Ignorance in accumulation phase "compounded" in decumulation phase

[SteveL]

This conversation reminds me of the oft heard comment that you cannot make things foolproof because fools are so ingenious.

People who have a saver/investor mentality will do ok with just about any set of circumstances. People who have the spender mentality will always end up at the end of the day with not much to show.

Unfortunately, the former always end up paying to support the latter when these folks are broke.

Please forgive my generalizing....

 

[Texas Proud]

* I understand there is a lot of misunderstanding about SS finances in the general public. A few people probably still think there's an account somewhere with their name on it. More people think that if the money isn't there is must have been spent on foreign aid or welfare.

HEY..... there IS an account somewhere with my name on it.... and it says how much I am supposed to get when I retire....


But I am smart enough to know there is no real money in the account...

 

[samclem]

We may simply see a continuation of the current trend of Baby Boomers not retiring for several years past their traditional retirement age to capture more of their high salaries for retirement. Unfortunately, this doesn't allow the next generation to advance in their careers, which will result in a loss of talent to companies who do not have an aging workforce, or even better, new startup companies where advancement and higher pay are possible.

The pool of available jobs isn't fixed. As more people enter the labor market the price of labor goes down and more people become employed (because jobs that weren't economical to do at a certain price become worthwhile at lower wages). Lower wages are exactly what the US needs to regain a competitive advantage in manufacturing--we've already got most of the other key factors in our favor. So, while lower wages may be bad news for individual workers, it's good news for the US economy as a whole.
And so what if younger workers have to compete against older workers for jobs and the highest pay? Nobody is owed a job, and if a younger person wants to move up he/she might just need to work a little bit harder to displace Ol' Joe. It's hard to work up a tear over that, especially as the more recent problem has been the forcing out of older workers to hire somebody cheaper (lower health care costs, lower wages, etc).

which will result in a loss of talent to companies who do not have an aging workforce, or even better, new startup companies where advancement and higher pay are possible

I don't understand what this means. Every company (startup, mature, declining) will benefit when the supply of willing workers increases.

 

[Independent]

While what you post is (strictly) true.

I believe that most boomers have the expectation of getting what they paid into.

There would be hell to pay if they try now to take it away. Just saying that "your money went to the previous generation" won't cut it .

I'll agree that politicians seem to assume that the simple truth is political suicide. For some reason, getting elected in the US means telling people they can have gov't services without paying taxes.

But that's just me ranting.

 

[Gone4Good]

I believe that most boomers have the expectation of getting what they paid into.

Sure, as long as we ignore the additional $13 Trillion borrowed over the past 40 years, the books look about balanced.

I don't think you can double the national debt as a percentage of GDP over you're working (and voting) career and then claim that you're somehow owed something because you paid taxes. Sounds like you did pay nearly enough.

 

[traineeinvestor]

Sure, as long as we ignore the additional $13 Trillion borrowed over the past 40 years, the books look about balanced.

I don't think you can double the national debt as a percentage of GDP over you're working (and voting) career and then claim that you're somehow owed something because you paid taxes. Sounds like you did pay nearly enough.

+1

You forgot to mention all the unfunded/underfunded entitlement programmes which are not reflected in the $13 Trillion.

No amount of higher taxes is going to close the gap - materially reducing entitlements one way or another will have to take place as well as rasing taxes accross all economic demographics.

 

[ERD50]

I believe that most boomers have the expectation of getting what they paid into.

I don't think you can double the national debt as a percentage of GDP over you're working (and voting) career and then claim that you're somehow owed something because you paid taxes. Sounds like you did pay nearly enough.

That may be the case, but there are two problems that could have been avoided:

1) Don't have a separate line item labeled "FICA" on a paycheck. If you 'compartmentalize' the withdrawal every single pay period of a person's career, don't be surprised if the average citizen 'compartmentalizes' some accounting of where that money is going and who paid into it. Real or not. Perception is reality.

2) Educate the public - SS is some convoluted, oddball, quirky form of a social safety net (* see note below). Teach people that this is to provide the basics, that they need to put aside money of their own for retirement. Give them some guidelines of how much they will need, and how much they need to save each year to get to that goal. No guarantees, other than someone who plans and saves will be better off than someone who doesn't. Scare them with dog food stories if they aren't saving enough.

(*) - convoluted, oddball, quirky form of a social safety net - I never understood SS. The less you earned over your life, the more you may need a safety net. Yet, SS is just the opposite - the more you earned the more you get (weighted towards lower incomes, and with a cap). I see our social safety nets like our taxes - not just one big chunk, but we get nickeled and dimed by an elaborate and complex system of taxation, with tons of overhead for each tax and 'loopholes' for avoidance. On the safety net side, there is a bunch of complex, overlapping systems, with overhead and 'loopholes' to take advantage of. I'd be all for one tax, one safety net. KISS. But that makes it too hard to fool people.

-ERD50

 

[clifp]

There are times on this forum when I think I really grew up in a different world than everyone else here and so did my DH.

When I was kid my grandmother shuttled around among her children to live. She had very little money and would spend a month here then a month with another kid and so on. When she stayed with us, she slept with me. And it didn't seem strange and she wasn't unhappy.

Among my parents and my husband's parents and their siblings it all is pretty much the same. They earned modest incomes but retired with a paid off house. They made had a couple of hundred thousand dollars saved (some had more and some less). They drew SS and maybe had a few very small pensions or take RMDs from IRAs. Living on $20,000 a year or so is fine.

It was just a given that retired people were "on a fixed income" (mostly SS) and had to watch money and couldn't spend a lot. And they are fine.

I see plenty of people doing fine with SS, a paid for modest house and a couple of hundred thousand dollars for extras.

Wiki has 28% of the households in the country getting by on less than 25K a year. A 60 year couple in which the husband makes 25K will make at least 1500/month in SS benefits if he works to 67. More if she has been working in the past. My cleaning lady has been getting by on $650 social security check and the occasional cleaning or elder care job and Hawaii is a very expensive place to live.

Now if you are a renter or have a big mortgage the situation is far more grim for retirees.

 

[arebelspy]

My cleaning lady has been getting by on $650 social security check and the occasional cleaning or elder care job and Hawaii is a very expensive place to live.

Yeah, I've got some friends there who don't make much (teachers) and I wonder how e heck they can afford to live in Hawaii.

 

[Jay_Gatsby]

The pool of available jobs isn't fixed. As more people enter the labor market the price of labor goes down and more people become employed (because jobs that weren't economical to do at a certain price become worthwhile at lower wages). Lower wages are exactly what the US needs to regain a competitive advantage in manufacturing--we've already got most of the other key factors in our favor. So, while lower wages may be bad news for individual workers, it's good news for the US economy as a whole.

Have to disagree with you. We cannot compete with China, India, etc... based on lower wages. Not possible when the cost of someone in the U.S. is 5x the same person in China. Our real competitive advantage is advanced technology, sophisticated manufacturing, etc...

And so what if younger workers have to compete against older workers for jobs and the highest pay? Nobody is owed a job, and if a younger person wants to move up he/she might just need to work a little bit harder to displace Ol' Joe. It's hard to work up a tear over that, especially as the more recent problem has been the forcing out of older workers to hire somebody cheaper (lower health care costs, lower wages, etc).

Younger workers can't compete against older workers for the highest pay in most organizations. The latter are entrenched, and are often the decision-makers for promotions. If there is no room at the top, nobody gets promoted. I never said anything about forcing older workers out to hire somebody cheaper.

I don't understand what this means. Every company (startup, mature, declining) will benefit when the supply of willing workers increases.

Highly-talented younger workers who see no career/promotion path (or feel that their careers are being stymied) will leave for companies where such opportunities exist - or will start their own companies.

 

[ERD50]

We cannot compete with China, India, etc... based on lower wages. Not possible when the cost of someone in the U.S. is 5x the same person in China. Our real competitive advantage is advanced technology, sophisticated manufacturing, etc...

I'll assume that when samclem said lower wages, he meant relatively lower wages, as in lower than current US wages, not lower than current Chinese wages. Lowering US wages would make us relatively more competitive.

Not many people want to hear that, but it is a reality. The only other reasonable option I see is to increase our productivity even further (in those areas you mentioned, and more) to close the gap. Maybe we could do some of both, but I think wage compression to some degree is inevitable.

-ERD50

 

[Jay_Gatsby]

I'll assume that when samclem said lower wages, he meant relatively lower wages, as in lower than current US wages, not lower than current Chinese wages. Lowering US wages would make us relatively more competitive.

Not many people want to hear that, but it is a reality. The only other reasonable option I see is to increase our productivity even further (in those areas you mentioned, and more) to close the gap. Maybe we could do some of both, but I think wage compression to some degree is inevitable.

-ERD50

Relatively lower wages still won't solve the problem. Absent protectionist policies (which would violate numerous treaties), the U.S. must find a way to distinguish itself from emerging economies through the production of more sophisticated products than can be manufactured in such economies. Unfortunately, the U.S. is woefully behind in math and science education, so the average worker won't be able to qualify for the high-tech jobs that would embody such distinction.

So what is the answer?

In the short term, focus on those jobs that can't be outsourced (e.g., the trades - plumber, electrician, carpenter, masons, welder, etc....) These domestic service-sector jobs formed the backbone of the U.S. economy from the late-1940s until the 1980s. There is a dearth of qualified tradespeople, with 200,000 trade jobs going begging for lack of skilled talent.

In the long term, focus on manufacturing jobs that require construction of sophisticated technologies that can be used domestically and exported to emerging economies who don't have: (1) skilled labor, and (2) natural resources to manufacture them. A good example of this is the cell phone and smart phone industry, as many poor countries lack the infrastructure to build land-based phone systems.

 

[ERD50]

Relatively lower wages still won't solve the problem.

I think we are talking about a matter of degrees and relative gains, not the absolutes of "solving" a problem. There is no doubt in my mind that lower wages in the US would help to make us more competitive. It's basic supply/demand.

So what is the answer?

In the short term, focus on those jobs that can't be outsourced (e.g., the trades - plumber, electrician, carpenter, masons, welder, etc....)

Well, a factory needs all sorts of skilled trades people to support it. So if we had more manufacturing we would also have more demand for these skilled trades. Of course, wages are not the only thing, business hates uncertainty when it tries to plan something like setting up a large factory. Uncertainty about tax rates, possible union demands, healthcare costs, and other things are a problem.

There is a dearth of qualified tradespeople, with 200,000 trade jobs going begging for lack of skilled talent.

Can you provide a reference for that? I was under the impression that with building at a standstill, there was an oversupply of trades people.

In the long term, focus on manufacturing jobs that require construction of sophisticated technologies that can be used domestically and exported to emerging economies who don't have: (1) skilled labor, and (2) natural resources to manufacture them. A good example of this is the cell phone and smart phone industry, as many poor countries lack the infrastructure to build land-based phone systems.

I don't think your cell phone example is a good one. China is building these for the world right now. They have plenty of labor that is skilled enough for this task, and willing to work for lower wages/benefits. From what I've read, Apple is making more profit on each iPhone or iPod than the Chinese make by supplying the labor to build them, but that seems to be an exception.

You can say we need more Apple Incs, but as long as we keep doing things like tie health insurance to employment, we limit entrepreneurship. We are doing lots of things wrong, and I suspect it is going to take lots of things done right to turn this around, or even to slow the rate of leveling of the 'flat earth'. OTOH, I can make the case that we shouldn't slow it down - a small rise in the standard of living in those third world countries would probably bring more comfort overall to the world than the discomfort a few 100 million Americans might experience by a slight drop in their standard of living. Not that it has to be a zero-sum game, but the distribution of any real growth might well be skewed enough to be negative for advanced countries.

-ERD50

 

[samclem]

Have to disagree with you. We cannot compete with China, India, etc... based on lower wages. Not possible when the cost of someone in the U.S. is 5x the same person in China. Our real competitive advantage is advanced technology, sophisticated manufacturing, etc...

Lower US wages will help us be more competitive, it's not the single-source answer to everything.

Highly-talented younger workers who see no career/promotion path (or feel that their careers are being stymied) will leave for companies where such opportunities exist - or will start their own companies.

Great. As long as those opportunities exist, competition will take care of the problem.

Absent protectionist policies (which would violate numerous treaties) . . .

Yes, but we could amend or withdraw from those treaties very quickly. Nations have an obligation to withdraw from treaties that don't serve their self interests. The best reason not to adopt protectionist policies is that this would severely damage our economy and be counter to our self interest.

 

[Gumby]

Would not a fall in the value of the dollar relative to other currencies (especially the yuan) accomplish a relative downward adjustment in US wages and lead to greater competitiveness?

 

[MasterBlaster]

Would not a fall in the value of the dollar relative to other currencies (especially the yuan) accomplish a relative downward adjustment in US wages and lead to greater competitiveness?

Yes. Isn't that their plan ?

 

[samclem]

Would not a fall in the value of the dollar relative to other currencies (especially the yuan) accomplish a relative downward adjustment in US wages and lead to greater competitiveness?

Yes, and in the same stroke it cuts the amount we owe to the Chinese. But, I think folks are on to us and are going to ask for more money to stay in the game.

 

[Gone4Good]

I'll assume that when samclem said lower wages, he meant relatively lower wages, as in lower than current US wages, not lower than current Chinese wages. Lowering US wages would make us relatively more competitive.

Agreed . . . over the long-run.

But at the moment the U.S. is caught in the 'through the looking glass' kind of world where economics is turned on its head (thrift and productivity are counterproductive, for example). It's a world where demand, rather than supply, determines output. In that world, lower wages result in lower demand, and, therefore, lower output. Said another way, lower wages lead to lower employment, not more.

I understand that is counter intuitive, and contrary to the way economics normally works, but that is how the world works in a liquidity trap.

 

[Gone4Good]

But, I think folks are on to us and are going to ask for more money to stay in the game.

Yup, look at how much they're asking . . . ("Interest rates are going to soar any day now" vintage 2008, "just around the corner" 2009, "soon" 2010, "next year" 2011 . . . ) Something else liquidity trap economics says is that large fiscal deficits and aggressive monetary policy don't lead to higher interest rates and inflation. That is also counter intuitive. But guess what?

 

[Jay_Gatsby]

Interesting article from Yahoo that's relevant to our discussion.

people-work-into-70s-marketwatch: Personal Finance News from Yahoo! Finance

 

[SunsetSail]

Agreed . . . over the long-run.

But at the moment the U.S. is caught in the 'through the looking glass' kind of world where economics is turned on its head (thrift and productivity are counterproductive, for example). It's a world where demand, rather than supply, determines output. In that world, lower wages result in lower demand, and, therefore, lower output. Said another way, lower wages lead to lower employment, not more.

I understand that is counter intuitive, and contrary to the way economics normally works, but that is how the world works in a liquidity trap.

I'm late to this discussion, but in reading through the thread I think this is a good point that is generally misunderstood. It is similar to a deflationary price spiral in the wage market. Although past isn't prologue, history has shown that developed economies can weather and eventually prosper after this type of environment either through increasing productivity or raising the wages in lower wage cost economies. I think it is almost always a combination of both.

In terms of free trade vs. protectionism, I don't know of many examples in history that don't show that certain types of protectionism are better for the residents of the protected economy while free trade makes the world better off in the aggregate but generally leads to painful labor markets in developed economies and even makes residents of those countries worse off in the short or medium term. I'm no fan of government intervention, but the case for some level of protectionism is fairly strong in my opinion.

 

[Nords]

Yes, and in the same stroke it cuts the amount we owe to the Chinese. But, I think folks are on to us and are going to ask for more money to stay in the game.

The dollar's predicted demise continues to elude many. I bet there's a lifetime left on the downward glide slop.

During the Great Recession, I was extremely surprised by the rest of the world's flight to dollars and Treasuries. Apparently our domestic problems are not the epicenter of the universe after all.

I think that the American economy and "land of opportunity" dream will continue to [-]sucker[/-] encourage a continued demand for government-sponsored debt. But I have a hard time coming up with a logical reason for this crowd's behavior.

 

[Jay_Gatsby]

The dollar's predicted demise continues to elude many. I bet there's a lifetime left on the downward glide slope.

True. And as other countries' currencies and economies rise in prominence, they will continue to object to the dollar being the world's reserve currency. Unfortunately, there isn't another single currency with which to replace it. Accordingly, we'll likely see a basket of currencies take the dollar's place (probably 3 currencies, with the dollar being one of them). Eventually there will be a single world currency.

During the Great Recession, I was extremely surprised by the rest of the world's flight to dollars and Treasuries. Apparently our domestic problems are not the epicenter of the universe after all.

This has more to do with the fact that the U.S. Government always pays its debts, even if it has to rob Peter to pay Paul.

I think that the American economy and "land of opportunity" dream will continue to [-]sucker[/-] encourage a continued demand for government-sponsored debt. But I have a hard time coming up with a logical reason for this crowd's behavior.

Yes, this will be the case for quite a while. Yet the U.S. hasn't really been the same "land of opportunity" as it was in the early-1900s, late-1940s-early-1950s, or even the 1980s. That said, it's still easier to make a fortune in the U.S. than anywhere else on Earth.

 

[samclem]

Yup, look at how much they're asking . . . ("Interest rates are going to soar any day now" vintage 2008, "just around the corner" 2009, "soon" 2010, "next year" 2011 . . . ) Something else liquidity trap economics says is that large fiscal deficits and aggressive monetary policy don't lead to higher interest rates and inflation. That is also counter intuitive. But guess what?

Anyone who tells you when inflation and Treasuries are going to begin their ascent is a Dirty Market Timer, and I ain't one of those.

 

[samclem]

Eventually there will be a single world currency.

Maybe, but it will have to wait until we get a single world government. Europe is now showing us what happens when nations have a common currency but disparate degrees of fiscal discipline.