‘I’ve got really good news for you Mick,’ said Paddy.
‘What is it then?’ asked Mick excitedly.
‘To be sure, to be sure, to be sure, we are all going to live much longer,’ Paddy said to Mick.
‘How do you know Paddy?’ Mick said.
‘Mick, I read it in dat there inter-generational report from the Government.’
‘Oh you’re a smart fella Paddy. But Paddy, if we are going to live longer, does that mean we have to stay with the missus all that time?’ Mick said with an equal mix of bewilderment and anxiety in his voice.
‘Ya know, Mick, I never thought of dat. O’Malley, bring us another pint will ya. We need to drown our sorrows.’
Plenty of ink (and Guinness) has been spilt over the government’s Intergenerational Report (IGR).
Whatever it cost to produce these projections, 40-years into the future, I would have gladly done it for half the price. The document is next to useless.
The Australian Securities Investment Commission (ASIC) requires all product disclosure statements to carry this disclaimer: Past performance is no guarantee of future results.
The IGR is a case of ‘do as I say, not as I do’.
Extrapolating past population trends and Australian economic growth rates into the future is nothing more than pure guesswork.
Consider an Intergenerational Report prepared in 1928 based on the stellar economic growth of the Roaring Twenties. With hindsight, we know this would have ended up being one of history’s greatest works of fiction (alongside Wayne Swan’s book, The Good Fight).
Life took a major U-turn in the 1930s and 1940s. No forecaster, bureaucrat, or man in the street could possibly have envisaged the human and economic costs of The Great Depression and the Second World War. Even if they did, do you think the report would have ever seen the light of day? No way.
In my half-priced and very succinct IGR, my base case would be we’re probably going to live longer, and there will be unintended consequences from this good news.
In addition to living longer, we should also be planning for a complete breakdown of the post-Second World War economic model. In fact, the sooner this happens, the better. Take the pain early and give enough time for recovery.
The global economic model has become increasingly more reliant on debt to achieve ‘growth’. Since the GFC, all economic ‘growth’ has been a direct result of global debt levels increasing from US$142 trillion to nearly US$200 trillion.
Without the willingness — no make that ‘eagerness’ — of governments to pile on the best part of $60 trillion in new debts, global growth over the past six years would have been non-existent.
The fact governments didn’t have this extra US$60 trillion lying around in savings, seems to be a moot point in mainstream economic commentary.
Any forecaster or politician who believes the stupidity of printing money on ‘the never never’ can continue for the next 40 years without serious repercussions, is smoking something much stronger than a cigar.
My half-priced IGR would factor in another Great Depression. This would be the decade when the world’s economic and moral values are reset. The Kardashians would lose their wealth and have to get real jobs. Uber, Twitter, AirBNB, Go Pro, Facebook, Alibaba et al would no longer be valued in the tens of billions of dollars but rather valued on a sensible price to earnings multiple…making those companies still in business promising small- to mid-cap stocks.
Obviously ‘The Greater Depression’ would throw a major spanner into the works. A complete reversal of an economic model — from one totally reliant on debt, to one operating more on savings — would create tremendous upheaval. Governments, businesses and households would face a major challenge: how to live within their somewhat reduced means. Decades of doing the opposite means the change of habit would be extremely difficult.
The Greater Depression would see property and superannuation funds fall in value. Unemployment would go up. Wages would stagnate.
Government revenues would suffer at a time when a greater number of people would require access to their ‘entitlements’. How the government of that decade manages these competing agendas remains to be seen. However, my experience is the political class (and its bureaucrats) tend to make a bad situation worse.
Therefore my half-priced IGR would make these recommendations to the man/woman in the street.
Depending on how old you are today, the odds are you are going to live to 90 and possibly beyond 100.
If you are under 40, look at the average life ‘journey’ and draw your own conclusions based on a modest amount of common sense.
You finish schooling (assuming you go to higher education) in your early 20s. In theory, you are going to retire (become eligible for part or full pension) at age 67. In the space of your 45-year working life, you have to:
- pay off probably two or more mortgages (assuming you upgrade from your first home)
- buy furniture and appliances for your home(s)
- buy a few cars
- pay off a HECS debt
- raise a child or two, if you want them
- go on the occasional holiday
- pay sufficient taxes to support the pension and healthcare needs of all those boomer retirees
- about 33% of you will have the cost of a divorce (and some more than once).
- oh and by the way, save enough for a retirement that may last for nearly 35 years.
Good luck with achieving all this in the ‘allotted’ timeframe.
Without even resorting to back of the envelope calculations, you can see that in all probability you’ll be working well into your late 70s and early 80s.
Faced with this prospect, some couples may opt not to have children or only have one. Also, if the government is struggling to find income to meet the ‘entitlement’ demands of the current population, will it be far more selective in its future immigration intake OR will prospective ‘well-heeled’ immigrants think twice about coming to a country that may tax them into oblivion?
These unexpected variables can completely alter the beautifully projected population trends in the government’s IGR.
If you are over 40, it will depend on how close to age 65 you are, how much debt you have, your savings level and where your investments are allocated as to whether you’ll have the ‘luxury’ of retirement (as we define it today) or not.
It’s reasonable to assume more and more people will opt to stay in the workforce (provided jobs are available) to help make ends meet.
Those already retired can be divided into two camps — under 80 and over 80. Under 80s may have 20 to 30 years of living to do and can ill-afford to be caught in the middle of a financially ruinous event such as The Greater Depression. Those over 80 (like my Dad and mother-in-law) tend to be rather conservative and have fairly basic needs. The pension (and its attendant benefits) plus interest earned on deposits makes their world go around.
My half priced IGR would be best summarised along the lines of ‘prepare for the worst and hope for the best’.
Prepare to work longer. Prepare to continually up skill yourself to increase your prospects of employment. Prepare to receive less from government. Prepare for a market downturn on a scale not seen since the 1930s. Rein in debt, increase savings and adopt a more conservative asset allocation. When you say ‘I do’, prepare for 70 years with the one person…divorce is expensive, so choose wisely.
Prepare to make the hard choices voluntarily rather than being unprepared for involuntary upheaval.
In my heart of hearts, I hope the dire financial scenario does not happen. Our world is not prepared for it. My (wildly optimistic) hope is that perhaps the modern financial system has found a way where we can live beyond our means indefinitely without any ramifications. That the 6-years since the GFC is evidence this is the case. Perhaps the policymakers can continue, indefinitely, doing what they have done…reflate share prices, increase property prices beyond the reach of ordinary folk, continue to offer generous welfare programmes, promise more employment.
History says ‘it can’t be done’. All the lessons tell us ‘the piper must be paid’.
We can hope ‘the piper’ has retired and the new wizards of finance have found how to create a socialist ‘nirvana’.
The question is ‘are you prepared to bet your retirement capital and dreams on this hope?’
The realist in me is therefore preparing for the worst.
The choices we make on the toss of this coin — heads is prepare and tails is hope — will create vastly different outcomes for us over the next 40 years.
But all is not as bad as it seems. On the upside, if the world does go to ‘mud’ for a decade or two, we can learn a lot from our Irish ancestry. Enjoying your favourite tipple with a mate and talking a bit of blarney doesn’t cost much, but can be so enriching for the soul. Ah, the simple things in life.
To prove that life is rarely one dimensional, here’s how Paddy’s wife (Mary) handled the Intergenerational Report’s news of living longer.
Mary goes up to Father O’Leary after his Sunday mass, and she’s in tears.
Father O’Leary says, ‘So what’s bothering you, Mary?’
She says, ‘Oh, Father, I’ve got terrible news. Paddy, me husband, passed away last night.’
Father O’Leary says, ‘Oh, Mary, that’s terrible. Tell me, Mary, did Paddy have any last requests?’
She says, ‘Aye, That he did, Father…’
The priest says, ‘What did he ask, Mary?’
She says, ‘He said, ‘Please, Mary, put down that damn gun…’
Happy St Patrick’s Day.
Editor, Gowdie Family Wealth