Nations in retirement: reposted

After writing about Peggy Noonan’s observation that the American dream turned from a set of ideals to material things, it got me thinking about how mature, wealthy societies resemble retired people who have left their productive years behind them and are primarily concerned with preserving their living standards through retirement on the wealth they managed to accumulate in those productive years — with a couple critical differences.

One, retired people are aware of their limited nest eggs.

Two, they understand that by preserving their life style they are consuming their wealth, rather than creating more.

Once nations, states, counties or cities get wealthy enough, it seems like a great deal of attention and energy goes into preserving and extending what previous generations would have considered luxuries to everyone as basic rights.

This thought triggered when I recently read something that suggested that the USA was behind the times because it does not yet have government-mandated paid family medical leave.

Sounds good, but that’s a consumption of resource, not a creator of it.

We seem to understand that when we look at it on the individual level. An alternative to paid family medical leave is to expect people who are planning families and want to take time off when their children are born, to arrange their affairs to do so. That might mean saving up so they will have funds to pay bills while they take time off, buying a smaller house, getting by with one less 50″ TV — or whatever.

We know that when new Daddy and Mommy take off 4 weeks and uses their savings to pay bills, that they are consuming resources. However, push that expectation for savings to their employers with paid family leave and — poof — some see that as adding value to society, as if the employers’ pockets are an unlimited magical fountain that can be tapped to provide the acceptable living standard.

But, every time we go to the magical fountains of employer or taxpayer wallets, we put our nation more in retirement and hamper the very processes that created the wealth that made these luxuries possible in the first place.

Whether the ‘right’ is guaranteeing everyone a living wage, making sure everyone has a comfortable retirement, a free education, resources to make it through a period of unemployment, “free” medical care — we very rarely recognize these as consumption of the nest eggs built by productivity of the free market.

We rarely consider that our relatively recent ancestors would have considered such things as kingly luxuries or why it is that we can even afford to be talking about such things.

Reposted:  This is a repost of an earlier post from a few days ago. There were some technical difficulties in readers that I could not figure out how to correct, so I thought it best to delete that post and try again.

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3 thoughts on “Nations in retirement: reposted

  1. I’m also re-posting a comment Mike M made to my original “Nations in retirement” post:

    Hi Seth – Let’s dig a little deeper to show how really bad – and frightening – it is. If you’re familiar with the concept of production possibility frontiers, we can apply that to your analogy of the retired person. The retired person has a nest egg, his principal. He can invest this principal in something that generates some type of return. In terms of his yearly living expenses and the return that his investment makes, three scenarios exist:

    First, he can spend LESS than the income that his investment generates – and in this case, his principal will grow each year. The result will be that he has more principal at work in the subsequent year such that his consumption can increase without invading his principal. This will allow his heirs to inherit the same working principal and put it to work generating for them the same income and hence the same standard of living as when he died. Note that this will be a higher income and higher standard of living than when he retired.

    Second, he can spend or consume exactly what he makes on investment returns and this is OK as long as we have no inflation and his expenses don’t increase (medical problems, etc.). The kids still inherit the principal, but it was the same amount as when he retired, i.e their standard of living hasn’t kept pace with the rest of society.

    Third, he can spend MORE than his investment generates. This necessarily means that he will be spending some of his capital each year. But it also means that each year his principal will be less and thus it will earn less requiring him to use ever increasingly larger percentages of his remaining principal. His heirs will LESS than the amount he retired on (if any at all). This means that, because he consumed more than he made, the heirs standard of living will be less (unless they continue to dig into principal also – in which case it will eventually run out).

    If we, as a country, consume MORE than we produce, we are consuming CAPITAL (those resources that allow us to produce goods and services) and thus reducing the amount that we can produce (and hence consume) in subsequent years.

    When we hand out “entitlements” to people, that has to come from somewhere. That somewhere is what the retired guy would refer to as his nest egg or principal. We are not only depleting our Capital, we are harming what Capital remains when we lessen the incentives for people to produce, i.e. our work ethic can be considered Capital. If we keep doing this, future generations may be “entitled” to certain “free” goods and services (health care, social security, food stamps. housing allowance, Obama phones, etc.), but the cupboard will be empty!

    • I agree, Mike. In my “Nation Going Into Retirement: India” post, I quoted Jagdish Bhagwati saying something very similar.

      I will admit that I oversimplified the individual’s retirement. While retirees may not be doing much personally productive, if they are investing their nest egg, then they are still doing something productive in the economy — lending their capital for investment that may create more wealth.

  2. Pingback: Bad Teacher | Our Dinner Table

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