The Bankruptcy of Government andPrivate Pension SystemsAlthough it is widely known that our Social Security and Medicare pro-
grams are threatened by these demographic trends, there are many who
believe that they have accumulated sufficient private wealth to fund
their retirement.
But this may not be so. The same crisis that strikes the public pen-
sion programs can overwhelm private pensions as well. Since there will
not be enough workers earning income, there will not be enough sav-
ings generated to purchase the assets the retirees must sell to finance
their retirement.
The reasons why retirees cannot turn their savings into consump-
tion is because the assets of wealth can be transformed into goods and
services only if they are sold to those willing to defer their consumption.
In a modern economy, wealth does not represent “stored consumption,”
such as a cache of acorns that squirrels bury to bide them through a long
winter. You cannot consume your stock certificates but must sell them to
someone else who wants a chance to consume at a later date. If there is a
shortage of these savers, this may cause a long and painful bear market
in stocks, bonds, and real estate that will leave retirees with insufficient
assets to enjoy retirement.
There are some who maintain that so much wealth in stocks is
passed on through bequests that the lack of demand from future work-
ers will not have much impact. But the heirs and foundations who are
bequeathed these fortunes often spend their wealth far faster than did
their wealthy benefactors, and this spending often requires the sale of
substantial stock. Furthermore, the large volume of bank accounts,
bonds, and other fixed-income securities that must be liquidated to fi-
nance the retirements of ordinary retirees could sharply raise interest
rates and depress equity prices.Reversal of a Century-Long Trend
Without enough demand and too much supply, asset prices will sink
and the long-standing trend to an earlier retirement will be halted dead
in its tracks. When Social Security was passed in 1935, the average re-
tirement age was 69. That age fell to 67 by 1950, and to 62 today. In 2003,
for the first time, more Americans chose the reduced Social Security ben-
efits at age 62 than the full benefit that starts at 65. Despite improving
health, surveys indicate that the bulk of Americans and Europeans want
to retire earlier, not later.CHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave 135