The Economics of Retirement

My last post addressed my frustration with a 60% taxation rate that left me wondering if my role was mainly to provide resources to be redistributed to other, undoubtedly needy, people who do not pay taxes.  The 40% that I get to spend barely covers my financial commitments.  So, how do I ever get ahead of the game and retire when I am 75 or 80 years old?

Many people are asking this question.  The number of highly educated older seniors delaying retirement has soared, resulting in an income tax windfall for the government that has helped fund the early retirement of less educated people caught by the Great Recession and unable to find employment.  Despite the recent recovery, such seniors continue to delay retirement.  What choices do they have?

One scenario is to simply die with their boots on, provide various life insurance proceeds, and accept the tax folks scarfing up their portion of the proceeds.  Another scenario is to make sure they end up poor.  Give away everything.  Leave themselves wards of the state.  Do their best to assure the state pays for hip, knee, kidney, and heart transplants.  Could be pretty expensive.

I can imagine this becoming a sport for baby boomers.  How much can you cost the system?  What percent of lifetime taxes paid can you recoup via medical expenses paid?  If you can exceed 100%, you get a free heart transplant or an evening with an aging Hollywood star.  If you identify a mechanism that others can use, you get an additional double hip replacement and an annual evening with aging Hollywood stars.

Of course, all of these whimsical ideas are avoiding the central issue.  We need the capable folks to provide the resources for the 50%+ of people who cannot be net contributors.   There is obviously a point at which the capable people will balk.  However, such people have demonstrated abilities to game the system in ways that minimize the number of capable earners who walk away from continued earning.  They find loopholes, which once closed, lead them to find new loopholes.

Underlying this dilemma are three compensating phenomena – people who are really capable, motivated to work very hard, and sufficiently insightful to identify opportunities for innovation – see Malcolm Gladwell’s Outliers.  These types of people change the world. Everyone else, in effect, lives off the consequences of these phenomena.

Well, it is not at all that simple.  If the masses of workers do not have the income needed to consume, markets will not have the scale to enable cars, airplanes, and smart phones.  Henry Ford identified this need a century ago when he doubled wages to $5 per day, although his primary motivation was to reduce the substantial employee turnover he was experiencing.

We need masses of people who are willing and able to consume.  Carnegie, Ford, Morgan, Rockefeller, and Vanderbilt depended on this.  Bezos, Brin, Gates, Jobs, Page, and Zuckerberg more recently have depended on people to consume.  Thus, income redistribution via taxes is essential to the economic growth of the country.  Our consumption-driven economy totally depends on people consuming – buying more and more stuff.  This, in turn, depends on people having incomes sufficient to enable the needed consumption.

What does this mean for the economics of retirement?  The success of my attempt to recoup my retirement investments lost to the real estate bubble has been diminished by the unexpected heavy taxation on my “homestretch” income.  In fact, I have to use retirement assets to pay the increased taxes, so the nest egg is decreasing rather than increasing.

In other countries, there is a substantial value added tax on consumption that provides a large percentage of the government’s income.  This tax on consumption is often called regressive, as it is indifferent to the income of the consumer.  The benefit to someone close to retirement is that you can choose to not consume, e.g., not buy a new car or engage in expensive travel.

Yet, this does not address the dilemma.  Income redistribution is essential to a civil society. Without redistribution, the impoverished inevitably revolt at the ballot box or in the streets. However, there is another solution — full employment and well-paying jobs. This may sound utopian, but it is not. See my earlier post “Five Million Jobs.”

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