Farewell Welfare in Retirement — Part One

Is ‘welfare’ a Latin interplay for ‘fare well’? Many on social security age pension, unemployment benefits, disability payments, etc. would argue very strongly that they do not fare all that well on the taxpayer funded payments they receive.

The term ‘taxpayer funded’ has been used deliberately. Most people define and describe social security as a government payment. But Government does not generate revenue; it’s a tax collector and redistributor. The following is an extract from the 2014-15 budget papers showing just how much tax the government collects.

By the year 2017, over 50% of the tax collected is earmarked for health and welfare spending. An ageing population comes with a tax cost. With wave after wave of baby boomers waiting to receive their gold watches, the largesse of future (and as yet unborn) tax payers is going to be…taxed (pardon the pun).

Boomers who are expecting the social security and health care status quo to be maintained should have a real cold shower — the numbers do not add up.

Boomers are a spoilt lot. I should know; I am one.

We’ve had a relatively charmed life — free tertiary education, affordable housing in our younger years, access to a variety of employment opportunities, rising asset values (shares and property), travel opportunities, access to a first class health system, inheritances courtesy of frugal parents.
Compared to our parents, we boomers have had a dream run — no Great Depression or World War to live through.

The absence of genuinely hard times (in economic terms) has led to complacency. Hyman Minsky’s Financial Instability Hypothesis determined that ‘stability leads to instability’. This is the academic way of saying familiarity breeds contempt.

If asset values rise each year, the stability in price action leads people to believe this constancy will continue forever. In effect, every year another deck is added to the house of cards. The longer the house of cards remains upright, the more decks will be added (and at a more frenzied pace).

The irony is that the more stable the original foundation (due to fear severely discounting values), the greater the number of upper decks likely to be added in the later years of greed.

Year after year, boomers built on the prosperity of previous years. Secure in the knowledge that the share and property markets would do the heavy lifting on savings, more debt (home equity loans, lines of credit, margin loans, credit cards, retail store financing, etc.) was added to household balance sheets.

While all boomers played this game, the strategy worked. Complacency bred contempt in the form of subprime lending. Total disregard of prudent financial principles provided the perfect environment for these destructive mortgages to be sold to unsuspecting borrowers, and, worst still, for these loans to then be securitised to unsuspecting investors. Ratings agencies, Wall Street and Central bankers completely lost their moral compasses. Decades of stability created instability.

The golden consumption years are behind us. Ahead lies the retirement years. The boomers’ working years where built on the solid post-WWII foundations laid by their frugal parents. The foundations for the boomer retirement years are far less stable:

  1. Massive private sector debt overhang will dampen economic growth.
  2. Low interest rates and growth rates will not provide sufficient return on retirement capital to meet living expenses.
  3. Heavily indebted governments will not be able to fund current welfare and healthcare promises. Absent the promised government safety net, boomer retirees will need to rely more heavily on their own capital.
  4. Longevity — perhaps living longer without sufficient money is not the nirvana science thought it would be.
  5. History strongly indicates that we are in the middle of a secular bear market — another decade of markets teasing and disappointing will lead to greater levels of despondency as portfolios suffer sustained losses.
  6. Over the coming decades Gen X and Y will continually remind us how they begrudge having to pay higher taxes for boomer excesses and indulgences. In the next 10 to 20 years, when Gen X & Y are old enough to influence public policy, watch for government entitlements to change.

They say everything old is new again. Perhaps our notion of retirement will also be altered in the coming years.

Keith Ambachtsheer (founder of KPA Advisory Services Ltd and director of and professor of finance at the Rotman International Centre for Pension Management at the University of Toronto) believes the concept of retirement began in the second half of the 19th century.

This was the time of the railroad boom. The growing number of railway accidents caused by aged operators (working until the day they died) grew to an unacceptable level. To reduce the mistake rate, railroads pensioned the aged operators out of active service. In the beginning, retirement was recognition a worker had reached their use-by-date.

That concept has certainly changed over the past 100+ years. The advent of social security in the early 20th century enabled more people to retire. From these humble beginnings, retirement is now its own economic sector feeding a variety of industries (travel, financial, retirement homes, etc.).

But have we reached a point where society’s concept of retirement has to be reconsidered? Has the pendulum swung too far? Will we see a return of people staying in the workforce much longer (say well into their 70s)?

With Minsky’s words ringing in my ears — stability creates instability — has decades of retirement stability now sown the seeds of instability?

  1. Government welfare is a pyramid scheme — a greater tax base is required to support the apex. If the apex is bigger than the base, the pyramid topples. Over the past century, the age pension pyramid scheme worked reasonably well. Means testing has helped keep the pyramid upright.
  2. Today’s age pensioners (the boomers’ parents) generally have lower lifestyle expenses (they are, after all, the children of The Great Depression). Therefore, the age pension and modest earnings from their investments enable them to live within their means.
  3. Life expectancies for previous generations were much lower — they did not stay around for too long at the apex.

These conditions enabled the concept of retirement to become an established and expected part of our life cycle.

Consider this: if tomorrow the government declared the abolition of the age pension for baby boomers and future generations, how many boomers could afford to retire on their existing capital?

Very few would be my response.

Imagine the outcry if this declaration of abolition was made.

This is what a century of conditioning does — what started out as sound business practice for a few (retiring off aged railway workers for safety reasons) gradually evolved (through the political process) into an entitlement for the masses. What was once a privilege is now considered a right.
So embedded is the entitlement culture that to have the temerity to question this right exposes the questioner to wholesale ridicule and scorn.

The standard retort is ‘I have paid taxes all my life’. Yeah so what. Those taxes paid for the government of the day to provide healthcare, roads, national security, education, etc. Not one cent of those taxes was set aside for the provision of future pensions. Age pensions are funded annually from the cash flow government receives via its tax revenue collection.

Once you dispense with this first line of age pension defence, the next retort is ‘I am entitled to it’. Why? ‘Because I am.’ Great argument. This thinking has evolved from decades of conditioning.

I am not anti-age pension. Senior members of my family receive an age pension. What I am doing is challenging the popular thinking. Throughout history, the masses get creamed because they do not apply critical thinking to a situation.

In truth, retirement (partly or fully funded by the age pension) is a gift, courtesy of the (voluntary or involuntary) ‘generosity’ of tomorrow’s taxpayers. Should those taxpayers of tomorrow decide the imposition is too onerous, then government-funded retirements will be in jeopardy.

While it is highly unlikely that any government would cease age pensions altogether, they could reduce or abolish indexation, tighten the means test (perhaps to include the family home) and/or increase the eligibility age.

These are very real risks boomer retirees need to factor into their retirement plan.

The more indentured tomorrow’s tax payers become, you must recognise the more at risk is the continuation of an ‘entitlement’ their labour is funding.


Vern Gowdie
for Markets and Money

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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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