Clear Thinkers favorite Arnold Kling has had some insightful thoughts lately (see also here) about the economics of retirement lately:
[Megan McArdle’s] main point is that if you live about 90 years and spend the last 30 of them not working, it is hard to maintain your standard of living no matter who pays for it. There is a lot of optimism about stock market returns built into state pension funds, individual retirement plans, and–I would say–even Social Security and Medicare. My argument is that without strong stock market returns, general tax revenues are not going to be robust, and Social Security and Medicare will go broke really soon without robust general tax revenues. [. . .]
For any given level of output, more consumption by one group (say, people over 65) is going to reduce what can be consumed by everyone else. As the ratio of people over 65 to everyone else goes up, this increases the ratio of state-confiscated income to total income required to keep Social Security and Medicare going. [To some] this higher confiscation rate represents a kinder and gentler society. But it may not feel kind and gentle to those who earn incomes and have them confiscated.
Kling’s thoughts resonate when reading this WSJ article on teacher’s pensions:
When it comes to shaking up the status quo, however, the most potent education reform may be the one that’s too often considered a side issue: pension reform.
That’s right, pension reform. Over the past 25 years, the private sector has moved from having four of five workers in a defined-benefit pension to having just one of five workers in such a plan. Mostly this means a shift to 401(k)s and the like, where payouts are related to what employees pay in.
Like most government employees, teachers have not made this shift. Their unions fight bitterly to retain the defined benefit plans underwritten by taxpayers. While these plans allow some lucky folks to retire in their 50s with a generous payout, they also feature perverse incentives that punish the young (more on this below) and encourage people to hang on for dear life even when they’d much rather leave. [. . .]
"A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career," said [Governor Chris Christie]. "What will we pay her? $1.4 million in pension benefits and another $215,000 in health-care benefit premiums over her lifetime. Is it ‘fair’ for all of us and our children to have to pay for this excess?"
The article goes on to point out that the unintended consequence of these subsidized pensions is that – similar to the dynamic of employer-based health care policies – employees lose the incentive to pursue different and potentially more fulfilling careers because of fear that they will lose their non-portable benefits if they change jobs.
Does it really make sense to reward employees who simply wait out the system for the pot at the end of the rainbow that the rest of us cannot afford to provide?
good post, tom.
these thoughts add to the notion that “retirement” is a twentieth century, social experiment that probably should, like communism and some other social experiments, be seen for the failure it mostly is.
healthier to keep one’s mind and body engaged in productive work. don’t like your job? quit and pursue what you like without concern about “retirement”–take plenty of time now, slow down when you age but don’t quit—this is the true path to economic freedom as well as better mental, physical and social health.
some who are now in their 50’s and 60’s will be blazing the trail of working till dead out of economic necessity while some of their government-worker and highly successful peers continue to “enjoy” their life of, often, meaningless leisure.
the contrast of robust, fulfilled older workers to their paperweight, door-stop, retired peers will likely, slowly, alter attitudes away from putting up with years of enslavement-for-retirement and toward “live-well-today, free from drudge work, intent on always enjoying work and an adequate income stream.”
getting taxpayers out of paying for the unaffordable, arguably ill-conceived, pensions is another matter—good luck to all of us on that.
Just to mention it, in Texas teachers don’t pay into Social Security and so are not eligible for it, meaning the Teacher Retirement System is all they have. And few of them are earning $62K, either so it’s not like they’ve got lots of extra resources to put in a 401(k).
Also, assuming the reference was to money available for retirement, I disagree that “For any given level of output, more consumption by one group (say, people over 65) is going to reduce what can be consumed by everyone else.” That’s one of those statements that sounds logical but flies in the face of the reality of modern capitalism where the money supply may expand and consumer spending is subject to a multiplier effect. Economics is not a zero-sum game. Me consuming more takes nothing from you and might even create more jobs so more people can consume more. A rising tide, said JFK, lifts all ships.
That said, I do agree with much of Dr. Tom’s comment, especially that the days are numbered for the 20th Century concept of retirement at 65 and the likelihood that many of us younger than that will doubtless work well into our twilight years.