1 00:00:00,360 --> 00:00:03,080 Hello and welcome. You are listening to Patrick 2 00:00:03,080 --> 00:00:06,800 Boyle on Finance, a podcast exploring ideas from 3 00:00:06,800 --> 00:00:10,320 quantitative finance, examining events occurring in markets 4 00:00:10,320 --> 00:00:14,080 right now and financial history to see what lessons can be taken 5 00:00:14,080 --> 00:00:17,400 away, including interviews with some of the most interesting 6 00:00:17,400 --> 00:00:20,960 people in the world of finance. To learn more about the podcast, 7 00:00:20,960 --> 00:00:29,320 visit on finance.org. Over the next five years, the 8 00:00:29,320 --> 00:00:32,640 largest cohort of the baby boomer generation will reach 9 00:00:32,640 --> 00:00:35,280 retirement age. And while it's broadly assumed 10 00:00:35,280 --> 00:00:39,280 that they'll have a comfortable retirement, a recent analysis of 11 00:00:39,280 --> 00:00:42,400 their assets shows that more than half of this final group of 12 00:00:42,400 --> 00:00:46,600 boomers are not financially prepared to retire whatsoever. 13 00:00:46,960 --> 00:00:49,240 Younger viewers might be shocked to hear this. 14 00:00:49,240 --> 00:00:52,480 After all, much has been made of the data showing that while 15 00:00:52,480 --> 00:00:57,360 retirees make up only 17% of the population, they hold more than 16 00:00:57,360 --> 00:01:00,720 half of America's wealth. This is, of course, to be 17 00:01:00,720 --> 00:01:03,560 somewhat expected, as a group who have worked their whole 18 00:01:03,560 --> 00:01:06,840 lives should have more accumulated wealth than those 19 00:01:06,840 --> 00:01:08,840 just starting out in the workforce. 20 00:01:09,280 --> 00:01:13,040 The baby boom generation is usually defined in the United 21 00:01:13,040 --> 00:01:19,120 States as the group born between 1946 and 90, 64 during a post 22 00:01:19,120 --> 00:01:22,600 World War Two period of growing American affluence. 23 00:01:22,880 --> 00:01:26,440 The group now approaching retirement age are described in 24 00:01:26,440 --> 00:01:30,160 a new study as peak boomers, which are the group born between 25 00:01:30,160 --> 00:01:35,640 1959 and 1964. This younger group of boomers 26 00:01:35,640 --> 00:01:39,080 are less financially secure than their siblings, who are often 27 00:01:39,080 --> 00:01:43,680 just a few years older, and many don't have sufficient savings to 28 00:01:43,680 --> 00:01:46,520 cover the cost of a comfortable retirement. 29 00:01:47,040 --> 00:01:53,720 A 2022 Federal Reserve study found that 43% of 55 to 64 year 30 00:01:53,720 --> 00:01:58,920 olds had no retirement savings at all, and the 30% of Americans 31 00:01:59,000 --> 00:02:03,600 over the age of 65 were economically insecure, which was 32 00:02:03,600 --> 00:02:08,680 defined as bringing in less than $27,000 per year per person. 33 00:02:09,080 --> 00:02:12,600 The fact that this younger cohort of boomers are less 34 00:02:12,600 --> 00:02:16,200 financially prepared than the group already of retirement age 35 00:02:16,400 --> 00:02:19,640 means that this problem is only going to grow. 36 00:02:20,120 --> 00:02:23,080 The new study from the Retirement Income Institute 37 00:02:23,080 --> 00:02:27,880 shows that based on an analysis of their assets, 2/3 of peak 38 00:02:27,880 --> 00:02:31,480 boomers will be financially challenged in retirement. 39 00:02:31,840 --> 00:02:35,800 This group or a group who mostly entered the workforce right at 40 00:02:35,800 --> 00:02:39,640 the time when defined benefit or traditional retirement plans 41 00:02:39,800 --> 00:02:42,800 disappeared. A defined benefit plan is a 42 00:02:42,800 --> 00:02:46,760 retirement plan that guarantees a fixed monthly payment to 43 00:02:46,760 --> 00:02:50,840 retirees, which is usually protected by federal insurance. 44 00:02:51,040 --> 00:02:54,720 When an employee dies, their beneficiaries often receive 45 00:02:54,720 --> 00:02:57,480 additional payments depending on the plan. 46 00:02:57,800 --> 00:03:01,640 This type of retirement plan has mostly been replaced by defined 47 00:03:01,640 --> 00:03:05,600 contribution plans, where a defined amount is contributed 48 00:03:05,600 --> 00:03:10,160 each month, but the eventual payout is unknown and depends on 49 00:03:10,160 --> 00:03:13,800 a combination of how much was set aside and investment 50 00:03:13,800 --> 00:03:16,960 returns. According to the study, just 51 00:03:16,960 --> 00:03:21,320 under 1/4 of peak boomers have defined benefit plans, and the 52 00:03:21,320 --> 00:03:24,840 group with these plans mostly had union jobs for private 53 00:03:24,840 --> 00:03:28,160 employers or worked for state and local governments. 54 00:03:28,360 --> 00:03:32,680 The most common retirement plans amongst peak boomers are defined 55 00:03:32,680 --> 00:03:38,360 contribution plans like 401 KS. 48% of peak Boomer men have 56 00:03:38,360 --> 00:03:42,720 defined contribution plans with median holdings of just under 57 00:03:42,720 --> 00:03:48,440 $100,000 and 41% of peak Boomer women have these plans with 58 00:03:48,480 --> 00:03:52,160 median holdings of just under $60,000. 59 00:03:52,600 --> 00:03:56,360 The greatest disparity within this group is explained by 60 00:03:56,360 --> 00:04:01,400 educational attainment. 55% of peak Boomer college graduates 61 00:04:01,520 --> 00:04:04,480 have defined contribution accounts with assets worth 62 00:04:04,520 --> 00:04:10,440 $117,000, compared to 40% of high school graduates having 63 00:04:10,440 --> 00:04:14,960 these accounts at all with assets of only $31,000. 64 00:04:15,640 --> 00:04:20,560 Only 13% of those without high school diplomas have defined 65 00:04:20,560 --> 00:04:23,840 contribution accounts whatsoever, and these accounts 66 00:04:23,840 --> 00:04:27,280 have a median balance of around $10,000. 67 00:04:28,000 --> 00:04:31,600 Boomers, of course, own assets other than just retirement 68 00:04:31,600 --> 00:04:33,480 accounts. Many own homes, cars, 69 00:04:33,480 --> 00:04:36,720 collectibles, cash savings and things like that. 70 00:04:36,960 --> 00:04:40,560 According to the study, more than half of peak boomers have 71 00:04:40,560 --> 00:04:45,760 total assets of $250,000 or less and can be expected to rely 72 00:04:45,760 --> 00:04:49,720 primarily on Social Security as their main source of income in 73 00:04:49,720 --> 00:04:52,520 retirement. One of the co-authors of the 74 00:04:52,520 --> 00:04:56,680 study, Robert Shapiro, writes that America has never seen so 75 00:04:56,680 --> 00:05:00,480 many people reaching retirement age over a short period, and 76 00:05:00,480 --> 00:05:03,560 well over half of them will find it challenging to meet their 77 00:05:03,560 --> 00:05:07,120 needs through their retirements, let alone maintain their current 78 00:05:07,120 --> 00:05:10,160 standard of living. They lack the protected income 79 00:05:10,160 --> 00:05:13,880 that many older boomers have from solid pensions or higher 80 00:05:13,880 --> 00:05:16,960 savings. So how did American retirees 81 00:05:16,960 --> 00:05:18,800 find themselves in this position? 82 00:05:19,040 --> 00:05:22,240 And how much do you need to save to have a comfortable 83 00:05:22,240 --> 00:05:24,880 retirement? In the United States? 84 00:05:24,880 --> 00:05:28,840 Until very late in the 19th century, pensions were pretty 85 00:05:28,840 --> 00:05:31,680 much unheard of. There were some benefits for 86 00:05:31,680 --> 00:05:35,440 Union Army veterans who had been injured, but retirement as a 87 00:05:35,440 --> 00:05:39,680 distinct phase of life devoted to leisure just didn't exist. 88 00:05:39,880 --> 00:05:43,600 Nor did unemployment. People worked their whole lives 89 00:05:43,600 --> 00:05:46,800 and as they age they can continued to work but worked a 90 00:05:46,800 --> 00:05:50,240 bit less and if needed turned to their family and friends for 91 00:05:50,240 --> 00:05:53,400 food and shelter. Back then people didn't live as 92 00:05:53,400 --> 00:05:57,600 long as they do today. In 1900, only 4% of the 93 00:05:57,600 --> 00:06:00,600 population was over the age of 65. 94 00:06:01,200 --> 00:06:04,520 With medical advances and the introduction of modern plumbing, 95 00:06:04,680 --> 00:06:07,880 people started to live a lot longer and due to 96 00:06:07,880 --> 00:06:11,000 industrialization and the appearance of the factory, 97 00:06:11,200 --> 00:06:14,200 people didn't work on farms anymore where they could slow 98 00:06:14,200 --> 00:06:18,040 down as they aged. Factory 4 men weren't interested 99 00:06:18,040 --> 00:06:21,240 in having less productive workers slowing down production 100 00:06:21,240 --> 00:06:24,080 lines. American Express, which started 101 00:06:24,080 --> 00:06:28,680 out as a freight forwarding company in 1850, introduced the 102 00:06:28,680 --> 00:06:33,480 first private pension plan in 1875, providing benefits for 103 00:06:33,480 --> 00:06:38,160 employees 60 years of age or older who had served 30 years of 104 00:06:38,160 --> 00:06:41,320 service with the company. The railroads, which were the 105 00:06:41,320 --> 00:06:44,680 high technology companies of the day, followed suit. 106 00:06:44,960 --> 00:06:48,760 This allowed them to attract the best workers and incentivize the 107 00:06:48,760 --> 00:06:52,640 workers to stay on the job, as they only got a pension after 30 108 00:06:52,640 --> 00:06:56,400 years of service, and it allowed companies to retire the older 109 00:06:56,400 --> 00:06:59,240 workers and replace them with younger, more productive 110 00:06:59,240 --> 00:07:02,160 workers. The railroads were soon followed 111 00:07:02,160 --> 00:07:06,080 by banks, insurers and utilities, the kind of companies 112 00:07:06,080 --> 00:07:09,720 interested in attracting and keeping a stable and skilled 113 00:07:09,720 --> 00:07:13,000 workforce. Changes to the tax code meant 114 00:07:13,000 --> 00:07:17,200 that money put into pension plans was tax deductible, so by 115 00:07:17,200 --> 00:07:21,920 the late 1920s a significant minority of employers offered 116 00:07:21,920 --> 00:07:26,160 pension plans of some sort. Some of the biggest factories in 117 00:07:26,160 --> 00:07:29,960 the United States were the car companies in Detroit, who paid 118 00:07:29,960 --> 00:07:33,720 their workers well but were adamantly opposed to trade 119 00:07:33,720 --> 00:07:37,280 unions. In 1927, when the Model T Ford 120 00:07:37,280 --> 00:07:41,560 was discontinued, 100,000 workers around the world were 121 00:07:41,560 --> 00:07:45,440 put out of work for months while the factories were retooled for 122 00:07:45,440 --> 00:07:48,480 the Model AA. Few years later, the Great 123 00:07:48,480 --> 00:07:52,440 Depression saw wage cuts and layoffs on a much larger scale. 124 00:07:52,680 --> 00:07:55,360 Life was not easy for an an auto worker. 125 00:07:55,760 --> 00:07:59,440 Labor unions grew in power during the Great Depression as 126 00:07:59,440 --> 00:08:02,440 workers turned to them to find work and protection. 127 00:08:02,720 --> 00:08:06,040 An out of work physician in California, Dr. Francis 128 00:08:06,040 --> 00:08:10,640 Townsend, began agitating for a national retirement scheme where 129 00:08:10,640 --> 00:08:15,000 the government would distribute $200 per month to each American 130 00:08:15,040 --> 00:08:19,000 over the age of 60 and pay for it with a sales tax. 131 00:08:19,160 --> 00:08:22,560 He argued that the increase in consumption would boost the 132 00:08:22,560 --> 00:08:25,360 economy. Millions of Americans joined 133 00:08:25,360 --> 00:08:29,320 Townsend clubs, and to a certain extent, Social Security was 134 00:08:29,320 --> 00:08:33,880 enacted in 1935 as a response to this agitation. 135 00:08:34,400 --> 00:08:37,600 The businesses who had been early adopters of pension plans 136 00:08:37,600 --> 00:08:41,360 like the railways, hadn't done much analysis on the long run 137 00:08:41,360 --> 00:08:44,760 cost of these programs. They simply paid benefits from 138 00:08:44,760 --> 00:08:48,000 general funds. As business conditions worsened 139 00:08:48,000 --> 00:08:51,600 during the Depression, the railroads in particular came 140 00:08:51,600 --> 00:08:54,840 under stress. The Pennsylvania Railroad, whose 141 00:08:54,840 --> 00:09:00,840 pension expense had been $235,000 in 1900, had reached $8 142 00:09:00,840 --> 00:09:05,160 million by 1931. The railways were less 143 00:09:05,160 --> 00:09:08,080 profitable and we're dealing with competition from long 144 00:09:08,080 --> 00:09:11,160 distance trucking. They discovered during this slow 145 00:09:11,160 --> 00:09:15,160 down that pension expenses, unlike wages, could not be 146 00:09:15,160 --> 00:09:19,320 reduced with the business cycle. It got so bad as the railroads 147 00:09:19,320 --> 00:09:22,600 fell into bankruptcy that railroad pensions had to be 148 00:09:22,600 --> 00:09:26,360 bailed out by Congress with the Railroad Retirement Act. 149 00:09:27,000 --> 00:09:30,400 By the end of the Second World War, around the time the first 150 00:09:30,400 --> 00:09:34,080 of the Boomers were being born, America's demographics had 151 00:09:34,080 --> 00:09:37,560 changed. Now 7% of Americans were over 152 00:09:37,560 --> 00:09:42,120 the age of 65, twice the percentage from 1900, and 153 00:09:42,120 --> 00:09:45,640 experts projected that this percentage would double again by 154 00:09:45,640 --> 00:09:50,400 1980. 2 Government policies enacted during the war had 155 00:09:50,400 --> 00:09:53,120 incentivized the growth of pension schemes. 156 00:09:53,360 --> 00:09:57,120 The first was a tax on excess profits, which made the tax 157 00:09:57,120 --> 00:10:00,800 shelter offered by retirement plans more attractive to 158 00:10:00,800 --> 00:10:03,800 employers. The second was a government 159 00:10:03,800 --> 00:10:08,120 freeze on cash wages which incentivized businesses to offer 160 00:10:08,120 --> 00:10:12,640 non cash benefits like pensions to workers to attract talent. 161 00:10:13,040 --> 00:10:17,160 By the end of the war, 1/6 of the US workforce now had 162 00:10:17,160 --> 00:10:21,360 pensions, but they were mostly offered to professionals, not 163 00:10:21,360 --> 00:10:25,200 blue collar workers. The National Labor Relations Act 164 00:10:25,280 --> 00:10:29,440 of 1935 had given workers the right to form unions and the 165 00:10:29,440 --> 00:10:33,080 right to collective bargaining. Its effect was muted during the 166 00:10:33,080 --> 00:10:37,920 Great Depression and during the war, but the unions erupted once 167 00:10:37,920 --> 00:10:41,120 the war ended, as workers had been squeezed by wartime 168 00:10:41,120 --> 00:10:43,920 inflation combined with pay freezes. 169 00:10:44,600 --> 00:10:47,920 There was a series of crippling strikes against steel mills, 170 00:10:47,920 --> 00:10:51,360 coal mines, shipping companies, refineries and auto 171 00:10:51,360 --> 00:10:55,560 manufacturers, which almost ground the US economy to a halt. 172 00:10:55,840 --> 00:10:59,800 President Truman took control of the coal mines and railroads to 173 00:10:59,800 --> 00:11:03,560 keep the economy alive. He threatened to use the Army as 174 00:11:03,560 --> 00:11:07,400 strike Breakers and asked Congress for the power to draft 175 00:11:07,400 --> 00:11:10,800 strikers into the military to then make them work. 176 00:11:13,480 --> 00:11:15,560 We'll be back. After a quick break. 177 00:11:15,920 --> 00:11:18,000 It's like our brains have a mind of their own when it comes to 178 00:11:18,000 --> 00:11:18,640 money, right? Yeah. 179 00:11:18,960 --> 00:11:21,120 It's crazy. We're diving into that today, 180 00:11:21,440 --> 00:11:24,000 how our brains really deal with money. 181 00:11:24,320 --> 00:11:27,040 We're going deep on this one, looking at money and how we 182 00:11:27,040 --> 00:11:31,600 decide behavioral research. This stuff is like eye opening. 183 00:11:31,600 --> 00:11:34,680 Seriously, it turns out our brains aren't always rational, 184 00:11:34,680 --> 00:11:36,680 especially with money. No kidding. 185 00:11:37,240 --> 00:11:40,000 So what's the deal with that? Why are we so bad at making, you 186 00:11:40,000 --> 00:11:41,640 know, sensible financial decisions? 187 00:11:41,640 --> 00:11:44,000 Well, our brains are kind of lazy in a way. 188 00:11:44,000 --> 00:11:50,800 They love taking shortcuts. As a part of this temporary 189 00:11:50,800 --> 00:11:54,880 emergency legislation, I request the Congress immediately to 190 00:11:54,880 --> 00:11:57,920 authorize the President to draft into the Armed forces the United 191 00:11:57,920 --> 00:12:01,520 States workers who are on strike against their government. 192 00:12:04,960 --> 00:12:09,280 The strike lasted for 21 months, and the unions finally accepted 193 00:12:09,280 --> 00:12:11,680 Truman's terms and returned to work. 194 00:12:12,520 --> 00:12:16,760 As inflation ebbed and the Cold War escalated, public opinion 195 00:12:16,760 --> 00:12:20,640 was less sympathetic to organised labour unions, reduced 196 00:12:20,640 --> 00:12:24,520 their demand for pay raises and instead asked for pensions and 197 00:12:24,520 --> 00:12:27,800 other benefits that employers were more willing to agree to. 198 00:12:28,320 --> 00:12:31,840 Post war welfare states were emerging in Europe, where 199 00:12:31,840 --> 00:12:36,240 Britain had nationalized coal, rail, gas and electricity and 200 00:12:36,240 --> 00:12:40,720 built public housing such that 40% of the population lived in 201 00:12:40,720 --> 00:12:43,520 government housing up until the 1980s. 202 00:12:44,200 --> 00:12:48,000 In France, Charles de Gaulle nationalized the energy, 203 00:12:48,000 --> 00:12:52,560 transportation, aviation and financial industries, absorbing 204 00:12:52,560 --> 00:12:56,920 Air France, the country's eleven largest insurance companies, and 205 00:12:56,920 --> 00:13:00,520 most of the banks. France's largest automaker, 206 00:13:00,520 --> 00:13:04,920 Renault was confiscated and its founder and owner Louis Renault 207 00:13:05,120 --> 00:13:08,680 died in prison while awaiting trial for producing trucks for 208 00:13:08,680 --> 00:13:14,000 the enemy during the occupation. By 1946, the French government 209 00:13:14,000 --> 00:13:19,800 directly controlled 98% of coal production, 95% of electricity, 210 00:13:19,960 --> 00:13:26,600 58% of the banking sector, 38% of automobile production and 15% 211 00:13:26,600 --> 00:13:30,040 of total GDP. This is not what the Americans 212 00:13:30,040 --> 00:13:33,640 wanted. In 1950, the United Auto Workers 213 00:13:33,640 --> 00:13:37,440 Union, after a crippling strike at Chrysler, struck a deal with 214 00:13:37,440 --> 00:13:41,560 the big three automakers known as the Treaty of Detroit, which 215 00:13:41,560 --> 00:13:46,440 gave auto workers pensions equivalent to around $1500 per 216 00:13:46,440 --> 00:13:49,840 month in today's money. A few business journalists at 217 00:13:49,840 --> 00:13:53,320 the time recognized the danger of these deals, noting the 218 00:13:53,320 --> 00:13:57,840 incalculable nature of pension obligations and asking if the 219 00:13:57,840 --> 00:14:01,600 businesses would even be around in the distant future when these 220 00:14:01,600 --> 00:14:05,520 obligations came due. The plans endowed pensions to 221 00:14:05,600 --> 00:14:10,320 all employees for whom no money had been set aside, some of whom 222 00:14:10,320 --> 00:14:14,440 were already nearing retirement. At Ford, which was still a 223 00:14:14,440 --> 00:14:18,760 privately held company, the estimated liability on day one 224 00:14:18,760 --> 00:14:24,000 was a staggering $200 million. After their success with the 225 00:14:24,000 --> 00:14:28,200 automakers, other unions were successful and American workers 226 00:14:28,200 --> 00:14:30,800 now had defined benefit pension plans. 227 00:14:31,080 --> 00:14:35,800 In 1955, the United Auto Workers Union pushed even harder. 228 00:14:36,000 --> 00:14:39,600 The car companies negotiating hand was weakened by the fact 229 00:14:39,760 --> 00:14:43,520 that they were rolling in money. General Motors had just been the 230 00:14:43,520 --> 00:14:47,040 first American company to ever earn a billion dollars in a 231 00:14:47,040 --> 00:14:49,920 year. The union wanted protection from 232 00:14:49,920 --> 00:14:53,080 layoffs and pushed for guaranteed wages whether an 233 00:14:53,080 --> 00:14:57,800 employee was working or not. Pensions were boosted 50%. 234 00:14:58,000 --> 00:15:00,320 Disabled workers got double pensions. 235 00:15:00,520 --> 00:15:04,960 Workers got 7 holidays and three weeks of paid vacation per year. 236 00:15:05,200 --> 00:15:09,120 They also demanded an even costlier benefit, healthcare for 237 00:15:09,120 --> 00:15:13,800 retirees. By nineteen, 6040% of American 238 00:15:13,800 --> 00:15:18,080 workers had worn or been granted pensions, and fewer men than 239 00:15:18,080 --> 00:15:21,560 ever before were working after the age of 65. 240 00:15:21,840 --> 00:15:25,920 In 19, twenty, 60% of seniors were still working. 241 00:15:26,160 --> 00:15:31,880 By 1960, only 30% were. The unions next began demanding 242 00:15:31,920 --> 00:15:34,440 early retirement with full pensions. 243 00:15:34,680 --> 00:15:38,600 This was the era of the rise of the American middle class, where 244 00:15:38,600 --> 00:15:41,840 a factory job could provide a good living for an American 245 00:15:41,840 --> 00:15:44,880 family. There was, however, a black spot 246 00:15:44,880 --> 00:15:49,240 on the horizon. In 1954, Packard had failed, 247 00:15:49,240 --> 00:15:52,600 wiping out a chunk of pensions owed to their employers. 248 00:15:53,000 --> 00:15:56,280 Studebaker, who had been struggling for years, agreed to 249 00:15:56,280 --> 00:15:58,960 it's 4th pension hike in eight years. 250 00:15:58,960 --> 00:16:04,120 In 1961, the union was able to celebrate another big win and 251 00:16:04,120 --> 00:16:06,960 Studebaker could hang on to it's scarce cash. 252 00:16:07,160 --> 00:16:10,640 After all, pensions wouldn't need to be paid out for years, 253 00:16:10,760 --> 00:16:13,120 unlike wage hikes which were immediate. 254 00:16:13,520 --> 00:16:17,800 Two years after this agreement, Studebaker failed and thousands 255 00:16:17,800 --> 00:16:20,640 of employees lost the bulk of their pensions. 256 00:16:21,120 --> 00:16:25,920 By the mid 1960s, automobile profits began to slow, and in 257 00:16:25,920 --> 00:16:30,520 1967 the first Datsun was sold in the United States. 258 00:16:30,800 --> 00:16:35,080 Americans loved the new Japanese imports, which were much cheaper 259 00:16:35,080 --> 00:16:37,880 as labor costs were a lot lower in Japan. 260 00:16:38,280 --> 00:16:42,000 The unions were at the height of their powers, however, and kept 261 00:16:42,000 --> 00:16:44,800 pushing. It was, after all, their job to 262 00:16:44,800 --> 00:16:47,440 get as much for their members as they could. 263 00:16:47,760 --> 00:16:53,800 In 1973, the UAW negotiated full pensions for early retirees, 264 00:16:53,960 --> 00:16:56,480 which was known as the 30 and out. 265 00:16:56,800 --> 00:17:00,680 Any worker could retire as soon as they'd served 30 years on the 266 00:17:00,680 --> 00:17:03,920 job. Many started working at age 17, 267 00:17:04,040 --> 00:17:07,839 which meant that they could retire at age 47 with a full 268 00:17:07,839 --> 00:17:12,040 pension, which included a top up to compensate them for the fact 269 00:17:12,200 --> 00:17:16,200 that Social Security wouldn't kick in until they turned 65. 270 00:17:16,480 --> 00:17:20,680 This was disastrous for the auto industry as apart from the early 271 00:17:20,680 --> 00:17:25,280 retire, Americans were living much longer than ever before and 272 00:17:25,280 --> 00:17:29,160 the actuarial cost of these pensions was exploding. 273 00:17:29,680 --> 00:17:33,200 This wasn't just happening in automobiles either, it was 274 00:17:33,200 --> 00:17:36,760 happening in steel, and in rubber too, where pension costs 275 00:17:36,760 --> 00:17:39,600 had risen at three times the rate of wages. 276 00:17:39,880 --> 00:17:43,240 American manufacturers were unable to compete with foreign 277 00:17:43,240 --> 00:17:46,920 competition when the cost of pensions and healthcare alone 278 00:17:47,040 --> 00:17:50,040 were higher than the margins on a Japanese car. 279 00:17:50,400 --> 00:17:53,840 Even a Japanese car that was being built in the United States 280 00:17:54,040 --> 00:17:58,160 cost thousands less to build per unit as the Japanese factories 281 00:17:58,160 --> 00:18:02,080 were not unionized. By the late 1990s, General 282 00:18:02,080 --> 00:18:07,840 Motors had 180,000 employees and 400,000 retirees that it was 283 00:18:07,840 --> 00:18:12,200 paying pensions to. In 2001, Bethlehem Steel had 284 00:18:12,280 --> 00:18:16,480 eight times more retirees than workers, and it's pension fund 285 00:18:16,480 --> 00:18:21,440 was $3.7 billion in the hole. No investor would have put money 286 00:18:21,440 --> 00:18:25,160 into the company if it involved taking on that obligation. 287 00:18:25,320 --> 00:18:29,440 So the firm went bankrupt, and the pension obligation went to 288 00:18:29,440 --> 00:18:33,320 the Pension Benefit Guarantee Corporation, a federal agency 289 00:18:33,320 --> 00:18:38,520 set up in 1974 to ensure pension benefits up to a reasonable 290 00:18:38,520 --> 00:18:41,280 limit. A wave of bankruptcies like the 291 00:18:41,280 --> 00:18:45,560 airlines in the early 2000s meant that this federal agency, 292 00:18:45,560 --> 00:18:49,920 which was backing pension plans itself, had a serious deficit, 293 00:18:50,160 --> 00:18:53,920 and the US auto industry, with its massive obligations, was on 294 00:18:53,920 --> 00:18:58,240 the rocks. By 2005, Starbucks was spending 295 00:18:58,240 --> 00:19:01,840 more on healthcare than on coffee beans, which partially 296 00:19:01,840 --> 00:19:06,520 explains their terrible coffee. In 2006, the average 297 00:19:06,520 --> 00:19:11,160 compensation of an auto worker, including benefits, was $81.00 298 00:19:11,160 --> 00:19:14,440 per hour. It wasn't just big industry that 299 00:19:14,440 --> 00:19:18,160 faced these problems either. Government employers had started 300 00:19:18,160 --> 00:19:21,040 offering pensions before private industry did. 301 00:19:21,200 --> 00:19:25,200 At first for hazardous lines of work, police, firefighters, jobs 302 00:19:25,200 --> 00:19:28,640 like that, and initially the benefits were only for people 303 00:19:28,640 --> 00:19:32,480 injured on the line of work. Roger Lowenstein's book While 304 00:19:32,480 --> 00:19:36,440 America Aged While Almost 20 Years Old is probably the best 305 00:19:36,440 --> 00:19:40,360 history of American pensions and how everything went wrong. 306 00:19:40,360 --> 00:19:43,960 I'm leaning quite heavily on it in researching this video. 307 00:19:44,440 --> 00:19:47,960 He describes how the Transport Workers Union in New York 308 00:19:48,160 --> 00:19:52,120 negotiated massive salaries and benefits out of politicians 309 00:19:52,320 --> 00:19:56,880 almost unopposed, as the elected officials negotiating with union 310 00:19:56,880 --> 00:20:00,560 leaders were well aware that the unions could sway elections. 311 00:20:01,160 --> 00:20:04,440 This led to deals where subway workers with a high school 312 00:20:04,440 --> 00:20:08,240 education earned more than the average New Yorker and could 313 00:20:08,240 --> 00:20:12,400 retire after 25 years, making more in retirement than they 314 00:20:12,400 --> 00:20:15,800 earned when on the job, and often spending more of their 315 00:20:15,800 --> 00:20:20,040 life retired than working. Lowenstein looks at the pension 316 00:20:20,040 --> 00:20:25,000 crisis in San Diego, where by 2005 the municipal pension fund 317 00:20:25,160 --> 00:20:30,840 was $1.7 billion in the hole, a dead equivalent to $6000 for 318 00:20:30,840 --> 00:20:34,680 every family in the city. The press had begun referring to 319 00:20:34,680 --> 00:20:39,480 San Diego as Enron by the Sea. This massive debt came from 320 00:20:39,480 --> 00:20:43,040 labour unions ringing higher benefits from weak politicians 321 00:20:43,040 --> 00:20:47,000 for decades, forcing the eventual expense on to later 322 00:20:47,000 --> 00:20:50,480 generations. Eventually, the SEC had to 323 00:20:50,480 --> 00:20:54,280 investigate the city's municipal bond disclosures regarding its 324 00:20:54,280 --> 00:20:58,280 pension and retiree healthcare obligations, sanctioning both 325 00:20:58,280 --> 00:21:01,480 the city for securities fraud and its auditors. 326 00:21:02,240 --> 00:21:06,040 Many workers today bemoaned the disappearance of defined benefit 327 00:21:06,040 --> 00:21:08,840 plans, which have mostly been replaced with defined 328 00:21:08,840 --> 00:21:11,760 contribution plans. But when you look at the history 329 00:21:11,760 --> 00:21:15,680 of these pensions, you can see that they can to a large extent 330 00:21:15,680 --> 00:21:19,080 be blamed for the decline of large scale manufacturing in the 331 00:21:19,080 --> 00:21:21,640 United States. When we blame foreign 332 00:21:21,640 --> 00:21:25,400 competition and outsourcing for the decline of manufacturing, we 333 00:21:25,400 --> 00:21:29,400 need to add to that list labour unions, who negotiated the deals 334 00:21:29,400 --> 00:21:32,920 for workers that crippled the businesses that employed them. 335 00:21:33,320 --> 00:21:37,360 In the mid 1950s, General Motors was the most profitable business 336 00:21:37,360 --> 00:21:40,560 in the world, churning out innovative products that people 337 00:21:40,560 --> 00:21:44,040 lined up to buy. When they became unprofitable, 338 00:21:44,040 --> 00:21:48,080 mostly due to terrible labor deals, Japanese manufacturers 339 00:21:48,240 --> 00:21:51,880 were not only able to undercut them in price, but because they 340 00:21:51,880 --> 00:21:55,240 had significant profits, they were able to reinvest in 341 00:21:55,240 --> 00:21:59,240 improving their cars while US manufacturers stagnated. 342 00:22:00,000 --> 00:22:03,320 As the pension problems of the US auto industry became 343 00:22:03,320 --> 00:22:07,040 glaringly obvious, other big American firms like Hewlett 344 00:22:07,040 --> 00:22:11,640 Packard, Verizon and IBM saw the writing on the wall and froze 345 00:22:11,640 --> 00:22:15,000 their defined benefit pension funds such that employees would 346 00:22:15,000 --> 00:22:18,840 no longer accrue benefits. The only pensions being offered 347 00:22:18,840 --> 00:22:21,400 now were defined contribution plans. 348 00:22:21,680 --> 00:22:25,880 The new companies that began to rise in the 1990s like Walmart, 349 00:22:25,880 --> 00:22:29,480 Amazon, and Microsoft didn't provide pensions to their 350 00:22:29,480 --> 00:22:33,200 employees and were able to hire and fire as they needed and pay 351 00:22:33,200 --> 00:22:36,000 a market wage. Well, many of the boomer 352 00:22:36,000 --> 00:22:39,600 generation did well out of the high pay and good pensions that 353 00:22:39,600 --> 00:22:41,840 existed when they entered the workforce. 354 00:22:42,080 --> 00:22:45,840 Many of the younger boomers will not have done nearly as well as 355 00:22:45,840 --> 00:22:49,480 their older siblings, as these deals were already on their way 356 00:22:49,480 --> 00:22:51,520 out by the time they started working. 357 00:22:51,760 --> 00:22:54,960 Unfortunately, they'll have seen the people a few years older 358 00:22:54,960 --> 00:22:58,360 than them retire comfortably and figured that things would just 359 00:22:58,360 --> 00:23:02,200 work out for them too. But those older boomers had very 360 00:23:02,200 --> 00:23:05,240 different finances. When we look back at the 361 00:23:05,240 --> 00:23:08,720 disappearance of middle class manufacturing jobs, we have to 362 00:23:08,720 --> 00:23:12,000 remember that this really only existed for a short period of 363 00:23:12,000 --> 00:23:15,720 time, and the high pay and benefits eventually bankrupted 364 00:23:15,720 --> 00:23:18,120 the companies that agreed to these deals. 365 00:23:18,400 --> 00:23:22,080 It's not obvious that those days are ever coming back, despite 366 00:23:22,080 --> 00:23:26,040 what politicians might tell you. Many workers who have not 367 00:23:26,040 --> 00:23:30,000 planned well for retirement may plan on simply working deeper 368 00:23:30,000 --> 00:23:33,720 into old age, but health issues can often prevent that from 369 00:23:33,720 --> 00:23:36,920 being a viable plan. If you remember from the start 370 00:23:36,920 --> 00:23:40,840 of the video, the least educated workers are usually the ones 371 00:23:40,840 --> 00:23:44,360 without good retirement plans, many of whom will have earned a 372 00:23:44,360 --> 00:23:47,880 living doing physical work, which can be harder to do as you 373 00:23:47,920 --> 00:23:50,000 age and your health deteriorates. 374 00:23:50,480 --> 00:23:53,960 Roger Lowenstein sums up his book by pointing out that 375 00:23:53,960 --> 00:23:57,800 financial debacles usually involve some sort of borrowing, 376 00:23:58,040 --> 00:24:01,240 and borrowing is essentially an arrangement between the present 377 00:24:01,240 --> 00:24:04,560 and the future. The pension schemes that blew up 378 00:24:04,560 --> 00:24:08,120 or the retirement plans that failed were predictable in the 379 00:24:08,120 --> 00:24:11,200 way that the outcome of overspending on a credit card is 380 00:24:11,200 --> 00:24:14,520 also predictable. A report from the US Senate 381 00:24:14,520 --> 00:24:18,040 Health, Education, Labour and Pensions Committee from earlier 382 00:24:18,040 --> 00:24:22,080 this year found that about half of American households will not 383 00:24:22,080 --> 00:24:25,560 be able to maintain their pre retirement living standard, and 384 00:24:25,560 --> 00:24:30,480 that 56% of low income households and 45% of those who 385 00:24:30,480 --> 00:24:34,000 are middle income are at risk of not maintaining those pre 386 00:24:34,000 --> 00:24:39,080 retirement standards at age 65. Federal programs like Social 387 00:24:39,080 --> 00:24:42,760 Security, Medicare, and Medicaid are of great importance to 388 00:24:42,760 --> 00:24:46,280 retirees, but they're often insufficient, meaning that the 389 00:24:46,280 --> 00:24:50,360 burden of caring for older people falls on younger family 390 00:24:50,360 --> 00:24:53,760 members who are often still supporting their own children. 391 00:24:54,320 --> 00:24:57,800 As the boomer generation leaves the workforce in the next 5 392 00:24:57,800 --> 00:25:01,320 years, it can be expected to have an impact on the economy. 393 00:25:01,560 --> 00:25:05,320 Retirees typically spend less money and spend it on different 394 00:25:05,320 --> 00:25:08,840 things than the employed do. As an example, they spend a lot 395 00:25:08,840 --> 00:25:12,000 less on transportation and more on healthcare. 396 00:25:12,280 --> 00:25:15,560 To offset the lower spending. Economists highlight that 397 00:25:15,560 --> 00:25:19,800 productivity can be expected to grow as young people replace the 398 00:25:19,800 --> 00:25:23,480 elderly in the workforce. So how much should you be 399 00:25:23,480 --> 00:25:27,200 setting aside or have set aside for retirement today? 400 00:25:27,560 --> 00:25:31,760 Well, according to T Rowe Price, by age 35 you should have set 401 00:25:31,760 --> 00:25:35,320 aside a year to a year and a half's income as retirement 402 00:25:35,320 --> 00:25:38,680 savings. By age 50, you should have 3 1/2 403 00:25:38,680 --> 00:25:42,200 to six years of salary as savings, and by retirement you 404 00:25:42,200 --> 00:25:47,040 should have 7 1/2 years to 13 1/2 years worth of salary set 405 00:25:47,040 --> 00:25:49,600 aside. Their assumptions are that this 406 00:25:49,600 --> 00:25:52,480 money is in a tax deferred retirement account and is 407 00:25:52,480 --> 00:25:57,040 invested to earn 7% per year, which means it's mostly 408 00:25:57,040 --> 00:26:00,200 allocated to stocks rather than bonds or real estate. 409 00:26:00,800 --> 00:26:03,040 Thanks for tuning into this week's podcast. 410 00:26:03,120 --> 00:26:06,120 If you found it interesting, I'd really appreciate it if you 411 00:26:06,120 --> 00:26:09,840 could write a short review on your podcasting app or send a 412 00:26:09,840 --> 00:26:12,200 link to a friend to help the podcast grow. 413 00:26:12,440 --> 00:26:14,960 Have a great week and talk to you again soon. 414 00:26:15,080 --> 00:26:18,560 Bye. If you enjoyed this episode, be 415 00:26:18,560 --> 00:26:21,400 sure to subscribe so you're notified when a new episode is 416 00:26:21,400 --> 00:26:23,640 posted. Thank you to everyone who is 417 00:26:23,640 --> 00:26:25,760 supporting this content on Patreon. 418 00:26:26,120 --> 00:26:29,000 If you enjoyed this content, you can find more like it on 419 00:26:29,000 --> 00:26:33,520 YouTube, on the Patrick Boyle on Finance channel, or follow us on 420 00:26:33,520 --> 00:26:36,720 Twitter at Patrick E Boyle. Thanks for listening. 421 00:26:36,720 --> 00:26:37,160 Bye.