In the last 150 years, a previously unknown social concept has taken hold in the US and other wealthy countries: retirement. And just as we’re getting used to it, it’s being wrenched away from us.
A century and a half ago, only those who had accumulated great wealth could stop working in their fifties or sixties to enjoy a leisurely retirement. People worked as long as they were physically able to. Once they became too feeble to work, family members cared for them.
Those with no family were generally sent to the poorhouse, a residence where disabled and elderly people were supported by taxpayers. They were expected to work if they were physically able. As you might expect, living conditions were Spartan.
Retirement is possible only because industrialization has helped to facilitate capital accumulation. This capital can be used to support a person’s needs after a certain age.
Capital accumulation occurs through savings, investment, and economic growth. Unless all three factors exist in sufficient quantities, a society’s ability to provide retirement benefits to older citizens declines.
Unfortunately, in the US, all three factors are moving in the wrong direction:
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- Savings. In the 1970s, Americans saved 9% to 15% of their income. Today, we save only about 4%.
- Investment. In an era of near-zero interest rates, it’s a lot tougher to generate safe investment returns. When my father retired in 1981, he could buy a certificate of deposit (CD) that paid 14% interest. Sure, inflation was higher in 1981 than it is now. But his after-inflation return on investment was nearly 6% higher than it is today.
1981 inflation rate: 10.3%
1981…