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Comment by constantcrying | Hacker News Reader

No. It is about how the system is funded.

If pensions were funded by actual retirement accounts, where employees invested money into some state fund and have it paid out for retirement this would be entirely unproblematic.

But the pension system in many EU countries is set up in a way in which tax contributions now finance pensions now. This can only work with a steadily growing economy which continually generates more revenue when more people retire. In some sense it is a literal Pyramid scheme, in which the obligations are continually pushed to younger generations, which have to contribute based on how many pensioners there are.

Especially now as EU economies become weaker this issue becomes bigger and bigger.

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Fundamentally any retirement plan that doesn't involve canned food in a celler is pay-go because the retirees will be consuming resources from the economy they retired into rather than the one they were workers in.

Their retirement savings can be in public company stocks instead of government guarantees but that only works if there are people willing to buy those stocks (ex: younger people saving for retirement).

That's only true if the economy doesn't grow i.e. productivity doesn't improve. If retirements are funded from returns on assets they scale with productivity. If they're funded by current workers they're bounded by the limits of population and wage growth.

There is a production side of the equation but also a demand side. Through robotics and AI, Toyota might get really good at making cars really fast with minimal human labor. But if the demand for cars drops every year, the value of Toyota will be like a melting ice cube. This will be true for all stocks actually, (except perhaps the firms that sell adult diapers) but not only stocks, but property as well. And probably bonds. Do we really think Japan is good for their 2060 bonds, assuming no debasement?

In a world with forever imploding consumer aggregate demand, there is no safe asset.

It breaks down if you think about individual firms like Toyota. But the macro picture is that humans are consuming less goods and services and due to that consumer demand drops. And that means the non-working population's needs can still be fulfilled by the proportionately-smaller working population.

Yes but my comment was about asset prices

Asset prices are just numbers. A retirement fund that invests in broad-based stock and bond indices will have returns that track the productivity of the entire economy. If the economy is producing more it means people are consuming more. If it produces less, people are consuming less. It balances out.

An extremely productive economy with 1/5 the number of consumers (and dropping) will have a cheaper stock index, even with improved productivity. Asset prices over the long-term are driven by cashflows. Hollowing out revenue while improving productivity still results in a lower asset price because your cashflows are smaller.

Productivity gains will also be swimming against the stream because scale advantage will deteriorate in all sectors.

> Hollowing out revenue while improving productivity still results in a lower asset price because your cashflows are smaller

And that's fine because it means consumption is lower too.

Ok but good luck saving for retirement when your investments are basically guaranteed a 2% decline every year.

Exactly. A world where aggregate consumer demand shrinks year after year is a world where all asset prices slide forever. Retirement is simply not possible on any large scale.

No, fundamentally it doesn't really matter. Retired people consume but don't produce. They are fed by the economy of today, not by economy of the past.

Whatever you accumulate for retirement (cash, stocks, gold, state pension points) it only represents coupons for your share of the economy of the future. Details may differ but fundamentals are the same: it a promise that the future generation will share some of their yield with you.

Retirement migration will be common in the future, either to lower-cost parts of the country or to different countries altogether. It's happening right now with Spain or Florida, but it will get even more common.

Let the hurricanes wipe out the current batch and then move your hovel in to be the next, o happy retirement!

> If pensions were funded by actual retirement accounts, where employees invested money into some state fund and have it paid out for retirement this would be entirely unproblematic.

You're talking about a system of pension by capitalization, like in US, which comes with its own problems.

Namely that if you reach retirement age during a crash like in 2008, you're screwed. You have to work 5 more years hoping the market recovers in the meantime, or retire anyway and get way less than you put in.

This is about public pensions.

Denmark has private pensions like the 401k system in the US.

People can start tapping into these up to 5 years before they are 70.

In reality most people will go down in time and partially tap into private pensions and saving long before they turn 70.

This is opposed to other European countries, like Germany, that does not have these private pensions, but only retirement insurance.

Germany has private pensions.

Just as in Germany Denmark funds it's pensions through taxes, Germany additionally funds them through employee contributions.

But these are organized as insurances, right?

In Denmark you have ratepension, which truly is an investment account and not an insurance product.

> in many EU countries is set up in a way in which tax contributions now finance pensions now

Hopefully US people realize that this is also how US public pensions (social security) actually works.

Chile had this and, while technocratically sound, was so unpopular it led to a new constitution.

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