The Final Farewell for Welfare

Finally, the Dow has made the decisive move, pushing through the 20,000-point level.

My guess is that we’ll see the market run a bit higher on ‘Trumpenomics’ and the promised return of the American dream…before reality sets in.

The US market was priced for ‘beyond perfection’ before it breached this important psychological barrier. This year’s hot tip for the Gold Statue at the Oscars is ‘La La Land’…a movie title that, through either fate or coincidence, is a fitting description of the US share market.

Speaking of all things gold, the precious metal was down slightly overnight, falling to around US$1,190 an ounce. All in all, though, it continues to make the kind of headway gold bugs like to see, up US$50 since late December.

Final farewell for welfare

I promise this is the final farewell for welfare.

This messenger has so many bullet holes in him that it’s a wonder I can still sit upright and hit the keyboard.


No respect for the elderly and their efforts.

It’s alright for you, you don’t need the pension.

How are we supposed to survive with low interest rates and reduced pension?’

Get your facts straight.

On this last point, I wasn’t told which facts that need straightening were ‘bent’.

Shooting the messenger is a great way to vent frustrations, but it doesn’t solve the problem.

The problem is that government has overpromised, and is destined to under-deliver in a world where people are living longer and birth rates are falling.

Australian fertility rate

Source: Sydney Morning Herald
[Click to enlarge]

The grand notion of a National Welfare Fund ceased to exist in 1950.

Politicians raided the pot, and there ended the short-lived dream of a national ‘super-superannuation’ plan.

The welfare today is nothing more than a giant Ponzi (pyramid) scheme.

Provided the base is greater than the apex, the illusion continues.

And that’s where the problem is…the base is not going to be broad enough to support the apex.

Back in June 2015, then Social Services Minister Scott Morrison gave an indication of just how many tax slaves it took to row the welfare boat:

Eight out of 10 income taxpayers go to work every day just to pay our $150 billion welfare bill.

We’re running out of taxpayers.

The solution? Increase taxes, decrease benefits and/or raise the eligibility age.

To see what’s possibly headed our way, let’s take a look at the ‘Land of the Ever-Rising Debt’: Japan.

Japan’s ballooning public debt is well documented. We watch in wonder as the debt-to-GDP ratio continues to go where no other has ever ventured before.

Each year the Japanese government finds itself with an ever-widening gap between tax receipts and expenditures.

The biggest outlay in Japan’s US$800 billion budget? You guessed it…social security.

This is an extract from The International Times on Japan’s 2016 budget (emphasis mine):

…budget also featured a record high welfare spending plan to cope with Japan’s ageing population. Social security related expenditure — the largest part of the budget — would be raised by 1.4 percent.

Social security spending, the budget’s biggest item, will rise 441 billion yen ($3.66 billion) to a record 31.97 trillion yen ($256.3 billion).

‘Record high’ and ‘biggest item’…these are not the terms you want to see on the expenditure side of the budget. Around one-third of Japan’s budget goes to social security. Something has to give.

According to Japan Insider:As of September 2016, 27% of the Japanese population was aged 65 or older but ‘only’ 13% are aged 75 or older…

In 1956, the United Nations passed a ruling that raised the official classification of being elderly from age 60 to 65.

Hmmm, what if an updated reclassification was being considered?

On 6 January 2017, The Japan Times published an article titled: ‘As welfare costs climb, gerontology groups propose higher age for definition of “elderly”’.

Here’s an extract (emphasis mine):

Japanese between 65 and 74 should no longer be classified as elderly because they are physically and mentally much younger than their counterparts were decades ago, says a proposal backed by two academic societies.

Under the recommendation, released Thursday by the Japan Gerontological Society and the Japan Geriatrics Society, the definition of elderly should be used for people who are at least 75, rather than 65 at present. It also proposes a new term for those 90 and over: “superelderly.”

Defining those between 65 and 74 as “pre-elderly,” the groups called on the government to reclassify them as supporters of society rather than people who need help from it.

Imagine if the UN reclassified those aged between 65 and 74 ‘as supporters of society’; that ruling would effectively halve Japan’s social security budget, declaring: Only those over 75 need help from society.

If you’re a politician, this would be a neat solution…the UN says the eligibility age for the pension is now 75.

Of course, these things don’t happen overnight and with immediate effect.

Changes of this magnitude to society generally have a long lead time and a slow burn…on the proviso there’s no major economic disruption that plays havoc with the revenue side of the budget.

Japan is roughly a decade or so further down the demographic path to the rest of the developed world. We should take note of the discussion they are preparing to have in order to slow down the ballooning cost of social security.

Lamenting the fact — and it is a ‘fact’ — that politicians past and present have squandered our money is not going to change the situation. It is what it is.

Politicians who make hollow promises and tell you what you want to hear are only going to add to your disillusionment.

Does Syriza Party ring any bells?

When the brown stuff hit the fan in Greece a few years ago, the charismatic leader of the Syriza Party, Alexis Tsipras, swept to power on a platform of ‘we’re not going to make any repayments’ and ‘we’re going to tell the Germans to stick their debt where the sun doesn’t shine,’ or words to that effect.

Yeah!! You bewddy!! Go for it Alexis, baby!!

You’re telling us what we want to hear. We’ll vote for you.

Well, we know who got shafted — and it wasn’t the Germans.

The Guardian, 3 October 2016:

‘Greek police fire teargas at pensioners during anti-austerity protest’

Greece’s leftwing government has imposed cuts on pensions this year as part of its bailout commitments to international lenders, with the International Monetary Fund pressing for tougher measures.

Years of cuts have pushed nearly half of pensioners’ monthly income below the official poverty line, according to a survey published last week by the National Pension Network, which represents Greece’s main retiree associations.

Fifty-two per cent of Greek households rely on pensions directly or indirectly to meet monthly expenses, the survey found.

Greece might be an extreme example of pension overpromise being harshly wound back; however, in the years to come, you can expect other indebted socialist European countries to go down the same road.

Forewarned is forearmed. Take heed of what’s happening in countries that are already facing major demographic and debt headwinds.

This is likely to be Australia in a decade’s time.

You can choose to believe that false political prophets promising the status quo can keep the ruse going indefinitely…OR protest the unfairness of it all…OR acknowledge the demographic and debt numbers are baked into the cake, and plan accordingly.

For retirees, enjoy the current level of pension while it lasts and, if possible, try to hold on to a few dollars to build a buffer for the time when the means test really does become very mean.

If you are a decade or two away from today’s retirement age of 67, then you may want to adjust your plans to age 70 and beyond.

Oh, and one last piece of advice: Please don’t shoot the messenger.


Vern Gowdie,
For Markets and Money

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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