Saturday, August 21, 2010

Retirement Policy for the 21st Century

This one is interesting as it raises a lot of interesting and important issues although it is exclusively framed in a US context (not strange thinking of the source).



The basic message is pretty simple. People should save more and be better at diversifying their assets as well as they should think about how they actually want to dissave (if at all). I agree, but this is also a somewhat selfdefeating argument in the context of our current capitalist system. Essentially, when fewer people of working age are asked and incited to save more and longer they spend less and as their share of the population declines they become a drag (in relative terms) on aggregate demand and not a boost (as they are supposed to be). This is a trap then by which a paradox of thrift locks in across generations in the aggregate.

The alternative then? I am not sure. We need to focus on the core too though and essentially do something about the inverted population pyramid as such.

6 comments:

Sid said...

What can you do about the inverted population pyramid? It's highly unlikely that any kind of financial stimulation will work in countries with such demography - the change in attitudes and worldview is just too big. Repressive measures are, obviously, out of the question (at least, for most countries) - and even they are pretty unlikely to work. Probably, we'll just have to take the inverted pyramid for granted and live with it.

CV said...

Hi Sid,

Right, I agree in so far as goes the medium term. There is nothing we can do about it. But is Japan going to commit collective suicide for example? I mean, this is a very real, relevant and important question I think!

As for the pension issue ... well, before civilization dies out etc the pension system will crash of course since we simply can't pay. What I am focusing on here is the suggestion to force a shrinking working age population to save more and longer without thinking about the effect on aggregate demand. I mean, Keynes had the arguments a long time ago, but today we are stuck in steady state mode and thus aggregate demand does not mean anything in the long run. I argue that it does ...

Claus

Econoclastic said...

An economy could encourage increases in human capital through immigration. That would raise aggregate demand. It would also increase aggregate investment (i.e. new businesses) as those integrating into the system increase aggregate savings and look to put their money to work.

Anonymous said...

Demand for workers will reach very high heights at some point if the youth population dramatically shrinks world wide.

Perhaps this will help lead to a a gradual, though not necessarily very large, increase in fertility rates.

Sid said...

Hi Claus, thanks for your answer!

"But is Japan going to commit collective suicide for example? I mean, this is a very real, relevant and important question I think!"
I don't think that the underlying problem is purely demographic. It would obviously have been so in a purely industrial society, where people beyond certain age cannot provide the (mostly, manual or requiring a rather high degree of physical activity) labor needed to sustain themselves, but Japan's past that stage of development. In post-industrial society, however, labor is increasingly non-manual and increasingly non-rhythmical, thus, less physically-demanding and less time-wasting. I think we might well see a trend towards progressively higher participation of old people in the workforce - perhaps to the point where the pension systems in traditional sense will be dismantled, thus solving our problem.

"What I am focusing on here is the suggestion to force a shrinking working age population to save more and longer without thinking about the effect on aggregate demand. I mean, Keynes had the arguments a long time ago, but today we are stuck in steady state mode and thus aggregate demand does not mean anything in the long run. I argue that it does ... "
I wholeheartedly agree with you on the paradox of thrift issue and that it makes the proposed solution (more savings by the workforce) seem pretty unrealistic.

Paul

rosethorn said...

I think that the inverted pyramid will solve itself over a period of approximately thirty years, due to normal mortality. It will be an extremely painful period from the point of view of standards of living, but societies have experienced similar lengthy periods of hard times before. For example, 1925-1950 (depression and war); and the post Soviet collapse in Eastern Europe. It will require a lot of social adjustment, but it will be unavoidable.