Tuesday, 22 November 2011
Self responsibility for retirement unintendedly exacerbates economic slowdowns
Some nations have encouraged individual self responsibility for retirement savings. That is wise policy because it insulates government budgets from growing baby-boomer pension liabilities; or, to put it another way, it reduces the burden upon the young to pay for the retirements of a growing number of old people who are living longer.
But, that policy has an unintended negative side effect: the exacerbation of the economic slowdown.
Stock market downturns generate negative sentiment. Retirees, and those saving for retirement, reduce spending to preserve their retirement investments and prospects, and to prevent having to return to work in old age. Reduced consumption by those saving for retirement reduces retail and other business activity, reducing wages and employment. Stores close, jobs are lost. That in turn results in negative market sentiment which depresses business outlook, which in turn depresses stock prices further.
The reverse applies when sentiment is positive. High retirement fund asset values free people from frugality, supporting business growth which in turn further reinforces positive sentiment.
Self responsibility for retirement savings has thus embedded a positive feedback loop into the economic structure. Such a feedback loop amplifies swings to the upside, and amplifies swings to the downside.
Therefore an unintended consequence of self responsibility for retirement savings is higher stock market volatility. Individual responsibility doesn’t cause volatility, it merely adds to it.
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Posted by Nils Marchant