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Saturday, March 25, 2006

Work and Retirement

People are living longer. Life expectancy has been creeping up over the last couple of decades, but with upcoming technology, I'm confident that a life expectancy of 100 will be achieved in my children's lifetime (i.e. they'll likely live to 100).

On the other hand, people seem to be retiring earlier and earlier. Many of my cohorts are planning on retiring in their fifties. Others, who've had financial strains such as divorce or a failed company, are lamenting that they might, worst case, actually have to work into their 60s. On current trends, I can see the expected retirement age creeping down to 50.

On the third hand (I must be an octopus), we seem to be taking longer to enter the work force, mostly for good reason. It can take ten years or longer to get a Ph.D. in some fields. We seem to need ever more lawyers and managers with MBAs. Healthcare is becoming an ever larger percentage of our GDP and it takes forever to become a doctor. At the present rate, the average age of entering the work force might be as high as 25.

I've just painted a picture where, on average, people enter the work force at 25, leave at 50, and live to 100. This implies (making the somewhat erroneous assumption of a flat age distribution) that there will be one worker for every four people.

This scenario, regardless of how it is financed, is a far, far less well off scenario than one where 3 out of 4 people work, which would be the case if everybody in the picture above worked till they died. It doesn't matter if everyone saves huge percentages of their income in order to prepare for their retirement years. In that case, there would be a large number of dollars chasing the few goods and services that can be produced by the one out of four people working. It doesn't matter if the government somehow extracts huge taxes out of the workers to pay for the retirees (and children). The total pie to be consumed would be much smaller than it would be if we all work for a larger percentage of our lives.

Thus, when pundits pontificate about fixing social security and other retirement entitlements, I can't even start to take it seriously unless it provides an incentive for people to work longer. A society in which people are retired for 20 or 50 years of their adult life is a poor society complete with a great deal of intergenerational resentment. It's simply unworkable in my opinion. And that's without even taking into account that as I've been watching people retire, I've noticed that they seem to go down hill much faster after retirement. I think that retirement is unhealthy for most people.

That's why a new book (or more accurately the description of said new book since it hasn't been released yet) by Charles Murray, the at least partially evil genius (in my opinion) author of the Bell Curve, caught my eye. In "In Our Hands", Murray proposes tossing social security (and the other entitlement benefits such as medicare) out the window and replacing them with a $10,000 stipend to every adult over 21:

The one I have devised--I call it simply "the Plan" for want of a catchier label--makes a $10,000 annual grant to all American citizens who are not incarcerated, beginning at age 21, of which $3,000 a year must be used for health care. Everyone gets a monthly check, deposited electronically to a bank account. If we implemented the Plan tomorrow, it would cost about $355 billion more than the current system. The projected costs of the Plan cross the projected costs of the current system in 2011. By 2020, the Plan would cost about half a trillion dollars less per year than conservative projections of the cost of the current system. By 2028, that difference would be a trillion dollars per year.

Many questions must be asked of a system that substitutes a direct cash grant for the current welfare state. Work disincentives, the comparative risks of market-based solutions versus government guarantees, transition costs, tradeoffs in health coverage, implications for the tax system, and effects on people too young to qualify for the grant, all require attention in deciding whether the Plan is feasible and desirable. I think all of the questions have answers, but they are not one-liners; I lay them out in my book.

Assuming that the questions really do have answers that aren't too evil, the single solution that "the Plan" offers that I think is absolutely critical is that it eliminates the concept of a retirement age, or a specific point at which retirement benefits begin. It would enable people to decide when to retire based on the proposed stipend and its current value in the market.

This would provide an automatic feedback mechanism. If too many people decided to retire too early, the goods and services that $10,000 could buy would drop and this would encourage people to keep working. This self regulating mechanism would reduce the likelihood of situations where there are too many people who aren't working. In other words, it's a solution that could work for the long haul, and it can continuously adapt as technology and society changes.

6 comments:

Oroborous said...

I don't think that your cohort is representative of America as a whole.

According to the Federal Reserve Board's 2004 Survey of Consumer Finances (PDF), the median income for families headed by a person aged 45 - 54 was $ 61,000, and for those headed by a perons aged 55 - 64, the median was $ 55,000.
(The SCF uses "family" in the same way that the U.S. Census Bureau uses "household", and hereafter I shall use "household").

The median net worth of households headed by a person aged 45 - 54 was $ 145,000, and the median net worth of those headed by a person aged 55 - 64 was $ 250,000.

Across all American households, slightly over one-third of all net worth was attributed to the market value of their primary residence, and vehicles. For households whose incomes fell in the middle 60% of all households, and for households headed by a person older than 45, an owner-occupied dwelling was usually the largest asset.

A net worth of $ 145,000, half or more of which is home equity, isn't an optimal retirement situation, especially if one is looking at financing 40 years of retirement.
While having a nice place to live is beneficial, it doesn't generate any cash flow - although I suppose one could always get a reverse-mortgage.

A quarter-million, combined with Social Security payments, would do the trick, but half of all retirement-aged American households don't have that much.

Further, the current government-regulated retirement accounts DO provide incentives to work past 50.
IRAs, 401(k)s, 403(b)s, and similar accounts don't allow penalty-free withdrawals until age 59 1/2, reduced-benefit Social Security "early retirement" payments don't begin until age 62, and for those born in 1970 and later, full-benefit SS payments don't begin until age 70.

Therefore, I don't think that more than a quarter, and certainly not more than half, of all people in their fifties are actually going to stop working voluntarily. They can't afford it.

I've noticed that [people] seem to go down hill much faster after retirement. I think that retirement is unhealthy for most people.

That's actually been well-proven by numerous studies - or at least, inactivity is a killer, which tends to correlate with retirement.

If they aren't going to work for money, they need to get an engrossing hobby, or volunteer for worthy causes.
Sitting around causes brain-rust and physiological failure.

This scenario, regardless of how it is financed, is a far, far less well off scenario than one where 3 out of 4 people work, which would be the case if everybody in the picture above worked till they died. It doesn't matter if everyone saves huge percentages of their income in order to prepare for their retirement years. [...] The total pie to be consumed would be much smaller than it would be if we all work for a larger percentage of our lives.

While that's objectively true, I'm not sure that it's totally true subjectively.

In the first place, right now only half of the entire American population is in the work force. The other half is too young, retired, or institutionalized. (Prison, nursing home, nuthouse). So if in the future only a third of the population works, that wouldn't necessarily be a catastrophic shift.
Secondly, over the next few decades the rate of productivity increase is going to get MUCH larger, due to advances in nanotechnology, computer speed and power, data storage, and especially telecommunications, plus your field. As our ability to produce grows substantially, we could either increase everyone's share of the pie, or keep the size of the shares the same, but allow more workers to drop out of production.

Which is the final point: As you were arguing the other day over at The Duck, once a certain level of comfort has been reached, it may be more rewarding for folks to drop out and watch the world go by, rather than to pile up more treasure.
So, as a society, it might even be healthier if more 50 year olds retired.
America would be less fabulously wealthy, and more mellow.

At least, that's what all the people who unfavorably compare workaholic America to the much more relaxed European attitude towards work, think.
I agree with the sentiment, but based on current behaviors, I don't think that the people of fifty years hence will be retiring any sooner, on average. This despite the probability that they'll be enjoying belonging to a society with an economy generating $ 250,000 annually per worker, in 2005 dollars, compared to today's $ 80,000. Also regardless of whether we adopt Charles Murray's plan, as young people will spend the money, instead of putting it into investments which would allow most of them to retire in twenty years.
While the average future person will spend more time in retirement, I doubt very much whether their working lives will really be only three decades long.

In fact, if the future's medical science keeps them feeling middle-aged until they're 100, we'll probably see people working until they're 80.
The reason behind such a prediction is that people like consumption, and they aren't greatly enamored of saving. If the average worker of 2050 is making the equivalent of $ 100,000 a year, she's certainly likely to save a higher percentage than the average worker of 2006 - but not twice as much more. She'll just have more, cooler, stuff.
Also, there will be far more cool stuff available in 2050, and if people aren't feeling too worn down to work when they hit age 60 or 70, many of them will just keep on working, to keep bringing in the means with which to purchase said cool stuff.

The only way that the majority of people will be able to retire after working for thirty years would be for the government to mandate savings, as they are theoretically doing now, but for real this time.
If every worker had to put 10% of their gross earnings into an IRA, and we dropped SS, then many people would have the option of retiring at relatively young ages.
If it's not mandated, then the current dynamic will continue.

Further, keeping people alive and in good shape until they're 120 (or 200, or 300 - whatever) may not be cheap. Medical expenses may become most people's biggest budget item. Staying alive for XXX years, with a good quality of life, may mean working for an extra decade or more, to cover the cost of treatment.

Bret said...

oroborous:

Wow, that's an amazingly well thought out and detailed comment! It should be it's own post!

Regarding: "I don't think that your cohort is representative of America as a whole."

Certainly not. Most of them are well above the median and, as a result, can afford to retire earlier than most. However, as the median income increases over time (assuming that enables people to save more), then more people might expect to retire earlier.

Regarding: "Therefore, I don't think that more than a quarter, and certainly not more than half, of all people in their fifties are actually going to stop working voluntarily."

Currently, that's true. According to this article from the Economist, the average age of retirement in the U.S. is under 62 (as of 2000), and around 60% of those aged 55-64 are employed.

The main point is that the trend is towards a smaller percentage of the population working. Which brings me to...

Regarding: "... right now only half of the entire American population is in the work force. The other half is too young, retired, or institutionalized. (Prison, nursing home, nuthouse).

And don't forget those who stay at home with the children.

Regarding: "So if in the future only a third of the population works, that wouldn't necessarily be a catastrophic shift.

I agree that my 3 out of 4 statement is erroneous (and I'll update the post accordingly in a few days - thanks for pointing that out). However, each of these groups would factor into my scenario as well, reducing the worker bee to non-worker bee ratio even further. So instead of 1 to 3 or 1 to 4, it might even be 1 to 5. It may not be catastrophic but I think it could add significant strains to society.

Regarding: Secondly, over the next few decades the rate of productivity increase is going to get MUCH larger, due to advances in nanotechnology, computer speed and power, data storage, and especially telecommunications, plus your field. As our ability to produce grows substantially, we could either increase everyone's share of the pie, or keep the size of the shares the same, but allow more workers to drop out of production."

I agree that technology will likely greatly increase productivity per hour and is a mitigating factor. The problem is with financing retirement. Currently the choices are: (a) redistribution via taxes (i.e. social security) which will cause a resentful burden on the remaining workers or (b) redistribution through savings and private pensions which won't be anywhere near enough because those savings and pensions are generated from today's productivity and today's technology and don't have the benefit of future technology and productivity. In either case, the potential for intergenerational conflict is large.

To me, a more plausible method of working less and being "more mellow" is to cycle in and out of working during the entire course of one's adult life. Work for a few years, take a few years sabbatical, go back to school, work some more, etc., but do this through one's entire life. Each bout of working would then utilize the latest technology and the earnings and savings would be based on that. Murray's plan would potentially facilitate this sort of thing and it may mesh well with the Kurzweilian world ("The Singularity is Near").

Regarding: "Staying alive for XXX years, with a good quality of life, may mean working for an extra decade or more..."

Exactly. I think a healthy society with a good quality of life requires that most of its members work during at least portions of nearly all of their lives.

Hey Skipper said...

Bret:

Does the average age of retirement figure from The Economist reference men only, or men & women?

Given what appear to be fairly well entrenched productivity trends, it doesn't seem outlandish that we can average 3% per year for quite some time. IIRC, that implies a doubling of productivity in 20 years, meaning we can do with a lot fewer workers.

But can we do with fewer moms?

Granting that supply is likely to go down, that means wages will go up, perhaps significantly. Twenty years from now, how many women will forego having children in order to make big money?

Bret said...

hey skipper,
I think that the average age is for men and women combined, but I'm not certain.

Note that because our population is also growing (because of immigration), 3% GDP growth doesn't equate with 3% GDP per capita growth (it's more like 2%). And median and below incomes grow even more slowly.

I don't have the exact number handy, but since 1980, there's been roughly a doubling of GDP, but the median income has only grown about 25% (assuming CPI and other measures are correct).

Nonetheless, if we have a low worker to non-worker ratio, then part of what I was writing about was that those who are working are going to make a lot of money relative to the financing of the non-workers, so I can easily see wages rising and women becoming more inclined to work more and have less children.

Hey Skipper said...

Bret:

I was referring to productivity, not GDP, growth.

Over the last 20 years, I'll bet GDP has increased far faster than the population, and will continue to do so.

Duck said...

I think that the biggest barrier to early retirement for most people is poor financial discipline. Many young people are getting credit cards in college. My daughter, who turned 18 last October and is still in High School is getting credit card offers in the mail already. I remember that when I was a college graduate and a junior officer in the Marines in 1981 I was turned down twice by Sears for a credit card. This at a time when short term rates were over 20%. Now with a global savings glut (except in the US) and interest rates so low, there is really no incentive to save and ample incentives to use easy credit to fund consumption. The idea of living within one's means is largely defunct for most people, unfortunately.

The growing productivity figures won't reward all employees equally. Knowledge workers will be disproportionately rewarded. The economy will increasingly need average people more as consumers than it will need them as producers. I think at some point people will be paid to consume.