Wednesday, February 20, 2013

The Economics of Reality Rear their Ugly Head – Americans Will be Working Longer, Retiring Later and Have Less Retirement Income

And No, the Federal Government Cannot Bail Everyone Out

The demographic trends of the post World War II United States have condemned the baby boomer generation to a not very appealing retirement.  For the next 20 years or more those seeking to retire will either be unable to do so financially, or if they can, will do so only at a substantially reduced standard of living.

For the first time since the New Deal, a majority of Americans are headed toward a retirement in which they will be financially worse off than their parents, jeopardizing a long era of improved living standards for the nation’s elderly, according to a growing consensus of new research.

The Great Recession and the weak recovery darkened the retirement picture for significant numbers of Americans. And the full extent of the damage is only now being grasped by experts and policymakers.

The only unusual thing in the above quote from a Washington Post article is that claim that only now is the problem being grasped by experts and policymakers.  The problem has been known for decades, ever since anyone looked at the birth rates from 1945 to 1965.

An economy does not prosper because of low or high taxes or a rising stock market.  An economy is made up of the amount of goods and services produced.  Old people, retired people do not produce goods and services, they consume them.  So with more old people and less goods and services producing people the economy must suffer.

The result here is that retirement will have to be delayed.  Many people will have to work until well into their 70’s.  Those that do retire will either be the lucky wealthy, the savers or those who get by on minimal income.

And no there is nothing to be done about this, its is foreordained by the baby boom which was followed by the baby bust.  Unlike political dogma, economics and demographics can neither be spun nor denied.

5 comments:

  1. So, with the premise that the elderly consume goods and services, doesn't it follow that if the income of the elderly is decreased, they will be consuming fewer goods and services? Thus, driving the need for fewer and fewer jobs to supply those needs. Doesn't it make more sense to see that retirees have enough income to support the goods and services they will need, thus increasing the job market for those goods and services? Isn't FDR's creation of social security one of the economic jump starts to get the U.S. out of the Great Depression? The elderly don't need to save for retirement or college, so if they can afford to spend, they will. Questions to ponder, just saying...

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  2. That is exactly correct. But given that the retired are consuming from a transfer of income from those working, the increased stimulus to the economy from elderly spending is offset, to some degree by lower spending from the employed.

    It's like having yuor gandfather move in with you. His consumption goes up, but everyone else's goes down.

    Yes, shifting income to the retired is a good thing, but it does not completely alleviate the problem.

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  3. @DPE. That is the answer I expected. However, it makes it sound as though we would be better off expecting our elderly to walk out onto ice floes to perish and get themselves out of the way of the younger generation. And the continuing focus, focus, focus on money in this country obscures the value of knowledge and information our elderly pass on to other generations. I will speak anonymously to a world-class opthalmic surgeon I know. He is busy teaching the next generation of physicians the skills he has taken a lifetime to hone, so that when he can no longer perform his cutting edge surgery, there will be those who can. As long as the national dialog continues around MONEY, we are not talking about the intrinsic cultural value of our oldest citizens. Doesn't an old horse who pulled a plow, carriage, or carried a child for a pleasure ride deserve a decent retirement in the pasture? Or a quick trip to the slaughterhouse? Does that old horse deserve the grain and grass he earned? Thoughts....

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  4. I agree with everything that you are saying, but the purpose of the post is to point out what is inevitable and to a certain extent uncontrollable, namely that the demographics of the U. S. population will result in a lower rate of growth, or even negative growth.

    Much of this is beyond policy solutions, although knowledge of the situation should result in better policies, ie, more efficient and effective medical care, methods to utilize the skills and knowledge of the retired people etc. And no, the solution is not to get rid of the elderly but to accommodate them and their needs as best as possible.

    But is is inevitable that in the future many people will work longer for less, which is unfortunate.

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  5. I love this blog but, occasionally, the author seems surprisingly wrong. Like in this case, it's not ordained and you don't need to deny economic or demography. The fallacy is in the sentence: "So with more old people and less goods and services producing people ..."! Wait there! How do you know there are "less goods"? What about "increased productivity"? For example suppose we can have robots to produce all goods we can use. So everyone decide to retire. Now does that mean that we have "less goods and services"? Everyone is retired, so by your logic, there are "less goods and services" ... no matter that the robots are producing as many of them as before!
    This is an extreme example, but I hope it shows the malthusian fallacy underlying this gloomy forecast.

    The upshot is that it is not question of retirement and saving but rather a question of fair distribution of productivity improvements.

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