What if everyone in the United States started to save for retirement the way financial planners said they should? The result would be a financial disaster of unprecedented proportions, for several reasons, but one in particular.
Consider: conventional financial planners suggest a nest egg of about $3 million, if you can manage it. In this plan, 100 million households would have an average of $2 million in the bank, or otherwise soundly invested. The national aggregate retirement savings would be a total of $200 trillion.
But there isn’t that much money. Everything the United States can produce for the next 10 years may not be worth $200 trillion. That means $200 trillion can exist only in a fictional sense. The money could exist in accounting records, but you wouldn’t really be able to spend it. This is a far more serious failing than the current political worries about the federal government owing $10 or $20 trillion.
We take the ability to save money for granted, but we shouldn’t. The ability of money to act as a store of value (that’s the economic term for it) isn’t actually a law of nature, nor is it strongly supported by history. A nation’s collective ability to save money is limited by its productive capacity. In other words, your money is worth something only if people are actually working and making things. There is a limit to how much money can be saved. Economists can’t say exactly what that limit is, but it is fair to say that it is impossible for there to be so much money put away that ordinary people can live the last one third of their lives in a lifestyle of leisure and luxury. No matter how cleverly we plan this financially, it won’t work. It may work for individuals, up to a point, but it won’t work as a plan for the whole country.
It is an open question whether it is possible for everyone to have even a subsistence-level retirement. We haven’t had to face that question — yet — for two main reasons. In the 20th century, western governments financed retirement plans based on a pyramid-style scheme supported by population growth. Further reducing the strain on the retirement systems, less than half of people reached retirement age. As many died in their 50s of tobacco-related illnesses. We cannot reasonably expect either of these two effects to continue.
People worry about the solvency of Social Security, and indeed, Social Security would be an illegal pyramid scheme or Ponzi scheme if it were sponsored by a private company. Yet people’s private retirement savings for the 2040s are in even worse jeopardy. Quite contrary to current experience, people could get to 2040 and find that their retirement savings are worth considerably less than the money they put in.
The whole concept of retirement will have to be reconsidered, and in addition, we have to stop relying so much on money and other financial instruments as a store of value. When financial planners currently talk about diversification, they mean not putting more than 20 percent of your portfolio in the stocks and bonds of any one sector. But if you are planning on retiring 30 years from now, real diversification probably means not having more than about 20 percent of your portfolio tied up in stocks or bonds or securities of any kind, or bank accounts, or anything that depends on the continued operation of the corporate world or the financial system.
What are we to invest in, then? It is a question we will have to figure out — because the way we are doing it now, there isn’t enough money for all of us to retire.