All investment systems suffer from this exact problem: returns aren't guaranteed. Even people with 401ks might experience this same issue if investment returns fall below the conventional wisdom rate of ~7% (or 4% real). But even if that rate holds up over the long-term, there's still to risk of a "lost decade" of no-returns or losses for and extended period, followed by a sudden market pop.
Pensions are hard.
If a government "invests" in its own bonds, that's not an investment.
Takes one to know one
You can always lose your money. Best to accept that and not worry too much.
Hence why I think an SP500 investment is risk free on a >3 year timeline.
The stock market went to shit, not the providers. The 401k appeal is that it's an account you *own* and the government can't touch for money, it would be the same as expropriating a bank account, which to be fair, the Argentinian goverment kind of did in 2001, hence why since then, people there save money in usd cash or in a foreign account, not in the local financial system. If the US government has to expropriate or do weird stuff in general with 401k accounts, we are in a situation where shit hit the fan long ago.
It went somewhere.
Boomer generation globally accumulated a lot of claims and considered them their "wealth" but forgot to produce enough people that are going to be willing to put an effort to satisfy these claims.
Now is the time when boomers will want to use their savings and discover their error.
It works more like a Ponzi scheme.
Not necessarily. What matters here is whether production matches demand. If the proportion of people in the workforce declines, but their productivity increases by the same amount (which isn't far from being the case in Europe) you don't have a problem.
And even that is too simple. As the population ages, demand changes. It increases im certain domains (health) so productivity increase might not suffice.
...but then of course the productivity of older people declines too, together with their health (higher unemployment, more sick leaves), so there is a lower and lower ROI as you put these people in the workforce. And then making people work longer accelerates the health decline, and so increases the demand. Except those people die younger on average, lowering the demand.
So it's a supply and demand issue, but not quite a supply and demand of workers. It's a complicated economic problem. All of this is talked about in the French debate, which is a lot more subtle than the loud vociferations reported in the news make it out to be.
Although I admit that there being other countries in the world does change the calculus a bit; it would be possible (albeit weird and unsustainable) for everyone in France to be retired, so long as say the Philippines was young and working and French retirees owned all the shares in Philippine companies.
In the more common model, you pay for the previous generation hoping that the next one will pay for you, and you need intergenerational agreement on what's a fair amount. You don't need that with the fund model, as you (usually) agree & know beforehand how much you'll pay and how much you'll get.
I'm fortunate to not be part of it, but I'm pretty sure German employees are looking at France where rents are higher and retirement age is lower and think "hey, you can do that?". I guess we'll see whether you can (though, fair enough, Germany is a special case, the reunification cost a lot of money).
How do you save labor for later? Current retirees need young folks to do the work they cannot do, and thus those young folks are paying in today.
When those young folks retire they will be relying on even younger folks to do the work for them. If there are not enough younger folks to do that work, the money saved between generations will become relatively worthless.
Thought another way: The same amount of labor needs doing. If the current generation of workers stops paying in (read: working), then the entire system stops. One generation saving more (or being larger) than the next doesn't change much other than that saved wealth chases a decreasing amount of available labor once that generation retires. Quality of living will be predicated on the amount of available labor - not saved capital.
It gets a little more wishy washy when you can plow capital into long-lasting infrastructure, international wage arbitrage, etc. but in the end you simply cannot run retirement systems if you have less labor available while keeping the same quality of life for all parties. Someone is going to lose.
That doesn’t seem beneficial to workers as a whole. I thought innovation was supposed to benefit everyone? Where’s the hole in this logic?
By 2030 this is expected to be about 2, which is better than I expected. You would need massive productivity gains inside the span of the past 40 years to make up 4-6 workers per retiree in labor.
The fact I have 4-6 less cousins my age to sell my labor to to help take care of grandma doesn't seem to offset that huge amount of labor now needed to be expended on largely unproductive tasks. We went from 4-6 people pitching in to help out grandma each day to just myself. If you look at that in hours vs. dollars, the problem starts to become quite apparent to me. I don't feel I'm 500% more efficient at what I do than my elders.
Perhaps we've innovated so well that we can now support old folks with a fraction of the labor, but I'm skeptical. Fixed costs seem rather fixed, and from where I'm sitting I think a whole lot of that "innovation budget" has been spent already on rising expectations of minimum quality of living.
Consider this extreme edge case: If everybody is retired and no is is working, inflation goes to infinity and all those savings and stocks become worthless.
In the "having money" case, you have more options, but if you're given options, you also have more opportunity to make terrible decisions. And if it's a lump sum (or private investment of some kind), you can pass it on to your children - you can't do that with pensions in the other type.
On the other hand, in the current system as it's used in France, Germany etc, their incentive is that hopefully someone else will do it for them in 40 years. But from what I gather, very few members of GenZ believe that our pension system will survive in its current form until it's their turn to benefit from it. They expect it to collapse, so everything they'd now put in would be wasted, much like if you invest in something after it has signaled that it will default soon.
That is basically the same situation, but you are replacing local people that see the retired ones with remote people that can refuse to send any money and won't even see old people starving.
A strong military can make the situation more sustainable, in a highly immoral way. But that again isn't new, you can enslave people near you too.
It's debatable whether paying into your own account is a transfer of wealth at all, even if you're not able to withdraw your money until retirement.
Imagine a future where there are half as many the workers as retirees. It doesn't matter how much money retirees have in their pensions if they cannot hire workers to look after them (do their healthcare, produce the food they eat etc). You'd just get rampant inflation as the richer retirees competed to get workers, and everyone else goes without. In other words, in that scenario the value of the saved money would be eroded by inflation.
Now I will admit that this is complicated by there being other countries, or if we invent humanoid healthcare robots or whatever. But there's a principle involved that someone (/ thing) has to do the work.
Yes, and that's why this basic pension can only be something guaranteed by the state. In case of war or massive devaluation or change or currency, the state (maybe not even the same one under which "rights" were acquired) can guarantee these things (and will want to guarantee them, in order to preserve the pensioners from poverty).
If caring for the elderly is made more valuable than say, slinging JavaScript, that’s where some of the labor will go.
And the key factor is that if everyone (or their government) saved twice as much, that wouldn't help because if the worker/retiree ratios are the same, then twice as much retirement savings should simply lead to a twice higher market clearing price for that work due to "these accounting mechanizations".
You assume:
* The labor market isn't flexible, that higher pay won't attract new workers
* There isn't a wage at which workers would be satisfied meeting their basic needs.
And this makes your conclusion that the labor would simply absorb additional funding too rigid.
Why yes, looking from a whole market macroeconomic perspective, we should assume that the labor market won't magically generate an arbitrary number of new workers just because the pay is higher - the total number of potential workers is set by demographics and cannot rapidly adjust due to market pressure. The pay rate does affect the labor participation rate, but there isn't that much room for maneuver there, the changes in proportion of workers-to-retirees are much larger than what you can fill with non-working potential workers.
Well, one way that does get new workers is massive immigration of working-age people (which is the strategy used, perhaps unintentionally, by some countries), but if their birth rate and life expectancy is similar, that only postpones the issue until those immigrants themselves reach non-working age.
Which is just a socialized form of the previous social security system which had children or grandchildren look after their parents. Of course, the glaring difference is that social security schemes have motivated many millions, who otherwise might have, to not have children at all or an inadequate number and so contribute very little to nothing towards the future maintenance of the system while still cashing the checks once they retire. Of course this system does help the minority who can't have children for whatever reason but it does look like we've swapped looking after that cohort for a few decades for effectively no social security system for anyone once this ponzi scheme collapses.
This implied link between public pensions and demographic collapse paints a picture that social security was destined to fail because people wouldn't have children for the purpose of taking care of them in old age. The millennial generation, the largest American generational cohort, were born almost 50 years after the founding of social security. How does it make sense that public pensions motivated millennials to not have children, but not their parents?
Across all developed countries where you have demographic collapse you have societies where it becomes more and more expensive to raise children. The public pension system requires that the economy grows year after year and that becomes hard when your population shrinks. As to why the population is shrinking you have to look at why people aren't having children. And when you ask that question you get way more "I can't even afford to buy a house" and not "the government is going to take care of me when I'm old".
1. Have children and treat them well. 2. Save and invest, so capital is available for the few children of the next generation to work with.
As long as millennials are doing option 2. there isn't a problem. If they rely on the pension system, then that would be a problem.
These systems are very sustainable, and the solution to the funding issues would be best served by indexing the cutoff for contributions to inflation.
As to birth rates, how do you expect people earning less than their parents to absorb the exponentially higher costs? My son was born over a decade ago. Thanks to a moderate, common complication, his birth cost $85k. His childcare at age 3 cost as much as our mortgage.
I am only arguing with "The point is that having children is simply too expensive, partly due to cost disease in healthcare." Typically, the main cost of having children involves preschool childcare and good colleges.
> What is the financial risk of having a child who needs insulin?
How many children need insulin? Again, I only contend with the broad generalization that having children is expensive due to healthcare costs.
Insurance profit margins are pretty tiny. We (or our employers) pay a ton for insurance because healthcare costs are beyond ridiculous in our country.
All the retirement savings won't make a difference if there is no one to spend them on. If the population is expected to decline, then you better hope your retirement investments are going into technology that can yield sufficient future productivity gains.
It's apparent if you just think about the farm labor required to produce food, which can't be stored as easily and long term as money. (On that note, maybe the best retirement strategy is a whole bunch of kerosene and shelf stable foods...)
Edit: As said elsewhere in the thread, I fully agree that the problem is due to children being too expensive, not that people just expect the government to take care of them.
Social Security caps are indexed to inflation (they went up 9% from 2022 to 2023): https://www.ssa.gov/benefits/retirement/planner/maxtax.html
Disagree.
Counter-examples:
401k in the US
Second pillar in Switzerland.
The money comes from the people saving and investing their own money for their old age.
Shocker, I know.
For example, your 401k ability to pay for your retirement will depend on productivity gains , growth, saving, investments happen in the future. Those will look very different if you have 4 working age people for one non working person, vs 2 working age people for one non working one. In the extreme case, if nobody is working anymore when you retire, your 401k will likely worth almost nothing.
The problem in France is not how it s funded, but the fact that retirement incomes are way above the funding level. France, with Italy, are the only two OECD countries where retirees have a higher income that working people, which is insane. However, since retirees vote much more than other demographics, their too large income will not be touched.
This change in retirement age only partially applies to those who started working before 1995. Therefore, it is still in a transition phase, and it will take some time before it takes full effect.
Nope. At least not completely. Canada switched away from a pure pay-as-you-go (PAYG) system in the 1990s:
> Move towards a hybrid structure to take advantage of investment earnings on accumulated assets. Instead of a "pay-as-you-go" structure, the CPP is expected to be 20 per cent funded by 2014, such funding ratio to constantly increase thereafter towards 30 per cent by 2075 (that is, the CPP Reserve Fund will equal 30 per cent of the "liabilities" - or accrued pension obligations).
* https://en.wikipedia.org/wiki/Canada_Pension_Plan#1996_refor...
Asset returns are used to help fund benefits. A number of pension funds in Canada have moved away from a (pure) PAYG model:
* https://en.wikipedia.org/wiki/Pensions_in_Canada#Canada_Mode...
The central issue is that physical goods and services need to be produced around the time that they're consumed, and at a given point in time, an economy has a fixed capacity to generate these goods and services.
If you have a non-producing population, and a producing population, then the only way for the non-producing population to consume a given quantity of goods and services is for the producing population to not consume those goods and services. Whether you call the reduction in consumption ability of the working population "taxes" or "investments" doesn't change this fundamental fact, except insofar as it alters certain behavioral incentives around deferring consumption and legal frameworks around property rights.
(This isn't 100% of the story, since you can "lay claim" to production of working people overseas via international investment, but is accurate in broad strokes.)
Populating aging happens over time, not all at once. Overall production also changes over time. It’s not inherently true that for “non-producing” (not sure exactly how you’d define that) people to consume goods the “producing” people must consume less, at least not relative to past levels of consumption.
"Non-producing" people are retirees (as well as children). People who don't produce market goods/services that make up the vast bulk of our material needs.
Isn't this true of capitalism generally, and not just for retirees and young workers?
The "non-producing population" is commonly called "capital", and the "producing population" is commonly called "labor".
Instead, they built ever-decaying roads and rotting ticky-tacky boxes and left nothing durable for future generations. Hell, they even ripped out trains in cities across the country. (Seattle interurban among so many examples).