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The World’s First Pension Crisis

by Simon Black, Sovereign Man:

In the late in the 5th century BC, the government of ancient Rome came up with a new idea that has lasted for thousands of years.

I’m not talking about their roads, republican form of government, or water sanitation.

Their bold idea was to start paying retirement benefits to Roman soldiers.

This was a pretty big deal. In ancient times, you worked until you died. There was no such thing as retirement.

But under the praemia militiae, retired legionnaires could be secure in their futures when they completed their service to the republic.

Roman pensions were generous. During the reign of Augustus, a retired legionnaire received a pension of 12,000 sesterces, worth nearly $40,000 in today’s money.

Eventually Roman soldiers came to depend on their pensions; they no longer viewed the money as a privileged benefit. Pensions became an entitlement.

The problem was, though, that the government made too many promises; there were too many retirees, and Rome hadn’t set aside enough money to pay them.

In time, the government’s inability to pay military retirees became a major source of social unrest, fueling the demise of the republic and rise of the Empire.

So just as the ancient Romans invented the first pensions, they also invented the first pension crisis. It wouldn’t be the last.

Most major governments find themselves in a similar position today.

According to a 2016 report from Citibank entitled “The Coming Pension Crisis,” the 35 developed nations which comprise the OECD (including the US, Canada, Japan, most of Europe, etc.) have pension shortfalls totaling $78 TRILLION.

To put this in context, $78 trillion is more than the size of the entire world economy.

And the shortfalls get worse each year.

It’s not just big national governments either.

State / provincial governments, local governments, and even countless private companies have underfunded pensions that are rapidly running out of cash.

In the United States, Social Security releases an annual report every summer describing the program’s pitiful finances in excruciating detail.

They don’t mince words: “projected [costs] will exceed total income . . . starting in 2020,” and, “trust fund reserves decline until reserves become depleted in 2034.”

You can literally circle a date on your calendar when Social Security’s trust funds are depleted.

Frankly I think their projections are optimistic.

Remember that the program is funded by taxpayers who are currently in the work force.

12.4% of your paycheck gets funneled to Social Security, and that money goes in the pockets of current beneficiaries.

There is a rather interesting long-term trend, however, that robots and artificial intelligence will replace a lot of human workers.

From self-driving cars to algorithmic financial advisers, millions of people may find themselves out of work in the future.

The problem for Social Security is that robots don’t pay tax. So the program will lose a LOT of tax revenue as a result.

This is clearly a long-term issue; nothing is going to happen to Social Security tomorrow. And that’s why few people really think about it.

Except that… this is RETIREMENT. We’re SUPPOSED to think long-term about retirement.

And if you think long-term about your retirement, it becomes pretty obvious that Social Security probably isn’t going to be there for you, especially if you’re in your mid-40s or younger.

Fortunately we have time to prepare.

It starts with a shift in mindset: the government won’t be able to take care of you. You have to be self-reliant.

One way is to start saving, and to do so with a better retirement structure.

A conventional IRA, for example, allows you to contribute up to $5,500 if you’re under the age of 50.

If you switch to a 401(k), however, you can contribute up to $18,000 per year.

Or if you own a small business, you can establish a SEP IRA and contribute potentially up to $54,000 per year to your retirement.

Obviously most people might not have an extra $50k each year to save for retirement.

But just putting away an extra $1,000 per year can result in a difference of more than $100,000 when compounded over 30 years.

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1 comment to The World’s First Pension Crisis

  • Ed_B

    Much of the conventional “wisdom” disseminated by the “pros” in the retirement planning game has been incorrect and for a good number of years. I remember some of these folks telling everyone that they needed to save 10% of their gross income for their retirement. OK, that’s better than the nothing that most were saving at the time but it is a long way from being able to fund a comfortable retirement that can last for 30+ years.

    I took a different approach to this. I saved as much as I could and the bulk of that went into various retirement plans, such as IRAs, a 401(k), a 403(b), and a couple of taxable accounts holding mutual funds with good long-term performance. While I had a good company pension plan, I knew that this, good as it was, would not be up to the task of funding a long-term retirement. So, I started saving more each year. By the time I retired in Oct. 2004, my retirement plan contributions were up to 42% of my gross earnings. I remember back in 2003 when, for the 1st time, the annual earnings from my 401(k) exceeded that of my annual salary. That was an eye-opening moment and truly proved the power of saving, investing, and compound interest.

    All of this led to a comfortable and secure retirement that I have enjoyed for the past 13 years and hope to enjoy for another several years. But the point is, none of this occurs on its own. WE have to plan and then implement our plan to create a secure retirement. No one is going to do it for us. Social Security may or may not survive the baby boomer generation but even if it does, the amount that it pays out is about 1/2 of what one needs for a secure retirement. Consider it as a subsistence payment only.

    The bottom line here is: 1) work hard; 2) save religiously; 3) invest wisely; 4) spend carefully, and 5) above all else marry someone whom you truly love and can stay with for your entire life. Divorce is a retirement killer because it will squander a large part of your savings and retirement account(s). I know that it can be necessary at times but it is very unfortunate in financial terms when it is.

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