Everything Has A Limit

Poker, economics, and personal crises, a three-for-one deal

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Pete, You say "People already retired (my italics) who are on final salary schemes are big winners. Those on fixed incomes, or about to buy an annuity, are big losers".

I don't follow. Once past the point of retirement., those (who were) on final salary schemes are then on fixed incomes - although sometimes with modest below-inflation adjustment.

Good point. An example of what happens when you type stream of consciousness and do not go over what you typed with a fine toothcomb; because, of course, it's easy to get lost.

To explain the source of the contradiction. I was actually writing about two different things, and failed to spot this.

1) Those who have retired on final salary schemes (many of whom do indeed receive an indexed increase every year) are almost certainly getting more out of the economy than their rentier status is generating in their pension funds. They are, therefore, net winners. If their pension funds were accumulating extra cash, and disbursing this elsewhere (e.g, if the companies operating them took pension holidays) then retired final salary scheme members would be net losers.

In addition, inflation is currently staying low (but higher than interest rate returns which are being artificially suppressed by QE) so the "absolute loss" to retired final salary scheme members (and indeed to those who bought annuities a few years ago) is less than for other members of society.

Finally, this is income without economic production. It's theoretically possible (and, in many cases, such as retired police officers, army generals, etc) to become economically productive while still cushioned with retirement income.

2) However, those on fixed incomes with assets are likely to be "big losers" over the next 10 years if and when QE has the effect of reducing the value of money. Here, the "big winners' will be those with no net assets at all or those with long-term debts fixed to the base rate. Real interest rates are likely to be negative for these people. meanwhile, QE continues to support asset prices.


"Make it so people can't afford to retire. Try to improve worker efficiency."

The only way those are compatible would be with significant absolute economic growth, wouldn't it? I'd say a lot of theoretical retirees would be seeking to postpone annuity purchase right now (and probably for several years into the future) but what do they do instead? Stay in work? Without growth there aren't any extra jobs, so youth unemployment goes up. Improving efficiency surely contributes to the problem if fewer workers are needed to get a constrained amount of work done. Or is this tied in with the QE/inflation idea: create the need for more work by stimulation?

I must say I'm glad I'm not ready for retirement age yet - I don't think I could afford it if I was.

Blimey Mike, considering how much the investment banks have taken out of the real economy without, as far as I can see, giving much back, you must have spent one hell of a lot of that unearned income (I'm not saying that you didn't earn it, merely that your bank paid itself, and, therefore, you, out of "profits" that were not genuinely created wealth, meaning that you were paid a bonus on wealth that was fictional) in the past decade if you aren't ready to retire. And, yes, I do include your bank in this -- that $5bn or so that it got from the US government in 2009 over AIG's 100 cents on the dollar basically just came from the printing presses. In genuine terms it should have been about 40 cents on the dollar.

On your previous point. Yes, you are in part correct; it would mainly be compatible with absolute economic growth. Good point.

However, there are caveats. The first is that improving efficiency should lead to greater economic wealth, although this might be hard to measure. The second is that it's easier to create jobs for unemployed youngsters (they are cheaper for a start) than it is to get older people back into the world of economic productivity. So I'm not saying keep someone old in a job in exchange for keeping someone young out of a job. I am, indceed, saying keep a greater proportion of the workforce economically active.

However, if you don't, there are "hidden" economic benefits -- just as in wartime (and this is a kind of war). One is that young unemployed tend to postpone having a family, and having a family is a big drain on a country's economy. If old people retire and their jobs go to younger people, you get a higher proportion of "economic dependents" (because those younger people will marry and have kids) than if you keep older people in jobs and economically force younger people to postpone their breeding.

Unpleasant facts (I told you macroeconomists wouldn't win the Nobel Prize) but we've seen evidence of this in the past.


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