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Hello, with socioeconomic commentary
Old 11-25-2002, 07:39 AM   #1
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Hello, with socioeconomic commentary

As someone who has been prematurely, involuntarily retired, I haven't yet developed enthusiasm for it. However, I have some academic background in economics, have followed the "efficient markets" approach to investing that is advocated by this web site, and appreciate the additional insights and tools (FIREcalc) that it provides.

While I respect everyone's right to make the decision to retire early if they can afford it, a sobering note is that society as a whole needs to be moving in the opposite direction -- towards later retirement.

A very fundamental economic problem is that the ratio of working people to retired people is shrinking. The financial manifestation of this is that the Social Security system will require either benefit cuts or substantially increased taxes in the future. The only socially acceptable long-term solution to this dilemma (other than to make current investments that increase the productivity of future workers) is for people to work longer, thereby preventing the ratio of workers to retirees from falling to a level that excessively burdens future workers.

We retired people presumably have as much "human worth" as others, but unless we provide valuable services (like this web site), our economic worth is negative (i.e., we only consume what others are producing). The fact that we did the "producing" for the previous generation of retirees, and for the current generation of workers when they were growing up, may make this "dependency" justified, but doesn't change the fact of its existence.

I think that the ideal strategy for society and the individuals in it who are contemplating retirement, is to look for arrangements for "phasing out" of full-time work and into retirement. And the best "tool" available to most people to assure that they will be able to afford retirement, is to have the flexibility to continue working as needed to achieve a high level of confidence that their assets will last throughout their retirement.

While the historical asset returns on which FIREcalc is based are a useful guide, another sobering thought is that the shift to an aging population may reduce the future returns of financial markets, which fundamentally depend on the growth of GDP per capita.
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Re: Hello, with socioeconomic commentary
Old 11-26-2002, 01:16 AM   #2
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Re: Hello, with socioeconomic commentary

Welcome, Ted, even though your joining our ranks wasn't exactly your goal!

I enjoyed reading your comments, and hope others more educated in the dismal science than I will chime in.

At first blush, I wonder about your comment about the fact that early (or late) retirees are no longer producing. Wouldn't this only be an issue if we had a problem due to insufficient production? I'm not aware that we have such a problem, or are anywhere close to such a problem.

Much of your commentary refers to people who rely on Social Security, funded by future workers, and the problems associated with a changing ratio between retirees and workers.

It would seem to me that [b]early[/] retireees who have funded their own retirement would be attractive (economically, anyway) to an economic system in the same way as are, say, tourists.

Again, welcome! I hope you'll soon develop enthusiasm for retired life.

Dory36
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Re: Hello, with socioeconomic commentary
Old 11-26-2002, 09:38 AM   #3
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Re: Hello, with socioeconomic commentary

One of the basic principles of the "dismal science" of economics is that the total "production" of any society is never sufficient to satisfy the desires of all of its members. Even if one is willing to dismiss the millions of people who live in obvious poverty on the basis of being "unmotivated" or whatever, there is a vast "middle class" whose consumption is considerably below the level of "comfort" that is enjoyed by perhaps the wealthiest 10% of the population. And 99% of the wealthiest 10% never seems to be satisfied, either.

It sounds simplistic, but is fundamentally true, that the material standard of living in a society depends upon the amount of "real" goods and services being produced, divided by the number of people consuming them. All of the people in a society are constantly consuming its output, but only those who are actively working are producing that output. So by simple math, the higher the ratio of producers to consumers, the higher the per capita level of consumption will be.

There are two general classes of non-working consumers: children and retired people. All of us begin life as "consumers," dependent on our parents' generation for our sustenance. We then eventually become "workers," and the roles reverse. Our retired parents/grandparents then become dependent on our generation for their actual sustenance. (This is true whether they pay us with the private assets that they saved and invested while they were working, or with Social Security benefits.) Our willingness to participate in this arrangement might be called a "contract between generations."

In pointing out the fact that we retired people are no longer contributing output to the economy, I am not making a moral criticism that we are "freeloading." Rather, I am trying to call attention to a very significant reduction that is likely to occur in the U.S. standard of living if the number of retired "consumers" becomes too great in relation to the working "producers." Avoiding the "crunch" that will come from this intergenerational competition for future economic output will mean that a lot of people will need to retire later rather than sooner, to maintain their accustomed standard of living.

Incidentally, the reason for my being prematurely retired (as a civil engineer) was my inclination to point out "bad news" like this about ill-conceived public works projects. I never could agree with the ethical implications of Lyndon Johnson's philosophy that "You get along by goin' along."
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Re: Hello, with socioeconomic commentary
Old 11-26-2002, 04:25 PM   #4
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Re: Hello, with socioeconomic commentary

Ted,

I agree with your views on a macro basis, but the actual number of "voluntary" early retirees are unlikely to ever be very large. The personality types that gravitate towards the freedom of early retirement make up only a very small part of the world at large. Check out the Retire Early Personality Survey we did a couple of years ago:

http://rehphome.tripod.com/mbti.html

Our numbers will never be large enough to effect the economy.

intercst
(also a civil engineer, retired in 1994 at age 38 )
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Re: Hello, with socioeconomic commentary
Old 11-27-2002, 01:25 AM   #5
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Re: Hello, with socioeconomic commentary

Thanks for the thoughtful reply, Ted. It's an interesting topic that I know little about (obviously...), so please forgive my sophomoric questions and comments!

You pointed out that "the total production of any society is never sufficient to satisfy the desires of all of its members". It seems that a substantial part of many marketing departments' goal is to create demand for the products and services produced by their firms. To the extent that this "new" demand forms a part of the unsatisfied desires, I guess I'd have to agree with the principle.

But these unsatisfied desires also seem to create at least some of the reasons why the ranks of the early retired will always be thin, as Intercst points out.

To retire early, the non-heirs among us must live below our means long enough to accumulate a nest egg that will support retirement before any employer will offer a pension. Once retired, many of the early retirees will have to consume less than they could had they continued working.

In many, if not most cases, debt is anathema to this group. However, for a large percentage of the population, debt is a tool used to help satisfy those desires. Their desires for goods and services would likely prevent them from contemplating the early retirement life, and their indebtedness prevents them from choosing it even if they could.

Anyway, welcome again.

Dory36

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Re: Hello, with socioeconomic commentary
Old 11-27-2002, 12:04 PM   #6
 
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Re: Hello, with socioeconomic commentary

Seems like economics is full of more excuses than a cat's got whiskers

We spend too much. We save too much.

Consumption is good. Consumption is bad

Not enough people working. Too many people working (payroll expense bad for the consumer)

It good to retire early but only for SOME people. The rest are needed to toil in perpetuity apparently

Hey, the rich dont work. They're always retired. Why isn't that a problem that needs to be corrected? They don't produce anything. They just collect and "redistribute", their way, the wealth created by all those people who we can't afford to have retire early.

The money is already there. The problem is the top 3/10's of 1 percent have it. Why not have them work and produce things like the rest of us since they seem to think work is good enough for everybody else; and then, like the Republicans always say, we can "let people keep more of thier own money" instead of redistributing it to rich people?

It seems empty to think that a society that has wants and needs, resources and manpower, will just sit there and shrug its shoulders and not get these things done.

It's a problem. We 'll do the same thing we do with other problems (and even perceived non existant problems): Solve them. So-called "productivity" is one component and is a relative factor anyway. How many people does it take to dig a ditch? (change a lightbulb, yadda yadda)

We are not a 3rd world country living in the stone age or a case of arrested development living in the 10th century that can't cope. But then some problems are self inflicted too.

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Re: Hello, with socioeconomic commentary
Old 11-27-2002, 02:48 PM   #7
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Re: Hello, with socioeconomic commentary

Because of the demographics you cited, I tend to think that Social Security benefits are likely to be reduced when the baby boom retires. Anyone who depends solely upon Social Security may encounter a reduced standard of living compared to the current generation. One can only hope that increased productivity, due to technological improvements, will offset the demographics a bit by increasing the size of the pie that the baby busters can produce. Increased immigration may also help a somewhat. I tend to use about 75% of the figure that Social Security's web site tells me they will send me at 66 1/2 for planning purposes. That is just a wild guess though.
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Re: Hello, with socioeconomic commentary
Old 12-04-2002, 07:49 AM   #8
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Re: Hello, with socioeconomic commentary

Here's a consolidated response to the preceding posts.

Intercst said that "voluntary" retirees will never make up a large part of the population. That will be true, but mainly as the result of economic necessity rather than "personality type." That is, people will have to accumulate hundreds of thousands, if not millions of dollars (given probable future inflation) in assets to assure a comfortable retirement.

By the way, I looked up the site that Intercst mentioned. I'm an INTP myself, but am not sure that that means anything statistically since I'm only half "voluntarily retired." By that I mean that I have attempted, over the past ten years or so, to practice what I preach about "phasing into" retirement by working reduced hours, but still performing highly valued work. It worked real well for awhile, until I lost my "flexible hours" job for political reasons unrelated to age.

Even if the numbers of voluntary retirees are relatively small, their potential economic impact is not trivial. "tt" commented that "Hey the rich don't work. They're always retired." For the most part, this is Marxist b.s.
In the U.S., most people who accumulate wealth (and can afford to retire early) do so by being extraordinarily productive. That is why national output will suffer if their services are completely withdrawn.

Also, "early retirement" for many people may mean retiring at, say, 60 rather than 65. That relatively few years of difference, applied to millions of workers, will make a big difference in the ratio of workers to retirees that is so fundamentally important as it affects average per capita consumption.

Mike noted that a fundamental solution to the dilemma is to increase productivity (through investment). That's certainly true -- the eternal political/economic problem is deciding how to do that. One observation is that there is a lot of "administrative overhead" type waste in the U.S. economy that should be targeted for elimination. One example is the unnecessarily high cost of administering the tax system. I heard and believe a figure that the corporate profits tax brings in about $200 billion in revenues and costs $100 billion to administer. That doesn't even count the economic distortions (inefficiencies) that it creates.

While I generally admire immigrants as being decent, hard working people, I do not believe that large scale immigration is in the long term economic interest of the U.S. In the near term, immigrants tend to improve the ratio of workers to retirees. But when those immigrants eventually retire themselves, the problem of supporting the retired population (off of a resource base that is in many important respects fixed or declining) will be that much worse. It's a mathematical certainty that the U.S. population can't continue expanding forever.

Dory 36 mentioned the way that advertising/marketing "creates demand." Although some advertising (especially, classified) is necessary for any economy to function, much of it is an economic waste because it simply shifts demand between competing manufacturers and increases the cost of their products to consumers.

There's an organization called the Urban Institute that has thorougholy analyzed the whole matter of public policy regarding retirement. See http://www.urban.org/content/Researc...Retirement.htm
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Re: Hello, with socioeconomic commentary
Old 12-04-2002, 08:42 AM   #9
 
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Re: Hello, with socioeconomic commentary

Ted
In the U.S., most people who accumulate wealth (and can afford to retire early) do so by being extraordinarily productive.

No, it's usually because they're born that way. You're talking about the merely "Beer and Pretzels" rich.
Also, most wealth is accumulated by redistributing other people's money and not by creating anything

Ted

That is why national output will suffer if their services are completely withdrawn

There shold be someone available to do the same thing for less. Capitalism...? That's how it's supposed to work

-----------
Ted

....much of it (advertising) is an economic waste because it simply shifts demand between competing manufacturers and increases the cost of their products to consumers.

B.S. Marx made this same point, and less directly, so did Adam Smith

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Re: Hello, with socioeconomic commentary
Old 12-04-2002, 11:37 AM   #10
 
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Re: Hello, with socioeconomic commentary

I agree that revising the tax code would improve productivity, but given our political system, I see this as a very low probability. I was thinking more in terms of advancing technology improving productivity. 100 years ago, most of the population was required to work on farms in order to produce enough food to feed the nation. Now, about 2% of the population feeds the nation. I see similar trends in many other industries. Immigration is a time honored tradition in our melting pot of a country. While the population cannot grow forever, this is irrelevant to the boomers retirement. There is enough empty space in our capacious land for a few hundred million more people. Increased productivity plus increased population equals growth of the pie. At a minimum, we will want to import myriad young nurses and such to care for the aging boomers.
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Re: Hello, with socioeconomic commentary
Old 12-04-2002, 02:10 PM   #11
 
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Re: Hello, with socioeconomic commentary

The web site you linked to uses a model that shows slowing economic growth, but growth nevertheless. This is growth even without the possibility of increased immigration, and a coninuation of the trend of accelerating tech progress. Quoted from the paper "Economic Consequences of An Aging Population":

"Demographic trends will have adverse effects on economic growth after 2010, due in large part to the slowdown in the growth of the workforce and the increase in spending on age-related government transfers. But the effects do not appear to be catastrophic. The economy will continue to grow, albeit at a slower rate."

Mike
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Re: Hello, with socioeconomic commentary
Old 12-04-2002, 03:00 PM   #12
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Re: Hello, with socioeconomic commentary

The report "Effects of Demographic Trends on Labor Supply and Living Standards" thinks that the future standard of living will be about what it was in 1997. The economic model used suggests growth in the standard of living between now and 2010, and then a gradual reversion to the living standard of 1997. This does not sound like a doomsday scenario for the stock market, as things were just fine in 1997. The safe withdrawal studies include a retirement at the start of the Great Depression, and nothing in this report suggests that anything worse than the Great Depression is on the horizon. It does not even suggest a prolonged depression at all, but rather counsels "cautious optimism" about the future. The report does suggest that increased workforce participation by some elderly is likely, but IMO this will probably be those who did not save much of anything during their working years for their retirement. I could not see anything in this report that would negate the results of the safe withdrawal studies based upon a 60/40 equity/debt split. It does suggest that people who do not prepare may be disappointed though.

"While the future does not look so bad compared with today, it looks worse compared with 2010 and even worse compared with expectations of rising income that may be generated by growth between 1997 and 2010."

Mike
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Re: Hello, with socioeconomic commentary
Old 12-10-2002, 10:11 AM   #13
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Re: Hello, with socioeconomic commentary

Had to chime in on this one. First of all, we may be retired early, but we are still consuming. Thus, we
are adding value in that way. Secondly, I agree
that the personality type to retire very early is a
small minority. I went from textbook workaholic
to 100% retired pretty rapidly and never looked back.
I have lots of friends (older and with a lot more money)
who have no specific plans to retire. I think they are nuts. They say they envy me, but they don't do it.
I am certain the reasons are many and varied.
Still, we are a very very small minority. I like it that
way. In my case, being somewhat misanthropic
and cynical helped. I dropped out pretty young and am never coming back (to work).
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Re: Hello, with socioeconomic commentary
Old 12-10-2002, 02:47 PM   #14
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Re: Hello, with socioeconomic commentary

I have read that many communities are trying to attract retirees because they are good for the local economy. They spend money, don't cause much trouble, and don't require elaborate tax subsidies to attract like some factories that pay only minimum wage do. Many retirees also help out with volunteer work. It is not necessary to work for others, or for pay, to contribute to the welfare of others. Retiree equity investments also help to increase productivity by funding business.
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Re: Hello, with socioeconomic commentary
Old 12-12-2002, 08:07 AM   #15
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Re: Hello, with socioeconomic commentary

A few points:

1. Immigration may be an American tradition, but anyone who thinks that it was an unalloyed good thing in the past should consider what it did to the original inhabitants of North America. I don't foresee that sort of disastrous consequence from continued immigration -- just increased competition for dwindling resources such as desirable locations to live and experience uncrowded natural places, and energy supplies.

2. Retirees are certainly good citizens, in general, but they are not contributing to the economy by consuming what other people sell them, any more than you are doing your wife a "service" by eating a meal that she cooks for you. When retirees hold part time jobs or do volunteer work, they are contributing to the economy even if they don't get paid for it. And the fact that they hold equities is less important, as a matter of financial economiocs, than the fact that, on balance, they are liquidating those equities to support their consumption.
(I'm not saying that equity ownership by retirees is "bad," but pointing out that as they liquidate those investments it tends to depress their prices. Therein lies the "catch" in the idea of shifting retirement financing away from Social Security and into personal investments in equities or other private financial instruments.)

3. The thing that has driven long-term investment returns in this country (amounting to about 7% per year on stocks in real, inflation-adjusted terms) has been the continually rising per capita standard of living. This has been driven by a level of capital investment per capita that has increased fairly consistently. Part of that investment has been in "human capital," meaning skill levels that have allowed the population to shift from menial work such as agriculture and mining into more productive employment.

Simultaneously, there has been a fortuitous stream of technological breakthroughs that fed the productivity of the system, such as electrification, automobiles, and most recently the Internet. But there is no guarantee that breakthroughs will continue to occur that will sustain the same rate of growth. And if there is a substantial shift in the workforce participation ratio as the result of there being too many retirees in relation to workers, it will impose an additional drag on economic growth. I'm not predicting a "crash," but pointing out the definite possibility of substantially leaner times that, as a society and as individuals, we should start preparing for now.

For similar views, see Robert J. Samuelson's column in the latest Newsweek (Dec. 16, pg. 55) and Jonathan Clements' "Getting Going" article in yesterday's Wall Street Journal.
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Re: Hello, with socioeconomic commentary
Old 12-12-2002, 11:52 AM   #16
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Re: Hello, with socioeconomic commentary

Of course there are problems with immigration, but overall it has done more good than harm to our nation. With our form of government, I don't see immigration ending in the near future. The main problem with scarce housing in many of our cities is restrictive zoning regulations. Normally, as prices rise, increased supply comes on the market to meet the need. In the case of housing, zoning regulations prevent sufficient additional supply from coming on the market. This has made housing scarce and unaffordable to many youngsters. It will get worse with or without immigrants because most current home owners want house prices to continue rising. They will continue to consistently vote for zoning regulations that keep the supply lower than the demand. Politicians will happily cooperate because this strategy maximizes the property tax receipts.

People moved off of the farms not because of their increased skill, but because new machines produced crops far cheaper than human labor could. They could not competitively sell human produced crops on the open market, and subsistence farming ended with the advent of high property taxes. The Amish, who are the only large group to consistently practice labor intensive subsistence farming in the USA, tend to all live in the same area so they can vote down the property tax in their locale. Technological breakthroughs have driven most of the increased productivity in our nation, not been a mere extra benefit. If the pace of technological advancement slows, productivity growth will slow dramatically. Investing in a new factory is only cost effective if it uses new technology to make products cheaper than an already existing factory can make them using older technology. Capital investment without new technology to invest in does not increase productivity significantly.
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Re: Hello, with socioeconomic commentary
Old 12-14-2002, 01:37 PM   #17
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Re: Hello, with socioeconomic commentary

I thought of your post on oil when I read this Saturday's Barrons. Auto execs think that hybrid gasoline/electric cars will slowly displace pure gas powered ones, and then within 10 to 20 years hydrogen powered cars will take over. European and Japanese governments are spending billions on hydrogen engine research. Battery powered cars will never be significant due to the lack of good batteries. Newly discovered oil reserves increased the world's proven reserves by 60% from 1980 to 1990, but only 4% from 1990 to 2000. I think that low prices in the 90s may have discouraged exploration, but the fact of finite oil is still undeniable.
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Re: Hello, with socioeconomic commentary
Old 12-14-2002, 01:48 PM   #18
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Re: Hello, with socioeconomic commentary

With all due respect, as far as oil reserves, power
sources, etc. , I will be dead a long time before any of this impacts my life. Frankly, I don't have time to
waste on these issues.
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Re: Hello, with socioeconomic commentary
Old 12-14-2002, 05:34 PM   #19
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Re: Hello, with socioeconomic commentary

I plan to be around for a long, long time.
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Old 11-26-2007, 12:22 AM   #20
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But I have to say, reading this thread and comparing it to 95% of the more recent ones shows how far the level of discourse has fallen over past 5 years. Maybe it is because I arrived, but Ted left.

Ha
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