Spain is Doomed; Youth Unemployment Hits 51%

[Admiral Yi]

I think I had about half a dozen rounds with Mono on this one, so I didn't bother repeating this one more time.

The problem with funding retirement from individual savings is that it forces you to be overly conservative.  On average, people have a predictable lifespan, but individually it's going to vary a lot.  If everyone covers their retirement on their own and wants to ensure that they don't run out of funds, then everyone has to assume that their lifespan will be far above average.  Obviously on average the lifespan can't be above average, so a lot of retirement savings would be left unspent.  That's very inefficient.

We've been over this a hundred times dude.  An individual can hedge the life expectancy risk by purchasing an annuity.

[Jacob]

We've been over this a hundred times dude.  An individual can hedge the life expectancy risk by purchasing an annuity.

Is it really controversial that collective hedging is more efficient than individual hedging?

[Admiral Yi]

Is it really controversial that collective hedging is more efficient than individual hedging?

If you look solely at long life risk collective might be more efficient because you don't have adverse selection, but if you add in the other distortions of public pensions I doubt it.

[Zanza]

The downside of everybody buying an annuity is that there aren't enough worthwhile investments that also fit the risk profile that's required for an annuity. You end up with indirectly buying low-yield government debt that will be used to create the demand that you did not create by saving so much. So it works as long as just some individuals do it, but I am sceptical it works for society at large.

[alfred russel]

The problem with having everyone provide for their own retirement security is that very few have the financial discipline to actually do it. While the system would be perfectly fair, in a sort of 'ant vs. grasshopper' sense, people are unlikely to tolerate the sight of old folks being reduced to beggary, no matter how much they deserve it for spending all of their moolah on big-screen TVs while they were working.

This is true. Speaking to the US situation that I believe is generally true internationally, the idea of social security to provide a minimum of retirement security has eroded: currently individual benefits can go up to $30k a year. Most get a lot less, but the point stands: $30k a year is not a minimum amout to get by--in parts of the country it probably approaches the average annual income. Adjusting for inflation, when social security started the maximum benefit was a fraction of that amount.

We tend to be of a mindset to reduce benefit payments by increasing the retirement age, which seems crazy to me. If social security is designed to protect people from destitution in old age, the most at risk are probably going to be working class people, and a lot of people aren't going to be so able to perform manual labor after age 67. I, on the other hand, may be able to shuffle paper for years after that, but I'm not really the at risk group.

[alfred russel]

In addition to DGuller's point about social security being a great way to pool death benefits, there are two other problems with tax advantaged savings vehicles:

1) The general public aren't trained investment professionals. There is a lot of evidence that the general public performs miserably at investing their own money and their gains tend to get chewed up in fees. Also, some will inevitably lose their savings completely, which brings us back to Malthus's concern of destitute old people.
2) The data shows that the people who take advantage of the tax advantaged private vehicles don't need them. I max out every tax advantaged account I can--and have for years--which has been a tremendous help in reducing my tax burden, but isn't really helping anyone avoid old age destitution. On the other hand, most poor people don't have 401ks or IRAs, and very few have them with enough assets to give them a secure retirement. I understand Mitt Romney's financial disclosures showed that he managed to get an IRA with about $30 million in it, which is money that has avoided US taxes to date and potentially could for another couple generations if the family plays the inheritance planning game right.

[Tamas]

yeah. the problem is, our current economic model would be in serious jeopardy if they stopped doing so, however. On the short term anyway. And we rather QE ourselves to death than to see that happen!

I was going to post something like this: that if people actualy did start saving and doing what is in their best interests and quit blowing their money on garbage they do not need our entire economy would be in real danger

yes, but I would like to believe, well, I need to believe, that an economy with a groundwork of savings, and not make-believe money, is possible.
It's just that we are way too far ahead into the current model to get rid of it without some major upheveal. And then that trouble may be an other big war, which will reset the whole thing, letting us start again for an other 50 years. The survivors, at least.

[Neil]

Of course, one could take it a level further and say the more fundamental problem is that basic idea that the state should provide this retirement security to begin with.

How could it not be?  The state exists to keep social order, and the only alternative to their providing of this security is blood in the streets.

[Jacob]

Is it really controversial that collective hedging is more efficient than individual hedging?

If you look solely at long life risk collective might be more efficient because you don't have adverse selection, but if you add in the other distortions of public pensions I doubt it.

I doubt that. What sort of distortions do you mean?

Seems to me that social security of any kind - be it unemployment insurance, health care and old age security - is best handled by the state. If the objective is to provide a universal minimum service - the objective is to give someone who loses their job some support until they find another job (unemployment insurance), to not let people die from or suffer from at least some treatable illnesses and accidents (health care), and to not be absolutely destitute when they're too old to earn their own living (social security) - and we want to provide that no matter how many bad financial decisions they made prior to needing any of these social services and this makes free market solutions inapplicable. Now, you may disagree that we as a society should provide such security - health, employment and old age (or worker's compensation or whatever) - but that's a different argument than the argument about the most efficient way to provide it.

The point of social security is that you can't opt out of it - you're guaranteed something of a safety net. Another point is that you can't mess it up - if you lack the proper financial planning skills or resources, if you have bad luck, or you otherwise don't do the right things - you're still covered; you don't need to starve to death under a bridge somewhere or take to a life of crime. How can a individual hedging provide that, unless it's underwritten by the collective (making it no actually individual at all)?

[Jacob]

Of course, one could take it a level further and say the more fundamental problem is that basic idea that the state should provide this retirement security to begin with.

How could it not be?  The state exists to keep social order, and the only alternative to their providing of this security is blood in the streets.

Yeah, I think it's more honest frame it like Berkut does.

Maybe you don't believe that the state should provide social security of particular forms (be it health, employment, retirement, whatever). If so, then let's have that discussion.

Personally, I think that providing social security of various sorts is one of the fundamental reasons for the existence of the state to begin with. I also think it's a better vehicle for providing the various forms of social security than the individual or privatized alternative, which is a somewhat different discussion.

[MadImmortalMan]

Maybe the biggest issue is like ARs point--that when it goes from being a safety net to a full-on pension it gets too big for itself. The same things that make a safety net universal and secure also make it a poorly performing investment. If it sucks up too much of society's assets it can slow economic growth.

[crazy canuck]

In addition to DGuller's point about social security being a great way to pool death benefits, there are two other problems with tax advantaged savings vehicles:

1) The general public aren't trained investment professionals. There is a lot of evidence that the general public performs miserably at investing their own money and their gains tend to get chewed up in fees. Also, some will inevitably lose their savings completely, which brings us back to Malthus's concern of destitute old people.
2) The data shows that the people who take advantage of the tax advantaged private vehicles don't need them. I max out every tax advantaged account I can--and have for years--which has been a tremendous help in reducing my tax burden, but isn't really helping anyone avoid old age destitution. On the other hand, most poor people don't have 401ks or IRAs, and very few have them with enough assets to give them a secure retirement. I understand Mitt Romney's financial disclosures showed that he managed to get an IRA with about $30 million in it, which is money that has avoided US taxes to date and potentially could for another couple generations if the family plays the inheritance planning game right.

Yep, if such a tax advantageous system was introduced I would do well.  But in the end I would end up paying more in tax to bail out those who didnt in any event.

Btw does anyone know where the idea of moving away from state pensions originated?

[Strix]

In addition to DGuller's point about social security being a great way to pool death benefits, there are two other problems with tax advantaged savings vehicles:

1) The general public aren't trained investment professionals. There is a lot of evidence that the general public performs miserably at investing their own money and their gains tend to get chewed up in fees. Also, some will inevitably lose their savings completely, which brings us back to Malthus's concern of destitute old people.
2) The data shows that the people who take advantage of the tax advantaged private vehicles don't need them. I max out every tax advantaged account I can--and have for years--which has been a tremendous help in reducing my tax burden, but isn't really helping anyone avoid old age destitution. On the other hand, most poor people don't have 401ks or IRAs, and very few have them with enough assets to give them a secure retirement. I understand Mitt Romney's financial disclosures showed that he managed to get an IRA with about $30 million in it, which is money that has avoided US taxes to date and potentially could for another couple generations if the family plays the inheritance planning game right.

Yep, if such a tax advantageous system was introduced I would do well.  But in the end I would end up paying more in tax to bail out those who didnt in any event.

Btw does anyone know where the idea of moving away from state pensions originated?

Wall Street

[MadImmortalMan]

Yep, if such a tax advantageous system was introduced I would do well.  But in the end I would end up paying more in tax to bail out those who didnt in any event.

What if the contributions were mandatory?

Btw does anyone know where the idea of moving away from state pensions originated?

Is anyone moving away?

[crazy canuck]

Is anyone moving away?

Did you take a Grumbler pill this morning?