by Gary North: My
Next Thousand LRC Articles . . . and Yours
ago, I acquired a Web domain address, www.neversayretire.com.
I had concluded that millions of baby boomers would discover at
age 65, much to their chagrin, that their plans for a comfortable
retirement had been smashed by the reality of low economic growth,
low returns from the stock market, their own insufficient savings
programs for decades, and inflation. I figured that I might create
a Website based on the theme, "never say retire." I have not developed
that site, but at least I set up a department on my Website. So,
if anyone types the words "never say retire," he is directed to
Sad to say,
hardly anyone ever searches Google for that phrase.
The media are
filled with articles on how few Americans have the necessary $1
million in their retirement portfolios that is required today to
live comfortably. With interest rates below 2%, and with stock dividends
no higher, there is no way that a mere millionaire can live for
15 to 20 years without selling off portions of his portfolio, year
by year. Unless he invested in housing before 1998, letting his
renters pay off his mortgages, he is facing the prospect of having
to deplete his capital, year by year. This is a fearful prospect.
Yet people don't plan for it.
March 2000, American stocks went into a decade-long decline, when
adjusted for price inflation of over 20%. After 18 years of high
returns, 1982-2000, this reversal caught the boomers by surprise.
They continued to invest in stocks, as their advisors recommended,
but the returns have been negative. The mantra of "buy a no-load
mutual fund of the S&P 500" has proven to be bad advice.
When I say
they invested in stocks, I really mean about 20% of them did. About
80% of stocks are owned by 20% of the population: the richest members.
Most boomers are not in this top 20%, so they are trusting that
Social Security and a little money in the bank will provide them
with their retirement.
A lot of information
on retirement is published by the Employee Benefits Research Institute
(EBRI), which has been researching this for decades. It is a non-profit
research organization. It publishes detailed reports, sometimes
filled with illuminating charts, on a regular basis. I have followed
the organization for a decade. Its continuing theme: Americans do
not save enough money for retirement.
ODDS ARE AGAINST YOU
For the poor
in America, the news is bad. But, of course, for the poor everywhere,
the news is bad. I think of Ed McMahon, Johnny Carson's sidekick,
who died bankrupt. His famous line was "How bad is it?" The EBRI
offers a grim assessment in its latest report, "The Impact of Deferring
Retirement Age on Retirement Income Adequacy" (June 2011). Unfortunately,
the report was written for statisticians by statisticians. It was
not written to communicate with the public.
We read that
"the lowest preretirement income quartile would need to defer retirement
age to 84 before 90 percent of the households would have a 50 percent
probability of success" (page 1). What does this mean? You walk
into an auditorium with 1000 randomly selected people age 84, and
of 900 of them, only 50% have a shot at a comfortable retirement.
I don't know
what to do with this statistic. Call me stupid. Here's my problem.
According to the latest figures
published by the United States government's Centers for Disease
Control, the average life expectancy of American males in 2007
at age 65 was about 17 years. So, the average American man who reaches
age 65 will die at age 82.
If I walk into
an auditorium filled with 84-year-old men, and I tell them that
90% of them have a 50-50 chance at a comfortable retirement, that's
because, on average, they only have a few months to live. They are
the lucky ones. Most of their peers have already died. But I digress.
Of the early
boomers, ages 48-57, the news is grim. As of 2010, nearly one-half
(47%) are "at risk of not having sufficient retirement income to
pay for 'basic' retirement expenditures as well as uninsured health
care costs" (page 7).
If you were
to read the report, which you will not do, since it is written mostly
in academic gibberish, you would come across an occasional sentence
or two that you could understand. The authors, on what appears to
be a random basis, provide tidbits worth quoting. This caught my
One of the
factors that makes a major difference in the percentage of households
satisfying the retirement income adequacy thresholds at any retirement
age is whether the worker is still participating in a defined contribution
plan after age 65. This factor results in at least a 10 percentage
point difference in the majority of the retirement age/income combinations
investigated (page 1).
I ask: "How
is this worker still participating in a defined contribution plan?"
The report does not address this issue directly, but I gather that
the worker has not yet retired. So, no question about it, if the
worker doesn't retire, this greatly extends the likelihood that
he will have enough money in his old age. He just won't have any
is this question: "How many American workers participate in a defined
benefit plan?" The report does not say. According to a
report issued by the accounting firm Ernst & Young in 2008,
in 2005 the percentage of workers who were involved in such retirement
plans was around 20% (page 2). In other words, the report from EBRI
is close to useless for less than 10% of Americans. Whatever good
news there is applies to only 50% of the 20% of Americans who (1)
are in a defined contribution program, and (2) then decide to stay
in the workforce beyond age 65. In short, the longer they keep working,
the more likely they will die before their money runs out. To support
this finding in incoherent English, the EBRI hired two statisticians.
You will find
this passage amusing. It appears in the executive summary, which
is where complex things are supposed to be boiled down into coherent
prose. It deals with medical expenses.
that has a tremendous impact on the value of deferring retirement
age is whether stochastic post-retirement health care costs are
excluded (or the stochastic nature is ignored). For the lowest preretirement
income quartile, the value of deferral (in terms of percentage of
additional households that will meet the threshold by deferring
retirement age from 65 to 84) decreases from 16.0 percent to 3.8
percent by excluding these costs. The highest preretirement income
quartile experiences a similar decrease, from 12.8 percent to 2.6
What does this
mean? It means that the two authors have found safe employment in
the non-profit sector, where they can produce incoherent reports
in exchange for upper-middle-class income. They had better do whatever
is required to keep their jobs, because not many people can find
employment writing stuff like this in the for-profit sector.
On page 20,
the authors lapse into something approaching English. They say that
many people retire at age 62. They do not say how many. About half
do. (http://bit.ly/Retirement2008) They say that if workers resist
this temptation and don't retire until age 65, it still will not
save most of them. (Note: you cannot draw full Social Security benefits
until you reach age 66, and this will rise to 67.) Even to have
a 50% shot at income adequacy, workers need more than a 25% raise
for years before they retire. Or, as the authors put it, "the median
additional percentage of compensation that would be required for
retirement income adequacy at more than a 50 percent probability
would exceed 25 percent of compensation annually (until age 65)
for many age/income combinations." In other words, forget about
it. You won't get the 25% raise not in this market. Neither
will the two authors.
I can see their
bargaining strategy. They go to their supervisor. "Look, if you'll
just give us a 25% raise, we'll write our future reports in English."
The response would be something like this: "If I had known reports
like this could be written in English, I would have hired somebody
else. You're fired!" These guys have no career leverage. They would
be wise to adopt this strategy: keep their mouths shut, avoid asking
for a raise, and keep working long after age 65.
to most Americans.
purposes only, you can read the report (i.e., look at words on a
page and charts that convey little information) here.
WILL REALITY SINK IN?
With half of
Americans retiring early, thereby cutting their lifetime Social
Security payments, we are building up an army of voters who are
heavily dependent on government money to survive. They will find
that their income does not allow them to live in anything like the
comfort they had imagined. They did not save enough money. Of those
few who did save more than 10% of their disposable income, year
after year, the last decade has eroded their capital.
If they did
not cut spending when they were employed, they did not develop the
habits of thrift that are mandatory in retirement. These habits
are not free resources. They cannot be adopted overnight by most
people. So, it will take several years of retirement overspending
to persuade them that they have to change. By then, they will have
depleted much or all of their savings.
not sink in apart from negative sanctions. People do not change
their behavior unless there are costs to be avoided or gains to
be made. We are creatures of habit. With respect to planning carefully
for the future, most people have bad habits.
Here is a non-profit
organization that lets people make plans for retirement. It has
the right name: Choose to Save.
It may be the best place for most people to begin. But most people
do not really want to face reality, because to do this would require
them to change their behavior.
The cost of
change is always high. Only in the last two or three years has the
financial press been hitting at the theme of the need to delay retirement.
This idea is percolating in the background. Most people think that
things will somehow work out by themselves, that deliverance will
come out of nowhere. They do not look at the numbers. They don't
want to see the numbers. The numbers do not add up.
not yet begun to sink in. By the time it does, most people will
be too late in their careers to adjust.
Yet the dream
of retirement is so powerful that most American refuse to abandon
it. They do not make plans to stay in the workforce. They pretend
that the numbers will work out for them, even though the numbers
will not work out for their peers. They retire without counting
I have worked with ever since I finished my university training
have been anti-retirement. I think of Ludwig von Mises, who continued
teaching at New York University until he was 88. His hearing got
bad, but his mind didn't. In 1965, at age 84, he wrote an
article on gold. He ended it with this warning: "There is only
one method available to prevent a farther reduction of the American
gold reserve: radical abandonment of deficit spending as well as
of any kind of 'easy money' policy." Six years later, Nixon took
the United States government off the gold standard. The gold outflow
that Mises had predicted had taken place.
I recall speaking
with Mises privately in 1971. He had retired two years earlier.
He died two years later. He was still alert. He still had a good
memory. I did not hear that he faded in the subsequent two years.
I think of
Leonard E. Read, who founded the Foundation for Economic Education
in 1946 and who died on the job in 1983 at age 84. He had slowed
mentally and physically at the end, but he refused to quit.
I think of
F. A. Hayek. In 1985, when he was 86, Mark Skousen and I interviewed
him. He had just finished his final book, a great book, on the failure
of central economic planning: The
Fatal Conceit. Listen to the interview here:
These men made
major contributions. Mises and Hayek became prominent in their 30s.
Yet they kept at it into their late 80s. They had the dedication
to their work that overcame whatever physical impediments they had.
what was coming, and he said so in print. When asked what the best
inflation hedge is, he replied, "Age." He died two months after
Nixon unilaterally abandoned the gold standard.
For Mises and
Hayek, reality set in early. They saw by 1920 where socialism was
heading and why it would fail. They saw where Keynesianism was heading
as soon as The
General Theory was published. Hayek lived to see the Soviet
Union fall. They never stopped battling the welfare state, despite
the fact that in their lifetime, they were both considered eccentric
dinosaurs for opposing the wave of the future.
that you think about what you want to retire into. There will be
a transition. You will stop doing the kinds of things you do now
in the environment in which you do them.
The free market
rewards service. It is a social order based on service to customers
or donors. To participate in the market order is to gain the habits
If you can
identify future buyers of your services, you can begin to make preparations
to meet future demand. What is the kind of demand that you would
like to meet?
It takes capital
to fund any transition. It may take mostly time, but this surely
is capital. If you are not allocating it today in terms of what
you want tomorrow then you suffer from what Mises called high time
preference. Those who have high time preference much prefer present
consumption to future consumption. They buy what they want. They
pay for present consumption with reduced future consumption.
transition should begin with time preference. Count the cost of
the future. Then allocate time and money to meet your expectations.
You may make a mistake, but responsible action requires action.
I think of
Mises in 1934, who was convinced that the Nazis would gain power
in Austria. He left the country, leaving his library behind. In
1940, he left Switzerland for he United States. He would surely
have been executed by the Nazis had he remained in Austria. He planned
for the future. Retirement was not part of his plans. Survival was.
Fighting the good fight was. In 1940, he had another 25 years of
productivity ahead of him. My generation of Austrian School scholars
benefitted from his planning and action.
It pays to
stay in the workforce if you can.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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