Retirement - Part 1

The concept of retirement is one that has only existed recently. The first retirement program was started in Germany in 1888. It provided financial support for people over 70. The kicker here is that the life expectancy at the time there was 50. So the number of people who were able to take advantage of it was quite small and their life expectancy at that point was very short. It made sense though because at that stage they probably were not able to contribute much economically and were at higher risk of needing financial assistance. It made sense.

Pensions made their entrance into the US in the 1920's initially in the banking and railroad industries. These programs helped usher in the implementation of Social Security in 1935. Again though, the age to collect benefits was set at 65 when the life expectancy of men was 58.

Over time with these programs began shifting our cultural perspective on what you did when you were older. It went from most people, even rich people, working until they couldn't anymore to what it is now. A perceived right. No matter my economic status or skill set I shouldn't have to work a day after 65.

There are two problems with this model. I'll talk about the economic side today and the social side tomorrow.

In the US today our life expectancy is 79 years. An average couple would need to save $728,000 to have the US median income in retirement savings for the 14 years between retirement and the end of the average lifespan. Today interest rates are so low we will be generous and give them a 3% rate of return on their investments. They would need to save 12% of their income every year from being 20 years old until 65 to have enough for retirement. That is certainly possible, but most people can't or won't do that.

Social Security is supposed to be a fix for this issue, but with the retirement age as low as it is, life expectancies where they are, and the population growth rate as low as it is it just doesn't add up. Universal retirement at an age below the median life expectancy is economically unsustainable. Regardless of the means of funding. Personal or public.

Expectations need to be adjusted to reality. If Social Security is to continue to exist it needs to be changed so the retirement age is phased up to and locked in at least 5 years above the median life expectancy. That is the only way it can be kept permanently solvent.