Have you heard the good news?
If you’re a retiree, you’re now better off than people who are in work. That’s right, in the decade during which interest rates and the income yielded on capital has dropped to 5,000 year lows… somehow pensioners have become wealthier than ever.
But have they?
If you’re retired, do you feel better off? Do you feel as though you have adequate income? Do you feel more secure, happier, richer?
I’m all ears. You can reach me on [email protected].
A strange decade to retire
This all came about after a report last week from the Resolution Foundation – widely reported in the press – who claimed that “pensioner incomes after housing costs now outstrip those of working age people”.
According to the report, “pensioner households are now £20 a week better off than working age households, but were £70 a week worse off in 2001.”
So what’s going on? How can it be that pensioners are getting richer while the return on capital (in income terms) is so poor?
There are several factors. For one, more pensioners continue to work today than they did in 2000. One in five senior households has at least one person in work, as opposed to one in eight a decade and a half ago.
Then you have benefits, which have increased over the same period. And housing costs make a difference too, with more people owning their home in retirement than they did in 2001.
The big one is demographics, though
In recent years increasing numbers of the baby-boomer generation have reached retirement age.
Financially speaking, that means people who’ve owned homes and other financial assets – mostly via a pension – during the “Great Moderation” from roughly 1980 onwards. In that time houses, stocks and bonds have all soared.
That means many people today will be retiring with much larger pension pots, or overall wealth if you take house prices (if downsizing) into account. More assets means – nominally – more income.
But that doesn’t tell the whole story, does it?
Those much bigger pension pots only pay marginally more income than people got a decade or more ago. If the financial system hadn’t been warped and distorted by the state, retirees today would be much, much better off in income terms than workers. Instead, they’re likely getting less than 2% where before others got 6%+.
I’m not sure that’s cause for celebration. And I’m not sure retirees today really feel that much richer. More likely they feel cheated out of the five-star retirement they thought their assets would provide when rates were high.
Income shocks
There is a relationship between changes in our income and how wealthy we feel we are.
It’s all a matter of perception. Our brains deal with sudden, unexpected changes to our income – either up or down – in very different ways. This can have a dramatic effect on how we spend our money.
For instance, researchers at the Bank Undergound blog calculated how much our spending fluctuates in relation to changes in our income. To do this they figured out “how much spending changed for each unexpected pound of extra/less income: known as the marginal propensity to consume (MPC)”.
They found that unexpected increases in income lead to a small increase in spending – 14p extra spending for every pound in extra income.
When it comes to decreases in income though, each £1 drop leads to a 64p decrease in spending. Essentially our response to a decrease in income is four times as severe as a corresponding increase.
That’s consistent with the asymmetrical way our brains deal with profit and loss: we fear loss much more than we desire gain. Therefore we respond to loss far more dramatically.
This, by the way, is one key reason the welfare state will fail
It’s virtually impossible to take away a benefit once you’ve promised it to someone without intense after-effects. A system that can only grow and pushes back against any attempt to cut it back is doomed to failure, once increasing lifespans push the balance of workers to dependents into the red zone. But that’s a story for another day.
My question is, how do we respond to declines to our expected income – ie, the income we thought we’d get in retirement… only to find that the system is rigged against us?
Let’s say you had a pension pot of £250k and expected through most of your working life to get paid 5% on that. You’d be looking at an income of roughly £12,500. It’s still not a lot. But let’s use that number for the sake of argument.
Then, you retire and find you’ll only get 2%. Your expected income just dropped by £7,500. I wonder if that has the same psychological impact on people’s spending and general approach to retirement? My guess is that it does.
Many people predicted the financial crisis in 2008. But very few people, so far as I’m aware, predicted how long the authorities’ “emergency” response would go on. That’s to the detriment of income seekers who’ve been waiting for things to normalise for eight years now.
I have bad news on that front: things aren’t going to be normal for a very long time. What does that mean for your portfolio and retirement plans? Are you prepared to wait another decade or two with virtually zero income on your portfolio?
Farewell, welfare
And this all comes at a point when other “traditional” sources of income are under threat – things like the social welfare system. This is something Alan Greenspan highlighted in our private conversations last month, primarily about the US. But we have the same problem here.
State-funded retirement only really works when the country’s long-term finances are sound, supported by positive long-term demographics. You need large numbers of young working people and relatively small numbers of older people.
(Or, of course, you can borrow the money.)
If that’s the case, and you have the cash free, you can afford to pay out retirement benefits. That’s been the case in this country for a century.
But we’re living through a period of great demographic change, which is seriously undermining the system. Increasing lifespans and falling birth rates (true across the Western world) means that there’s increasingly going to be a growing pool of retired folks… compared to a shrinking number of workers.
Demographics are like icebergs
They move slowly and fairly predictably. But they’re hard to stop. And when they hit you, the damage can be immense.
Which is leading some people to question whether the very idea of retirement is even feasible in the modern age. Expect to see more and more of this as the situation deteriorates. Like this piece, from The Guardian last week:
Retirement was once considered the jewel in the crown of any civilised society. Discrediting the idea that it’s acceptable for the elderly to toil late into their twilight years was one of the great achievements of the 20th century. It wasn’t just about morality, of course. There was also an economic rationale. But giving people the chance to rest after 45 years of hard slog was deemed the decent thing to do.
Not any more. Now we have entered the age of austerity, one that we’re told might never end. As a result, there’ll be no government help in your dotage. Nor will your employer’s pension plan provide enough to make ends meet. If this heartless post-crash variant of neoliberal capitalism could be summed up in one message, it would be this: you are on your own.
Hmmm. I’m not sure about that one
Is it worse to tell people “you’re on your own” when the facts suggest that the system is failing – and our ability to pay retirement benefits will become progressively more difficult to do? Or to pretend things are ok… only for the iron rules of demographics and mathematics to have their day in the future?
The first isn’t a palatable message. It wouldn’t be a vote winner. Though it might change the way people behaved enough to help them prepare themselves.
The second, in my opinion, is morally bankrupt. It’ll leave a generation of people believing the government will “do something” to fix the problem – only to find out far too late that they really are “on their own”.
The second option seems to be the route the establishment has taken. Oh well.
I do have some good news for you. There are ways to take control of this situation. The first thing to do is to accept things aren’t going to get better quickly (or at all). Action is required. Then you need to seek out ways of generating more regular income outside the traditional financial system (the world of 1%).
I want to share several ways of doing exactly that with you this week. I’ve been preparing our research for you all month. It’ll be ready on Wednesday I think. If you want to earn big, consistent income in today’s world – you’ll want to review what I’ve prepared for you.
By the way, it’s the exact opposite of the idea I spent last week discussing with you: how to make 10-X from small technology stocks. It solves a different problem altogether.
So if you’re sick of hearing me bang on about high-risk, high-reward opportunities and just want a simple way to generate the income you need, check back in for more information tomorrow. I’m on [email protected] if you want to get in touch before that.
Best,
Nick O’Connor
Associate Publisher, Capital & Conflict
Category: Economics