PROJECT M
 

Spending it wisely

One of the cherished notions of the developed world is under increasing stress. Retirement, the golden time of life when people withdraw from employment to enjoy their remaining years, is being challenged by a combination of demographics and unrealistic expectations

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Spending it wisely

One of the cherished notions of the developed world is under increasing stress. Retirement, the golden time of life when people withdraw from employment to enjoy their remaining years, is being challenged by a combination of demographics and unrealistic expectations

Bismarck’s Pension Trap

Germany was the first nation to introduce old-age social insurance. William the First wrote to Parliament at the behest of Chancellor Otto von Bismarck, explaining “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.”

The system, introduced in 1889, set retirement at 70 years of age. Average life expectancy was 35.6 for men, 38.4 for women. In 1916 retirement age was lowered to 65, which has been a default applied in many countries since then.Today, life expectancy in Germany is 75.9 and 81.5 years respectively – and rising. Like many countries, Germany faces the question of how to support growing numbers of retirees without bankrupting the economy. With retirement set at an arbitrary age rather than disability, an increasing number of otherwise fit and active people are withdrawing their human capital from the economy.

This has been referred to as “Bismarck’s pension trap.” The goal of the Iron Chancellor was actually to purchase social peace through a limited redistribution of income. He personally believed that as long as a person was fit enough to work, they should in principle arrange for their own protection regardless of age.

The Golden Cohort

It may not seem like Fortune smiled if you were born in the Depression and raised during World War II, but comparatively, you may be part of the luckiest generation in history. Often referred to as the Golden Cohort, the generation born in the 1930s grew up in a period when childhood diseases such as diphtheria and polio were virtually eradicated. It was a time when diet and housing underwent substantial improvement, education became general and many demanding industrial jobs were being phased out and replaced by those in the service sector.

This generation also reaped the benefits of the welfare state, including soft retirement with index-linked pensions and, afterwards, reasonable health services. “Through one thousand generations of civilized life on this planet, we have never seen anything like this before,” says Professor David Blake. “And you have to begin to wonder how long it can continue in its current form.”

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