Professor Bradford Cornell demonstrated that, like physics, economics also has a few foundational laws of conservation, which cannot be violated, no matter how popular or powerful the great wizard in the White House might be. Specifically, we can only consume what we produce in aggregate. Consequently, if fewer of us produce, then per capita consumption must decline. This law has tremendous implications for the impending pension crisis in the context of boomer retirement.
This law suggests that “nominal” pension savings cannot help retirees all consume more, when the aging demographics necessarily means that a significant fraction of the workforce goes into non-productive retirement. From a per capita basis, unless we are blessed with major technological advances to boost productivity, we must necessarily consume less no matter how much nominal wealth we have accumulated in aggregate. Our relative wealth in retirement merely serves to influence how we split a smaller pie. This reasoning supports a prediction offered by another speaker at the 2013 Research Affiliates Advisory Panel: Tim Hodgson of Towers Watson anticipates that there will be rationing in the upcoming global retirement boom.
However, government intervention creates yet another uncertainty (and perhaps another unintended incentive) in the retirement planning calculation. If one believes that the government’s objective function is to redistribute consumption in order to ensure reasonable equality in the quality of living for the elderly, then it is arguable that a large retirement savings account could translate into significantly more consumption per retirement year, especially in the coveted area of high-end healthcare. The government must simply means-test public benefits, increase taxes to fund more retirement welfare, ration healthcare resources, and pursue a regime of low interest rates and higher inflation to erode the assets of retirees with large savings balances.
At the heart of the retirement challenge is the simple fact that we cannot store human capital. And slavery is not an option. Asian families have traditionally tried to work around that by keeping a stranglehold on their children (children are expected to care for their aging parents), but, given the widespread adoption of Western pop culture in Asia, that approach is not working as well now as it did in the past. Western societies have solved the problem of providing for old age by means of property rights; old folks who own the machines and the underlying intellectual property can force the young to share the fruits of their labor. While the boomers cannot own generations X and Y, they can own the tools they need to make a living!
The transition from the boomers to gen Xs and Ys in the workforce brings into focus the second fundamental conservation law in economics: how much we produce in the long run depends on how many people are working and how productive they are. If gen X and Y workers are more productive than the boomers they replace, then the pie will be bigger, and dividing it will be less contentious. Thus, the retirement problem can actually be recast as an innovation problem, to which investment—understood this time as an allocation of capital that enables innovators to succeed—is a solution. If boomers allocate capital wisely to productive enterprises, they can solve the retirement problem by fostering innovation which ultimately increases productivity for the gen X and Y workers. For their contribution to technological advances, boomers are hoping that gen Xs and Ys would share generously rather than drive up wages so severely as to wipe out much of the real value of boomers’ nominal retirement portfolios.