Is Retirement More Out Of Reach Now Than Ever?
Will young people need to work forever?
One of the more insidious side effects of high inflation, especially home price and rent inflation is that it makes retirement more expensive. The math is relatively simple — high inflation raises the price of goods, services, and shelter — and thus it raises the cost of the life you will have to fund in retirement with your savings (as many of these things such as medical care and end-of-life care inflate at a rate even higher than CPI). And unless you’re one of the lucky few working for a company that’s generous enough to hand out raises in excess of inflation, high inflation also reduces real incomes, which reduces our disposable income and therefore our ability to put aside money for retirement.
And thanks to frothy asset markets over the past 15 years (due to Fed money printing), asset price inflation has already made it extremely expensive to save for retirement. The reason why is a bit counter intuitive — while increases in the prices of assets such as stocks benefit those that own a lot of assets, most people don’t as they are still early on in their savings journey. As a saver, when you invest in stocks, you want to buy as many dollars of corporate earnings (since a share of stock entitles you to a share of the company and its profits) or dividends as you can for each dollar invested. When stock valuations rise significantly like they did over the past decade or so, that means going forward every dollar we invest buys significantly less earnings than it used to. You’re getting way less bang for your buck. This means less opportunity to reinvest earnings and dividends as you save, and ultimately a much smaller pool of earnings and dividends to work with in retirement versus if you had been able to invest at cheap valuations.
So we’re simultaneously poorer thanks to reduced real incomes (due to pay appreciating slower than inflation) at the same time that the assets needed to fund retirement have become more expensive (due to their prices appreciating faster than inflation). Not a fun time to be saving for retirement.
Long term consequences
This will have long term impacts. The large and rising costs of home ownership and raising a child (e.g. childcare and education) mean fewer people will decide to have children. That will create demographic and economic issues in the future.
A reduced ability to save and invest for retirement means a higher reliance on Social Security, which itself is under immense pressure as retirees are living longer than ever, more baby boomers retire, and the ratio of retirees taking from the system to workers paying into the system keeps rising. Social Security will probably look very different when folks 40 and under retire versus now — the minimum retirement age will likely rise and average payouts will decline. Folks who are thinking, “at least I can rely on my Social Security check”, will be in for a rude awakening. Any significant revisions to Social Security benefits will be very badly received and could even lead to social unrest.
Hybrid retirements, where people still work part-time, will probably become more of a norm than the exception as most will have not have saved enough to fully fund a non-working retirement. But due to age discrimination and inability to work certain types of jobs, earning a paycheck will be very tough for those in their 70s and 80s. The number of people that are both old and poor will rise, putting a financial burden on their kids (if they had any) as well as the government.