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The fundamental issue is that saving financial assets today has essentially zero impact on the total consumption of future retirees. Instead, what matters is 1)

The fundamental issue is that saving financial assets today has essentially zero impact on the total consumption of future retirees. Instead, what matters is 1) the amount of real goods and services future workers generate, 2) how much of this production they give up in tax transfers to retirees or sold for financial assets owned by retirees, and 3) how many workers there are per retiree. As a society, we cannot collectively save our way out of the coming pension crisis. Already economic growth is basically not capital-constrained - if an extra billion dollars starts sloshing around the system, it simply raises the market capitalization of existing bonds, businesses, and real estate by a billion dollars. Public companies, on net, return cash each year to investors. Saving doesn't make future retirees as a class wealthier, it simply rearranges the rank ordering of future retiree wealth while allowing current retirees to spend more via higher asset prices. So, what can future retirees collectively do? Have more children, allow more immigrant workers, increase future tax transfers, force higher savings rates on future workers (eg, student loan debt, mortgage repayments, land rents), retire later, or accept a lower standard of living. What individual options are there? Basically all you can do is save more and wind up in a more privileged tranche of future retirees, and hope that society winds up rich enough to support your retirement dreams. There's some room for optimizing your investment strategy so that it minimizes costs and risks, via tax-advantaged accounts owning broad-market index funds, but there's only so much juice to squeeze there.

dcolkitt 7y ago
> Already economic growth is basically not capital-constrained I really disagree with this. Consider a simple counter-example. Workers in the Bay Area are substantially more productive than the American average. One simple way to use capital to increase GDP is to build more housing and infrastructure in places like the Bay Area. Even if the population doesn't grow, that housing stock will allow future workers to move from West Virginia to San Francisco. By shifting future workers from low-productivity job markets to high-productivity job markets, we can substantially increase total economic. Even with the same population and the same technology base. The only constraint is the tight housing supply in places like the Bay Area. But we know how to build more housing, all it takes is a willing political system and capital investment.
- ThrustVectoring 7y ago
  The housing supply in the Bay Area is politically constrained, not capital-constrained. It does not matter how much money you have; if you want to build in the Bay Area, you need to convince the local NIMBYs to allow you to do so.
  - wolco 7y ago
    It is geograpically constrainted and cannot build new single detacted. Building up changes the character and no one mentions earth quake issud and the lack of supertall building found commonly elsewhere.
    - nradov 7y ago
      Earthquake safety has only a minor impact on building construction costs. If you put aside land and permit costs, constructing a building in the Bay Area costs about the same as other major metropolitan areas.
    - CalRobert 7y ago
      " cannot build new single detacted" so... don't? Plenty of other types of home. (Nevermind that we're accepting the idea we don't have room at face value)
- ACow_Adonis 7y ago
  There's certain economic laws you can't get around even with capital expenditure. Diminishing marginal returns, political and social capital, etc. In fact, trying to increase capital expenditure to achieve future income gains actually faces an anti-intuitive danger: most capital expenditure creates future depreciation/maintenance/ opportunity costs. So if you mis-allocate big chunks of capital expenditure (and centrally driven political decisions such as this have a high risk of that happening compared to decentralised/incremental/market decisions) your apparent fix can actually make the situation worse, as your big chunks of capital create future maintenance and depreciation and political liabilities which create (political) pressure for further draws on the future tax base. There's a strong argument that various forms of past infrastructure spending that now require upkeep the local population can't afford (various road infrastructure in local municipalities) and rust belts are literally that. Also, if the form of capital expenditure focuses on environmental resource consumption or uncosted externalaties, some forms of capital expenditure can be thought of as transferring future consumption into the present. And then I haven't even touched upon whether the capital expenditure/expansion is funded via debt...
tenpies 7y ago
What makes me somewhat mad are the (Western) countries "solving" their public pension problems through immigration. Not only do you then destroy the tax payer base in the country that loses the emigrant, but you're just pushing the problem down the line so that the immigrants that saved you tomorrow, are themselves screwed when/if they ever get to retire. It's literally a legal Ponzi scheme and in many cases, you are legally obliged to play. I'm looking at you Canada.
- throwawaycanada 7y ago
  Yeah the new push is to drive our population to 100M in 80 years from about 37M now. It costs $2300/mo in our biggest cities for a single bedroom apartment on average.
  - anon1m0us 7y ago
    A lot of this is the rush of foreign investment and the government you elect caring more about the tax revenue from people who don't even live in your country over the welfare of their own constituents.
    - quaquaqua1 7y ago
      Agreed, however it's also a result of overly strict building and zoning codes that don't allow density to increase in exchange for a reasonable price. The result, however, is tragic. People just live in "illegal" housing situations like stuffing 4 or 5 people into a 1 bedroom or 2 bedroom apartment, where people just create temporary walls to zone off part of the living room or use an extra large closet for extra "bedrooms". Thus the city loses out on tax revenue AND preventing population increase in certain areas, which is the whole point of these restrictive zoning laws.
  - ben_w 7y ago
    You are not the first person I have seen conflate those two things. I assume you’re assuming higher demand and fixed supply leading to rising prices, is that fair? If so, what is your mental model for the how/where/why of house construction?
novok 7y ago
We are also more productive as a society compared to the 50-60 years ago that retirees were born. Theoretically we should be able to make more with less people too.
- ThrustVectoring 7y ago
  Productivity gains certainly help, but it's not something that pension plans have any control over. They can only estimate what it's going to be going forward, and try to hedge their defined-benefit terms around it. Defined-contribution plans have a much better time, since they can foist this risk onto future retirees.
  - roenxi 7y ago
    There might be others, but I recall 2 styles of pension setup. One we use in Australia is that workers set aside x% of their wages into a fund where they can't access the money until they have retired at >60 years old. The other is a transfer-payment from current workers to retired workers. In the second case what you say is true; pension funds would be basically a thin abstraction for what is basically a welfare system. People's benefits are not linked to their productivity and life choices. Pension funds would have no power. However in the Australian system the funds have enormous power because they sit on a vast pool of capital they have exclusive control over. They have the means and power to start their own business/create demand for new businesses that meet their retirees potential needs. This shows there is no theoretical reason why pension funds can't actively participate in shaping the economy to meet future retirees needs. But your main point goes to the fact that 'investment' is typically in pieces of paper rather than real things. This is probably a result of government policy favouring people who own financial assets over real assets. Governments have been running a 'war on investment' for many years; look at how well companies like Uber do that take capital and basically burn it. How is a productive company supposed to compete with that sort of business plan? There is far too much credit in the system and that is a direct result of government policies or situations quietly accepted by government policy. All those resources could have gone into things that retirees were going to use. If a company losing billions can make its owners billions; there is no particular incentive to do the legwork to actually think about the future and come up with a plan that works. We are starting to see the results of that thinking, which is pervasive, in the pension funds. Addition For Clarity; real investment is supposed to be about making it much cheaper and easier to secure useful resources in the future. If there are broad scale pension crises, which there are, then whatever has been going on isn't real investment. It was a likely outcome of the '08 crisis that real investment would be squelched; because people who were exposed as not stewarding money sensibly were left in charge. I'll bet the Europeans are in a worse spot than the Americans and doing something foolish like following their financial lead but with a more extensive welfare state.
perspective1 7y ago
More investment leads to higher asset prices, lower interest rates, business growth and more future production. Investing in capital markets just gets the market to allocate your capital, as opposed to if you built a widget factory yourself instead. The end result is the same (but the market is probably more efficient), more production.
kcanini 7y ago
This comment nicely explains the concept of the "veil of money": viewing economic activity in terms of real products and services instead of money can clarify what's actually happening in the economy.
- chii 7y ago
  but you'd expect that technological advances to prop up the implied drop in worker productivity (which is why there's an implied scarcity of goods and services in the future). What i know for sure though, is that a large number of future retirees hav not have saved up enough for themselves.
  - ThrustVectoring 7y ago
    Retirees as a group cannot save their way out of the pension crisis - an extra TV made in 1998 does not materially impact the ability of society to provide health care to a retiree in 2018. You'd have to physically store goods for later consumption for this to work at all. All you get out of extra saving today is higher asset prices, allowing current retirees to consume the extra goods that current workers neglect to consume via saving.
romaaeterna 7y ago
> 3) how many workers there are per retiree Rather, total production of workers per retiree. More kids from economically unproductive population segments, and more immigrants to unproductive population segments don't help future retirees. It seems likely to me that political change is the mostly likely result from a future pension crisis: another government expansion of responsibilities for old age income and health care.

dcolkitt 7y ago

> Already economic growth is basically not capital-constrained I really disagree with this. Consider a simple counter-example. Workers in the Bay Area are substantially more productive than the American average. One simple way to use capital to increase GDP is to build more housing and infrastructure in places like the Bay Area. Even if the population doesn't grow, that housing stock will allow future workers to move from West Virginia to San Francisco. By shifting future workers from low-productivity job markets to high-productivity job markets, we can substantially increase total economic. Even with the same population and the same technology base. The only constraint is the tight housing supply in places like the Bay Area. But we know how to build more housing, all it takes is a willing political system and capital investment.

ThrustVectoring 7y ago
The housing supply in the Bay Area is politically constrained, not capital-constrained. It does not matter how much money you have; if you want to build in the Bay Area, you need to convince the local NIMBYs to allow you to do so.
- wolco 7y ago
  It is geograpically constrainted and cannot build new single detacted. Building up changes the character and no one mentions earth quake issud and the lack of supertall building found commonly elsewhere.
  - nradov 7y ago
    Earthquake safety has only a minor impact on building construction costs. If you put aside land and permit costs, constructing a building in the Bay Area costs about the same as other major metropolitan areas.
  - CalRobert 7y ago
    " cannot build new single detacted" so... don't? Plenty of other types of home. (Nevermind that we're accepting the idea we don't have room at face value)
ACow_Adonis 7y ago
There's certain economic laws you can't get around even with capital expenditure. Diminishing marginal returns, political and social capital, etc. In fact, trying to increase capital expenditure to achieve future income gains actually faces an anti-intuitive danger: most capital expenditure creates future depreciation/maintenance/ opportunity costs. So if you mis-allocate big chunks of capital expenditure (and centrally driven political decisions such as this have a high risk of that happening compared to decentralised/incremental/market decisions) your apparent fix can actually make the situation worse, as your big chunks of capital create future maintenance and depreciation and political liabilities which create (political) pressure for further draws on the future tax base. There's a strong argument that various forms of past infrastructure spending that now require upkeep the local population can't afford (various road infrastructure in local municipalities) and rust belts are literally that. Also, if the form of capital expenditure focuses on environmental resource consumption or uncosted externalaties, some forms of capital expenditure can be thought of as transferring future consumption into the present. And then I haven't even touched upon whether the capital expenditure/expansion is funded via debt...

tenpies 7y ago

What makes me somewhat mad are the (Western) countries "solving" their public pension problems through immigration. Not only do you then destroy the tax payer base in the country that loses the emigrant, but you're just pushing the problem down the line so that the immigrants that saved you tomorrow, are themselves screwed when/if they ever get to retire. It's literally a legal Ponzi scheme and in many cases, you are legally obliged to play. I'm looking at you Canada.

throwawaycanada 7y ago
Yeah the new push is to drive our population to 100M in 80 years from about 37M now. It costs $2300/mo in our biggest cities for a single bedroom apartment on average.
- anon1m0us 7y ago
  A lot of this is the rush of foreign investment and the government you elect caring more about the tax revenue from people who don't even live in your country over the welfare of their own constituents.
  - quaquaqua1 7y ago
    Agreed, however it's also a result of overly strict building and zoning codes that don't allow density to increase in exchange for a reasonable price. The result, however, is tragic. People just live in "illegal" housing situations like stuffing 4 or 5 people into a 1 bedroom or 2 bedroom apartment, where people just create temporary walls to zone off part of the living room or use an extra large closet for extra "bedrooms". Thus the city loses out on tax revenue AND preventing population increase in certain areas, which is the whole point of these restrictive zoning laws.
- ben_w 7y ago
  You are not the first person I have seen conflate those two things. I assume you’re assuming higher demand and fixed supply leading to rising prices, is that fair? If so, what is your mental model for the how/where/why of house construction?

novok 7y ago

We are also more productive as a society compared to the 50-60 years ago that retirees were born. Theoretically we should be able to make more with less people too.

ThrustVectoring 7y ago
Productivity gains certainly help, but it's not something that pension plans have any control over. They can only estimate what it's going to be going forward, and try to hedge their defined-benefit terms around it. Defined-contribution plans have a much better time, since they can foist this risk onto future retirees.
- roenxi 7y ago
  There might be others, but I recall 2 styles of pension setup. One we use in Australia is that workers set aside x% of their wages into a fund where they can't access the money until they have retired at >60 years old. The other is a transfer-payment from current workers to retired workers. In the second case what you say is true; pension funds would be basically a thin abstraction for what is basically a welfare system. People's benefits are not linked to their productivity and life choices. Pension funds would have no power. However in the Australian system the funds have enormous power because they sit on a vast pool of capital they have exclusive control over. They have the means and power to start their own business/create demand for new businesses that meet their retirees potential needs. This shows there is no theoretical reason why pension funds can't actively participate in shaping the economy to meet future retirees needs. But your main point goes to the fact that 'investment' is typically in pieces of paper rather than real things. This is probably a result of government policy favouring people who own financial assets over real assets. Governments have been running a 'war on investment' for many years; look at how well companies like Uber do that take capital and basically burn it. How is a productive company supposed to compete with that sort of business plan? There is far too much credit in the system and that is a direct result of government policies or situations quietly accepted by government policy. All those resources could have gone into things that retirees were going to use. If a company losing billions can make its owners billions; there is no particular incentive to do the legwork to actually think about the future and come up with a plan that works. We are starting to see the results of that thinking, which is pervasive, in the pension funds. Addition For Clarity; real investment is supposed to be about making it much cheaper and easier to secure useful resources in the future. If there are broad scale pension crises, which there are, then whatever has been going on isn't real investment. It was a likely outcome of the '08 crisis that real investment would be squelched; because people who were exposed as not stewarding money sensibly were left in charge. I'll bet the Europeans are in a worse spot than the Americans and doing something foolish like following their financial lead but with a more extensive welfare state.

perspective1 7y ago

More investment leads to higher asset prices, lower interest rates, business growth and more future production. Investing in capital markets just gets the market to allocate your capital, as opposed to if you built a widget factory yourself instead. The end result is the same (but the market is probably more efficient), more production.

kcanini 7y ago

This comment nicely explains the concept of the "veil of money": viewing economic activity in terms of real products and services instead of money can clarify what's actually happening in the economy.

chii 7y ago
but you'd expect that technological advances to prop up the implied drop in worker productivity (which is why there's an implied scarcity of goods and services in the future). What i know for sure though, is that a large number of future retirees hav not have saved up enough for themselves.
- ThrustVectoring 7y ago
  Retirees as a group cannot save their way out of the pension crisis - an extra TV made in 1998 does not materially impact the ability of society to provide health care to a retiree in 2018. You'd have to physically store goods for later consumption for this to work at all. All you get out of extra saving today is higher asset prices, allowing current retirees to consume the extra goods that current workers neglect to consume via saving.

romaaeterna 7y ago

> 3) how many workers there are per retiree Rather, total production of workers per retiree. More kids from economically unproductive population segments, and more immigrants to unproductive population segments don't help future retirees. It seems likely to me that political change is the mostly likely result from a future pension crisis: another government expansion of responsibilities for old age income and health care.