The End of Retirement

I suppose I shouldn’t have been surprised by the flurry of responses to last week’s Archdruid Report post on the twilight of investment. “Men will forgive the murder of their fathers sooner than the loss of their patrimony,” Machiavelli wrote a long time ago, and the principle can be applied more generally: if you really want to rile people, threaten the money and property they think is securely theirs.

Unfortunately the word “security” can be applied to any financial asset in today’s economy only in the most ironic of senses. The entire system of economic value that underlies the possibility of investment broke down completely in the speculative excesses of the last thirty years, drowned in a flood of unpayable debts – public, corporate, and private – that were mistakenly classified and then sold as financial assets. The face value of these paper debts vastly exceeds the value of all human economic activities on Earth; the huge majority of them can thus never be paid off, and so they are effectively worthless.

That awkward fact, if honestly faced, would likely bring the world’s economies to a shuddering halt. Thus we can be confident that it will not be honestly faced. Instead, governments around the world are playing a high-stakes game of make-believe, pretending that the global economy is not bankrupt in the hope that the losses can be spread out over years rather than hitting all at once. For all I know, they may succeed – but even so, the downside will not be pretty.

One aspect of that downside was on many of my readers’ minds last week, to judge by the comments and emails I fielded. People nowadays invest for many reasons, but one of the most common is retirement. Ever since the American pension system and its government equivalent, Social Security, began to shed their reputation for stability and adequate funding, a growing number of Americans – pushed that way by large and lavishly funded ad campaigns – have placed their hopes for a comfortable old age on investments. The result is a huge fraction of Americans who are emotionally as well as financially invested in the hope that a big payoff from their assets will enable them to have the retirement of their dreams.

If you are among the people who cling to that belief, I’m sorry to say I have bad news. Over the next decade or so, the huge overhang of paper wealth that now floods the world economy is going to lose nearly all its value. As it goes, it will take your retirement funds with it.

It’s anyone’s guess exactly how the process will play out. One possibility is a long deflationary spiral in which markets slump, bankruptcies soar, and the legacy of bad debt suffers the death of a thousand cuts. Another is hyperinflation, in which the dollar value of the bad debt still holds good but a cheeseburger costs US$150,000 and workmen take their salaries home in wheelbarrows. Another is a credit crisis in which efforts by governments to fund deficits via borrowing exhaust the world’s dwindling pool of credit, and nations are forced into default. Still another is a political decision on the part of a major debtor nation to default on its foreign debt, leading to panic selling of offshore assets and the collapse of international trade and investment.

What makes this devastating for those who hope to retire on their current investments is that most current asset classes are part of that overhang of unpayable debt, and the rest are priced at levels that assume that much of the unpayable debt is still boosting the global economy’s net worth. One way or another, those assets will sooner or later move toward their real value, which in the case of most financial assets is nothing, and in the case of most nonfinancial assets is a lot less than they’re worth on paper right now. This means that no matter where you put your investments, you’re likely to lose most of your money.

Interestingly, this is likely to be true even of commodities such as crude oil which are subject to declining production curves for hard geological reasons. Last year’s price spikes in oil and other energy resources were only partly a product of geological limits on production. The soaring demand growth of an overheating economy, and speculative money flooding into any asset that was gaining in price, both played major parts. Prices collapsed when the speculative money flowed back out, and slumping demand has helped keep prices low since then. As the economy unravels further, the chance of further downside action can’t be dismissed. It has, I think, too rarely been noticed in peak oil circles that there are at least two ways to price oil out of the market; the first is for the price per barrel to soar out of reach, the second is for the economy to contract so sharply that even a modest price per barrel is more than most people can pay.

For the next decade or so, then, there’s unlikely to be any asset class that will give prospective retirees the income they’ve come to expect. Nor will private pensions, most of which are dependent on investments and vulnerable to corporate bankruptcies, far much better during that time. Nor are government pensions immune; most governments are hemmorrhaging red ink right now, adding to unsupportable debt loads, and the pool of credit available for government borrowing is far from limitless.

What about after that, when the overhang of debt has been cleared one way or another and this crisis, like all economic crises, finally comes to an end? Well, once again, I have bad news.

Retirement as a social habit was entirely a product of the zenith of the age of abundance now sliding backwards in our collective rear view mirror. For a brief window of time – rather less than a century – it made financial and political sense for nations in the developed world to pay their elderly citizens to stay out of the work force, in order to keep unemployment down to politically bearable levels. All this unfolded, in turn, from an industrial economy so lavishly supplied with cheap energy that human labor was worth replacing with machines wherever the state of technology permitted, and so greedy for new markets that every part of human life was made subject to market forces.

Before that period began, something less than half of all economic activity even in the industrial world had anything to do with the market at all. Most women, and many men outside the age of regular employment, worked in a household economy governed by custom and intrafamily exchange rather than market forces. This included essentially everyone who would be eligible for retirement by the standards of the age that has just ended. Outside the market but not outside the demand for skilled human labor, elderly people typically provided household goods and services to a household somewhere in their extended family. That was their full-time job; by contributing the value of their labor and skills, they earned their keep.

The end of the age of cheap energy means that such household economies will once again be viable. It also means that they will once again be necessary. When the limited energy and resources of a contracting, deindustrial society have to be prioritized for urgent needs, takeout meals and convenience foods will sooner or later draw the short straw; in their absence, most food will once again be made at home from raw materials. When the energy cost of the global network of sweatshops that keeps Americans clothed can no longer be met, a great deal of clothing will once again be made at home from raw fiber, as it was not so long ago, and so on. All this requires human labor. Thus a society no longer supplied with nearly unlimited amounts of cheap abundant energy will have every incentive to keep elderly people in the household labor force, and neither the incentive nor the resources to keep them in comfortable idleness.

Now of course it’s true that we will not be landing in such a society overnight. It’s also true that the clout of the retiree lobby in most industrial nations is such that public and private pensions will be gutted only when every other option has been exhausted – though in the United States, at least, the vast tide of red ink currently flooding out of Washington DC is likely to bring about this eventuality sooner rather than later. Still, it’s quite possible that at least some of today’s retirees and soon-to-be-retirees will manage to cling to that status, at least for a while.

If I were asked for advice about retirement, then, it would probably go something like this. If you’re already retired, or within a few years of retirement, it’s probably worth your while to try to get any investment money you have left into a stable investment, if you can find one. Still, it’s probably unwise to assume that your investments will be worth anything in the long terms, and having a Plan B in place would be a very good idea. If you’re more than a decade or so out from retirement, having a Plan B in place is essential. If you’re thirty years out or more out, as I am, forget about Plan A for now; you can look into the options for investment later, once the wreckage of the last few decades has been hauled away and a new economic order has begun to take shape, but you probably will never retire.

What sort of Plan B might work best for you depends on so many local and personal variables that specifics would almost certainly be misleading. If you’ve got a large family with whom you’re on good terms, bone up on your home ec skills; ten years from now, when four of your grandkids, their spouses, and their children all live in one rundown McMansion, having Grandma and Grandpa there to cook the meals, tend the children, and keep the garden going will likely be worth much more than your keep. If you don’t have a family or can’t stand them, cultivate relationships with younger friends, or get ready to take up a second career that you can continue into advanced old age.

No matter what you choose, it’s not going to be as fun as sitting on a lawn chair in a Sun Belt trailer park. Still, history is under no obligation to give the options we’d prefer, and a great many pleasant options are going away for a time, or forever, as the industrial age draws to a close.