The Retirement Bubble

Almost every asset funds a liability.  What gets pitched most frequently to the average American, investment-wise?  Save for your retirement.

And that’s good, mostly.  We need to save as a society, and we don’t do it.  Even our government, who claims to save for us through Social Security and Medicare, does not do it, but expends the money on current obligations of other programs.

But with so many among the Baby Boomers not saving, and with one lost decade behind us in stock investment terms, how will the Baby Boomers survive retirement?  Can they retire?  Or must they learn the phrase, “Do you want fries with that?”

I have written critically about retirement in the past. The ability of Baby Boomers as a group in the US to fulfill their dreams is limited.  They did not save enough, and asset markets offer little in the way of returns prospectively.  Interest rates are low, and P/Bs are middling.

When any bubble pops, there is a limited range of strategies.  Default, defer, reduce.

Default — things are so bad that I can’t make payments now, much less years into the future.  For practical purposes, I am broke.

Defer — things are bad, but if I wait and work longer, I can retire later than I hope for with reasonable outcomes.

Reduce — I can’t retire at the income level I thought I would, but I can retire at a lower level that I can live with.

Sadly, this is messy, with complications from inflation, and the productivity of the economy.  I expect that most older people will work to some degree in their old age, partly to make ends meet, and partly for social fulfillment, because “retirement” can be dull.

There should be no shame in this work, no matter how menial — hey, we were made to work, not relax.  There are no guarantees, and historically, no society has survived.  Thus relying on the present social compact to last is risky.  I write this as one that relies on the division of labor to support those who work in finance.  As one who has studied history, that is not the most stable place.

The concept of the retirement bubble simply means that the expectations of people exceeded their willingness to fund the future.  Also, the 80s & 90s made people conclude that retirement was free.  Put a little aside, and you have it made.

Ignore the distractions of financial assets.  If they didn’t exist, how would we live in our old age?

  • Our children would help us, though in the present day the incentive to have children is diminished by the low rates of marriage and fertility.  But in the present day, we imagine that we will have a retirement funded outside of ourselves.
  • We would save more in commodity terms, which don’t offer a lot of gains outside of inflation.
  • We would find places to work.  After all, we have reliable work histories, and can aid almost any enterprise because we have more knowledge than someone 40-50 years younger than us.

I could add in the idea that children might be less productive than we expect.  No great surprise for the US, given the educational trends here.  That said, we have a lot of capital investments that make our laborers far more efficient than in other countries.


I don’t think retirement is realistic, and I am not planning on retiring, should I live so long. My Dad retired at 62, which was late in his industry, given the hard labor of installing sewers.  And that was after his brother (my uncle) died, contracting MS after a tragic accident.

In the present day, few have a hard time of it in their jobs  in North America.  For most of us, old age means limitations in our usefulness, but not an absolute limitation in our ability to work.

The US economy will retool to use the labor of older people, outside of what is considered retirement.  We’re the United States; we adjust while the rest of the world does not.

And that gives me some hope.  I expect to see older people in less skilled positions, and perhaps a greater amount of younger people unemployed.  Maybe the young people will emigrate, or maybe they will humble themselves and pick fruits and vegetables, or something like that.  I’m not trying to be mean, but so many criticize immigrants.  We would not have so many immigrants if we had children enough to do the tasks that immigrants do.


If there is not enough income behind the growing population of elderly people to fund them in retirement, then retirement is a bubble, and shoul1d be abandoned.  Tell retirees to defer or reduce their retirement goals.  If they can’t even make on that level, tell them that they have to work until they die.  A sad concept, but true for most of humanity so far.

I’m not trying to be mean.  I am just looking at existing structures and asking how do we support the elderly in the US.  It is not an easy question.

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About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website ( Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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