McKinsey says State pensions unsustainable

[cremeegg]

Gee the Swiss must be awful stupid, 'cause that is what we do and yes of course it works. A Swiss state pension at the max makes up about 20% of a pension's annual income the rest comes from the assets you claim will make no difference, plus savings. Mandatory pension contributions starts at age 25 (7%) and increases over the years until it reaches about 11% in your mid 50s by law this is matched 100% by employers, but most actually contribute more often as high as 200%.

Unless the Swiss dependancy ratio has already reached 1 retiree to 2 workers this does not really address the point. ( I thought you were a Mayo man)

Saving may well be a solution at the level of the individual, though not if the state pension becomes means tested, but it does nothing at the level of society.

 

[cremeegg]

It is correct that significant personal savings won't affect the dependency ratio but they will mitigate the impact of the changing dependency ratio - which is what is important. If people have significant assets saved, they can rely less on the state. Relying on the state for 1/6 of your post-retirement income rather than 1/2 of it equalizes the impact of a dependency ratio changing from 6:1 to 2:1.

For two workers to produce the same output in 40 years time as 6 do today would require an increase in productivity of 3% per year every year for forty years. It makes no difference at the level of society whether income is channelled to retirees through state or private pensions.

 

[cremeegg]

As an aside, I do find it a bit odd that you have another thread on the go bemoaning the poor quality of postings on AAM these days and then you are this rude/patronising to a poster who does indeed understand pensions and the problems surrounding their provision. But I digress...

I don't mean to be rude and I certainly don't doubt Steven's knowledge of the current pension system.

But the idea that increased savings can address the problem of a huge shift in the dependancy ratio simply does not stack up.

 

[trasneoir]

But the idea that increased savings can address the problem of a huge shift in the dependancy ratio simply does not stack up.

Am I missing something here? Sufficiently increased savings could eliminate retiree's "dependancy" on workers, right? Or does inflation or some other macroeconomic factor torpedo this notion?

 

[cremeegg]

Am I missing something here? Sufficiently increased savings could eliminate retiree's "dependancy" on workers, right? Or does inflation or some other macroeconomic factor torpedo this notion?

We are all dependant on the output of the economy to eat and consume. Output depends on workers, yes increased investment may increase output per worker but the demographic shift is so large that the level of increased productivity required is at the high end of what is likely to be possible.

Let me try an analogy. If 42 people live on a farm and 36 work and 6 are retired that describes the situation we have now. In 40 years time only 28 people will be working and 14 will be retired. That will be difficult. It does not really matter who owns the farm.

If we save up enough to buy the farm next door that does not help as we would still need people to work it and they have the same dependancy ratio.

The only way out is if we invent new machines so that the 28 workers in 40 years time can produce as much as the 36 today. That would require a large increase in productivity, for no increase in living standards.

 

[Sarenco]

Cremeegg

I'm still struggling to understand your argument. Are you suggesting that workers today, in aggregate, cannot defer consumption to provide for their retirement?

I take the point that a very high aggregate saving rate would adversely impact economic activity today but surely it's a question of balance so we can smooth the transition to a society with an older demographic profile? There is not much we can do about the increasing dependency ratio but we can take steps to mitigate the impact of this change.

That is precisely what the world's most sustainable pension systems (New Zealand, Australia, Norway) are doing. Are you suggesting that they are wasting their time?

 

[cremeegg]

Are you suggesting that workers today, in aggregate, cannot defer consumption to provide for their retirement?

That is exactly what I am saying. I wish I had expressed it so well.

This isn't an economic issue, short of living on canned food in retirement it is a physical impossibility.

I take the point that a very high aggregate saving rate would adversely impact economic activity today.

That may be true but I have not made that point.

Increased savings might lead to increased capital formation might lead to greater productivity in the future but it would have to happen on a large scale to be sufficient to address the problem. Current low interest rates suggest that there is no sign of that at present.

That is precisely what the world's most sustainable pension systems (New Zealand, Australia, Norway) are doing. Are you suggesting that they are wasting their time?

They may have a bigger slice of the pie than other countries in the future but it doesn't make the pie any larger.

 

[Sarenco]

That is exactly what I am saying. I wish I had expressed it so well.

Ok but could you explain why? Surely we can chose to defer the point at which we decide to expend our collective capital.

They may have a bigger slice of the pie than other countries in the future but it doesn't make the pie any larger.

I don't think anybody would argue that retirement provision would expand the pie. Again, this is simply about temporal smoothing of consumption.

 

[trasneoir]

Let me try an analogy. If 42 people live on a farm and 36 work and 6 are retired that describes the situation we have now. In 40 years time only 28 people will be working and 14 will be retired. That will be difficult. It does not really matter who owns the farm.

It's a nice analogy, but in "Farm Ireland" maybe 10 of your 36 workers are engaged in producing real value for humanity (stuff like agriculture, industry, infrastructure, transport, vital services). These are also the areas where automation and technology has (and will continue to have) the most impact. The amount of labour needed in the transport industry will plummet over the next 20 years, for example.

Several more of our 36 are producing luxuries that retirees would be happy to produce for free - art, community services, hospitality and the like.

The rest of our 36 are selling consumer debt, nail care, dog grooming, or suing one another. Stuff that adds little or no value to humanity, in other words.

If the major impact of this shrinking dependancy ratio in the west was a shift from the high street and office to the farm and the factory, well, good. The west can consume and waste an awful lot less resources and labour without any significant loss in welfare or happiness.

Am I naieve in thinking that, when pressed, the world will value farmers more and lawyers less?

 

[Jim2007]

Let me try an analogy. If 42 people live on a farm and 36 work and 6 are retired that describes the situation we have now. In 40 years time only 28 people will be working and 14 will be retired. That will be difficult. It does not really matter who owns the farm.

And your assumption is that everything must be produced on the one farm and there will be no productivity gains etc... If we maintain the current ratio into the future it is just as likely that we will be challenged to find meaningful work for people rather than the other way around. So just a sidebar to the discussion.

 

[cremeegg]

And your assumption is that everything must be produced on the one farm and there will be no productivity gains etc

Have you read any of the previous posts? I have addressed the possibility of buying a second farm. You don't have to agree with my opinion, but please don't attribute an assumption to me which is clearly exactly opposite to my actual position.

Again productivity gains. I certainly do not assume that there will be no productivity gains. Increased productivity is the only way an increased dependancy ratio can be managed. I said this very clearly.

The extent of the increased productivity required is very large. If the dependancy ratio goes from 6 to 1 to 2 to 1 each worker in 40 years time will have to produce three times more than each worker does today. And that is only to maintain living standards. That is a very tall order. And if we start by looking at increased savings as a solution we miss the point.

If we maintain the current ratio into the future...

Does any demographic projection suggest that this is likely?

 

[cremeegg]

It's a nice analogy, but in "Farm Ireland" maybe 10 of your 36 workers are engaged in producing real value for humanity (stuff like agriculture, industry, infrastructure, transport, vital services). These are also the areas where automation and technology has (and will continue to have) the most impact. The amount of labour needed in the transport industry will plummet over the next 20 years, for example.

Several more of our 36 are producing luxuries that retirees would be happy to produce for free - art, community services, hospitality and the like.

The rest of our 36 are selling consumer debt, nail care, dog grooming, or suing one another. Stuff that adds little or no value to humanity, in other words.

If the major impact of this shrinking dependancy ratio in the west was a shift from the high street and office to the farm and the factory, well, good. The west can consume and waste an awful lot less resources and labour without any significant loss in welfare or happiness.

Am I naieve in thinking that, when pressed, the world will value farmers more and lawyers less?

I absolutely agree with this concept, but there will be huge practical difficulties. Who is going to tell the lawyers that they are going to have to drive tractors.

Are we educating young people to fill these roles?

There will be huge social dislocation associated with these changes.

 

[Sarenco]

Hi Cremeegg

I don't disagree with any of that but it still doesn't explain your position that workers cannot defer consumption to provide for their retirement. To extend your farmyard analogy, surely workers can set aside the excess from harvests during their working life and can consume same during retirement?

 

[cremeegg]

surely workers can set aside the excess from harvests during their working life and can consume same during retirement?

In my opinion they cannot. There is no store of value which would allow that to happen, short of taking the stored harvest literally.

Money is a claim on the future output of an economy, shares are a claim on the future output of a company. Neither increase that future output.

All of the food that will be eaten in 2050 all the goods and services that will be consumed, will have to be produced in 2050.

 

[Sarenco]

Hi Cremegg

It's certainly the case that money is simply a claim on products and services produced within an economy. However, where we part company is your thesis that the value of wealth (accumulated savings) cannot be maintained over time.

There is simply no historical basis for that projection. Even cash has produced a real return of 1.5% per annum over a 50 year period (Barclays Equity-Gilt Study 2015) and equities and gilts have produced far greater long term real returns.

If projected demographic changes result in a prolonged period of deflation across the developed world (if we all go Japanese), that should make it easier, and not more difficult, to preserve the real value of accumulated wealth in the future.

Products and services consumed in 2050 will certainly have to be paid for out of 2050 wealth but there is no reason to assume that 2050 wealth cannot be accumulated prior to 2050.

 

[elacsaplau]

Is there a link to the report in question?

 

[cremeegg]

Even cash has produced a real return of 1.5% per annum over a 50 year period (Barclays Equity-Gilt Study 2015) and equities and gilts have produced far greater long term real returns.

Is this not because there has been real increase in the productive capacity of the economy, over the last 50 years. This will be very difficult to maintain in the face of a decreasing workforce.

I will have to think about the Japanese experience and deflation

 

[Sarenco]

Is there a link to the report in question?

https://wealth.barclays.com/en_gb/s...investing-lessons-from-114-years-of-data.html

http://www.telegraph.co.uk/finance/...nvestors-Barclays-Equity-Gilt-Study-2015.html

http://www.thisismoney.co.uk/money/...0-years-finds-Barclays-Equity-Gilt-Study.html

 

[Sarenco]

Is this not because there has been real increase in the productive capacity of the economy, over the last 50 years. This will be very difficult to maintain in the face of a decreasing workforce.

I will have to think about the Japanese experience and deflation

Who is to say there won't be a real increase in the productive capacity of the economy over the next 50 years?

Re deflation, my point is really that if we see a very long term period of deflation (highly unlikely in my opinion), then a 2015 euro would purchase more goods and services in 2050, even without any investment returns in the intervening period.

 

[elacsaplau]

Thanks Sarenco

Sorry for being unclear. What I meant to ask for was for a link to the McKinsey report itself?!