The world is sitting on a $400T financial time bomb (2017)
qz.com
qz.com
Imagine a desert island of two people. They have a system of savings. You can bank away a voucher that makes the other person gather coconuts for you, and do other necessary work.
One of the two people could conceivably work harder in their youth and then work less later using the vouchers. But:
1. They can't both do it 2. If the other person loses capacity to work hard in their later years, your savings voucher loses value.
How can they both save? To a limited extent, they can store resources like extra coconuts, build infrastructure and tools while young, etc. But this only goes so far: food rots, infrastructure depreciates.
On a global scale the world is no different. A savings shortfall means that global youth productivity won't be high enough to support global elderly retirement. We will need to either:
1. Get youth more productive 2. Make more youth 3. Take a greater percent of youth's income 4. Have old people live on less or not retire so early
Notice that none of these are about saving now? That's because moving 1's and 0's in a ledger isn't a provisioning of future goods. You need actual future goods production.
Addressed by graeme as "build infrastructure and tools while young."
If you look at the generations who were working between 1980 and 2000 (spanning 20 years), they delivered mind-blowing innovations: personal computers, graphics cards, databases, the internet, countless vaccines... It's impossible to list everything. What did the newer generations do in the last 20 years? Facebook, Twitter, Snap, Youtube, Netflix, Uber, Bitcoin... The only genuinely impressive thing that we achieved was the successful commercialization of the electric car. Our generation sucks. We are stupid and unwise. We can't allocate capital.
See the various options under :
https://en.wikipedia.org/wiki/Secular_stagnation
and
https://en.wikipedia.org/wiki/Energy_returned_on_energy_inve...
the world is not infinite, and economic growth can not be infinite.
I have no proof if we are effectivelly at "the limits to growth" or not. It sure starts to feel like it.
In your analogy, both people can redeem their coconut voucher if they've built a robot that gathers the cononuts.
Yes they can. Assuming there are enough resources to sustain both their entire lives (let's say 75 years); each can work enough to accumulate those resources in 50 years so they don't have to work the final 25 years.
Do you believe you can store coconuts for twenty-five years?
Youth is always more productive because they use tools and strategies worked out by the older.
>2. Make more youth
In some wealthier, western countries many people in their 20s and 30s can't afford to have a dog.
>3. Take a greater percent of youth's income
That's how you divide a nation, young will hate the old, riots will start. Check out "2030: The Real Story of What Happens to America"
>4. Have old people live on less or not retire so early
That's how politicians lose support, Brexit happened because more old people voted than young people, now opinions of old people are being listened to, young are ignored, because they have less voting power.
How can anyone not afford a dog? They are free and don’t eat that much
"Free" after veterinary costs and a bit of equipment. Plus the food. Let's say that's N dollars per month.
That's the N dollars some people don't have.
Or, if they have them, it can be seen as a failure of the current embodiment of capitalism: obviously someone is not extracting enough rents.
5. Automate more, and make sure the production value from the automation benefits those that need it.
This is the basic idea behind Universal Basic Income.
If you have a coconut harvesting robot, none of the two islanders need to work -- assuming there isn't a third person charging them for the coconuts.
> You need actual future goods production.
That's the real key to "world savings", and in your terms you can think of it as "making youth more productive" (or making the elderly productive enough).
In the desert island, You seem to imagine that labor is a zero-sum game (the desert island is the same tomorrow as today) rather than a positive-sum, where I improve the world by my labor, in addition to providing for today's consumption.
Imagine an isolated homesteading family with no community. How would this person/family save for old age? By building up the farm, building tools, planting orchards, building irrigation systems, managing forests, so that today's labor can reduce the amount of labor required for the future.
Agafia Lykova is such a person - https://www.businessinsider.com/72-year-old-hermit-lives-in-... - she lives alone, using tools saved from an earlier time, in a home her family built in previous decades. Life with this infrastructure, including maintenance, requires less effort than initial construction, which was done when there was surplus labor available.
Similarly for a country or a world - the net savings exists in acquired infrastructure (capital) that enables future production (& consumption).
Trees are a good example - by planting fruit trees (capital investment), I enable future fruit harvests. Managed timber forests provide future lumber (or fuel) production decades later.
Similar investments in infrastructure (water systems, equipment, buildings, etc.) all represent net saved value today that enhances future production in subsequent years.
Yes, labor is required in future years, both for production and maintenance (unless/until we can fully automate), but the ratio of consumption today to future consumption is not constant, even in global sum (e.g., the years 1940-1945 may have been a world-wide net loss of acquired capital, certainly for Europe). That net improvement in infrastructure is global savings (or loss).
A more appropriate example is not an island that constrains population, but a population where new people are born and make investments into new businesses and new ideas. You can certainly have people transition more towards savings over time as they enter their prime career earning potential, without it impacting the rest. This is because there will always be other people who are willing to start businesses.
However, this has limits. A country with a 8:1 worker:retiree ratio is currently much more productive than a country with a 2:1 or a 1:2 ratio.
Maybe savings could change this for the future, by really making something that hardly needs labour. But presently we have a real labour barrier to this kind of saving.
I agree it would be better if we saved more though, as this does indeed translate to invest. I hadn't explicitly spelled this out, so thanks.
The islanders are indeed better off if they defer. But, they cannot make themselves so well off as when their society was young, and they still need some labour.
Or they could have a system where they store food for the winter...
Ultimately, the goods and services consumed by retirees are provided by the real economy, not by financial instruments (which is just a fancy way of saying that you can't eat savings).
The way to ensure their availability is to make real investments, not financial ones: build infrastructure, factories, accessible retirement homes; train nurses, doctors, etc...
Unfortunately, focus on the financial can trigger (and arguably has already triggered) some extremely counterproductive reflexes. For example, we've been told for decades now that private savings are essential for retirement. This may be true at an individual level, but in the aggregate it causes a savings glut - those low interest rates aren't just the making of central banks - and it withdraws effective demand from the real economy, which disincentives many of the investments in the real economy we need to provide for an aging society.
So yeah, good to see some focus on the aging society, but please try to look beyond the financial smokescreen.
What's the solution in non-financial terms? Make more young people care for the elderly? Automate as much of the healthcare as possible? Let some elderly people go without healthcare?
But yeah, ultimately the solution would have to be something along the lines of the things you mention. Of course, you don't necessarily have to automate healthcare: if you automate something else, it could also free people to then move to healthcare.
The real problem is on the demand side of funds, we've run out of low-hanging fruits and marginal productive investments, whether in infrastructure, tech or labor are returning less than before, which drives the rates lower. This is in turn driving up the prices of existing profitable enterprises and premium real estate, squeezing out both productive ventures and labor.
Some have said that financial reserve banking enabled the industrial revolution. The party is over, we now have negative nominal interest rates, and very negative real interest rates.
Society has adjusting by chasing risk. Comments like "as long as you hold for at least 10 years, investing in the stock market is risk free" become common. They make these statements by cherry picking American returns. Meanwhile an investment in 1914 German stocks would not return your investment until 2014. I don't believe that we're comparable to 1914 Germany, but potential isn't comparable to the last century of American growth either...
A society does not become rich by moving pieces of paper around. A society becomes rich by increasing its capacity to provide goods and services.
But there's about 20x more people in the US as in NL. The shortfalls are about the same.
I was looking at exactly that 6T figure, and was like: This is an AWEFUL LOT for a country with less than 20 Million people.
I'm not sure about the US, but in the Netherlands the pensions are a hot topic in politics.
The pension funds have to maintain a minimum amount of money, and need to take action if they risk getting below the minimum.
Some/most funds are no longer indexing yearly based on inflation, and some funds are talking about reducing payouts to the retired. They are actively protecting their wealth to ensure the younger generation still has access to a pension when they retire.
On a grander scale there are talks about a completely new pension system; the big funds where the current generation of workers pay the pensions of the retired is fragile with the general aging of the population. The amount of working persons per retired person is shifting, so they are talking about restructuring in a way where every working person saves money for their own pension.
So when the article states that it is an invisible problem... not entirely true for the Netherlands.
Oh come on... why 70%? Presumably retirees don't have childcare costs, can downsize on housing, no more daily commute so savings on transport and lunch costs, ... Also, does "private savings" account for accumulated housing equity?
Also, I think that "retirement savings" are a fundamentally misguided economic policy... There's a fixed amount of wealth created at any moment (and a lot of it isn't transferable over time - in particular, labor, energy and food), so by "saving for retirement" we're actually causing a deflation (less money spent to buy same amount of wealth) and will cause an inflation when we start "spending retirement savings" (more money spent to buy same amount of wealth, so prices go up). This is a rat race, you only get ahead as long as you save more than others (similar to the housing bubble). The only sustainable solution is the working population to subsidize the non-working population (kids, students, retirees) in real time, year by year. If that math doesn't work out, we need to change it (make more kids who become new workers or make less retirees by having people work longer). Or post-scarcity economy of course.
In effect retirement increases economic activity by forcing huge numbers of people to save for benefits they don't receive.
Even if saving decreases economic activity, I doubt it decreases it that much.
Convince, as writing a check or using a bank card allows for large and specific transactions. Paying rent every month via check for 1234.56$ is easy, with cash you need to count and recount etc. This is especially true for transactions over the internet.
Scale this up and you get into Logistics for large transactions like buying property. Verifying a 1,000,000$ Bill is not fake is one issue, as is trying to get change for huge denominations. On it’s own this would creat an ecosystem of bank like entities such as money exchanges with associated fees.
Efficiency, banks make use of deposits for loans which allows them to offer services at a discount. Remove that and people end up directly paying for this stuff.
Banks provide other services like transactions between physical and digital currency at ATM’s. The large unbanked population ends up paying high fees for many services banks provide.
For example, VC firms entire business model is based around investors generating economic activity by handing it to someone that’s going to spend it. Government bonds are another ‘investment’ that seems to sit around doing nothing, but the bonds are not money. The money was more or less instantly spent by the issuing government or handed to an earlier bond holder.
I came here to say the same thing; was even typing it up. Then I paused. Healthcare (in the U.S. at least) is going to be at a crisis point in a decade. Prices keep going up and it isn't sustainable. Retirees will spend a large portion of their retirement income on healthcare.
We're rapidly approaching a time when leaving inheritance will no longer happen at all for nearly all people who've worked their whole lives (i.e. have never been owners, "capitalists", as their primary source of income). I mean I know there's not much there already, but soon that'll just not be a thing anymore. Healthcare expenses plus the death of pensions are going to cause some serious unrest in the next decade or two, unless we course correct hard and very soon.
Money doesn't work that way. Fixing the problems that can be fixed usually isn't a crippling amount of money.
And when hospice is expensive, it's not because any notable treatment is happening, it's just to give you a place to live.
So people aren't saving enough to retire with 70% of their pre-retirement income.
From the paper:
> We have assumed that current global conventions of retiring between 60 and 70 are maintained, and that individuals do not simply remain in the workplace longer.
I don't see how this is a financial bomb. 70% of pre-retirement income is pretty arbitrary. The paper discusses this in the context of increasing life expectancy, but doesn't take into account people working longer which seems the natural thing to happen.
> Still, an overwhelming majority of the short-fall comes from government programs. In order to address this problem, governments must adequately and proactively fund their entitlements too, either by increasing taxes or by cutting benefits. Individuals alone cannot save enough to compensate for the unrealistic promises their governments have made.
A better solution would be to stop providing public defined benefit pensions. Instead switch over to defined contribution. Defined benefit encourages government agencies to make promises in the future that they won't be around to carry out. As a worker, I wouldn't want to trust my retirement to the political process over 50 years. Defined contribution prevents you from kicking the can down the road and not properly fund the person's retirement
Back of the envelope: 50M people doing this at $300k average home value and $20k annual maintenance/taxes/insurance over 20 years of lifespan, and costs drop to food and healthcare. Seems like a no brainer.
(yes obviously this depends on people having had kids and not borrowed heavily against their house...)
What am I missing?
Old people sell homes and combine households with family. Young people (larger total population) buy up those homes.
Thats how its supposed to work, but instead we have real-estate as investment and old people sitting alone in their massive houses until they croak.
I'm not sure that really matters. If young people can't afford to keep a huge house that costs a fortune to maintain then any shortage isn't going to get people to buy that house. They can't afford it even if the old people who own it lower the price.
At the same time there isn't enough supply of smaller properties that young people ~do~ want. This is another, separate problem.
My wife's parents both live with us, they're Chinese and that's a common cultural norm in China, which which I am absolutely fine. It's not a common thing generally here in the UK though.
I can't imagine doing this with my mother because she is used to living in her own house, with her rules and her way of doing things. There's nothing wrong with that, I get on with my mother fine, but living with us would drive her, or us, or all of us insane very quickly. It's not just about doing it, it's also about the social norms and expectations of behaviour that make it possible.
Lack of options will be the encouragement. It's luxury to be able to live alone with your own rules and way of doing things. I will bet that most people who currently "live by their own rules" will acquiesce once they no longer have the power to do so.
> No problem! Just move in together!
The point is to find a way to resolve the shortfall before it happens, not just accept it as an inevitability.
It's a smart policy, but it's quite uncommon. When economists think of simplifying assumptions that also help to communicate the essence of a situation, this one doesn't seem that bad to me.
https://www.mrmoneymustache.com/2012/01/13/the-shockingly-si...
That is not true
From TFA they would have to sell something(assets), and probably adjust their spending in the next paycheck
The myth that abled bodied human beings in 2019 America are unable to come up with $400 is ridiculous
https://www.federalreserve.gov/publications/files/2018-repor...
It’s things you bought that you can sell to access those $400
not selling those assets and going into debt is a choice
The title of the WEF paper is "We’ll Live to 100 – How Can We Afford It?" The entire paper is an extrapolation of that one assumption.
There is no country in the world with life expectancy over 84. There is also no US congressional district with LE over 84. The idea that any collection of humans can exceed even 90 years in average life expectancy is unproven, much moreso for the entire human population. In fact, the LE for the USA has been decreasing for the last 5 years.
Food for thought...
but it's not the only mistake made: pensions are easily affordable as a society, but not for individuals.
the idea to link pensions to financial markets was the first and huge mistake.
"Sleeping on a Volcano: The Worldwide Demographic Decline and the Economic and Geopolitical Implications"
Non-affiliated, just though it was a very good read: https://www.amazon.com/Sleeping-Volcano-Demographic-Geopolit...
No need to create a tyrannical government to force people to do deeds of arbitrary value for elderly people.
A money market account is insured and the real return is 0%, so it's not as vulnerable as you seem to think.
You can call money a credit. Then you can assign credits to actions and create a moral police to assign credits to people who do these actions and enter those credits into a leger. And now you've recreated communist China. Congrats.
All around, money is a better currency of exchange than time, or any other measure really. It measures well the actual value of time , effort, what have you. 1-to-1 time currency would be particularly bad choice, just imagine how much time you would have to pay back for someone who was born 60 years ago. Life was much much slower and unproductive. In the same amount of time today you can do multiple times the work/product that they did.
2030 is when US Social security retirement hits a big wall.