the check that is in the mail, or a social security trust fund. Instead, meaning that true purchasing power of goods equivalent to the amount (falsely believed to be) saved. The myth is that the goods will exist at the time I need them when I retire.

That “money” was spent the moment it was taken from the paycheck. The money that will be returned will look the same, function the same, but won’t be the same.

It is the same for the stock market and housing – two other retirement myths, cousins of the social security myth. There is only value in these upon retirement if there is productive capacity willing to trade some of that capacity for your retirement. The same is true for cash savings and gold – both worthless unless there is enough productive capacity willing to work in exchange for your leisure.

In the end, there must be enough productive willing to support the non-productive. When the system is voluntary, the system maintains some balance: both through the true worth of savings (true savings are the root of investment which is the root of productivity, thus allowing savers to retire based on their contribution to enhanced productivity…hence modifying and increasing the previously possible non-productive to productive ratio), and through extended families, as DB rightly points out. When the system is coerced, too many are falsely led into an impossible belief: others (the government, the stock market, financial planners, etc.) will be better stewards of your future (and care for you more) than you and your extended family.

DB: “Central banks and modern stock markets are the two halves of an efficient, middle-class money-extraction mechanism.”

Certainly true, as to stock markets for an additional reason: volume. A small cut off of the top of every trade. It doesn’t matter what the market does as long as people keep the faith and trade. Like the single-zero or double-zero on the roulette wheel (depending on where you play), this small cut ensures the house always wins.