>Renters can get the same benefit if they save up a lot of money or invest smartly, but that takes more discipline than just making mortgage payments each month. I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets.
I'd be interested to hear what Americans think of a policy we have in Australia called mandatory superannuation. It essentially forces people to put around 12% of their income into pension funds (they can choose which fund, or possibly even self-manage it in some cases) that they can't touch until they're retired, meaning that people who rent their whole lives and save nothing can still have hundreds of thousands in savings to support them when they retire.
We have the same concept in Europe, or at least the country I'm from (Slovenia). You are mandated by law to put a percentage of your monthly income into pension. If you miss a payment, you are in debt to the state and they will hunt you down for it. They take these things very seriously.
Everyone under 40-ish agrees that we are never going to see that money. We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.
> We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.
This comes up again and again (not just in Slovenia, but in any country that has an inter-generational pension system).
There are two points to make here:
One is that as long as a country produces enough goods and services, money is "just" a tool for allocating these goods and services. How money is being saved and spent has already changed massively; countries have a different tax structure, require people to spend vastly more on health insurance than a century ago, families are smaller compared to a century ago and parents are less dependent on their children in old age (and thus the way our retirement works now is already vastly different from back then). There's little reason to think that the system cannot adapt. This is not to say that it "will" (because, well, predictions are hard, especially about the future), but it would also be unrealistic to assume that what we are going to have 30-50 years from now will be like what we have now. Heck, we don't even know if the "lump of labor fallacy" will still be a fallacy in a future of rising automation or whether part-time work will become the norm. At which point all bets are off, anyway.
As a simple example, we could just implement a basic level of pensions through taxes (in lieu of existing pension schemes) that people could increase through private pension schemes. This is essentially basic income minus the moral hazard (because you don't have to worry about creating a disincentive to work for people outside the labor force).
The second point is that investing privately in your retirement does not fundamentally change anything. When a society ages and has a disproportionate amount of young people, these young people still need to generate enough economic output, regardless of whether the income for those too old to contribute comes out of interest payments, an inter-generational scheme, taxes, or something else.
>We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension.
Australia's system is slightly different, in that the pension funds are privately owned and the government (currently) has no way to take money out of them or use it for anything else. People here'd be pretty pissed off if the government started dipping into their super.
To be fair, I don't think our government is dipping into anything. They're just using the funds to pay out current pensions because there isn't enough money in the system.
Why there isn't enough money in the system I don't know. There are likely to be multiple factors ranging from the fact that the country is just 25 years old, that there's been population decline or stagnation, or that those pension funds weren't growing enough.
>To be fair, I don't think our government is dipping into anything. They're just using the funds to pay out current pensions because there isn't enough money in the system.
That's what I meant by dipping in: they're using the funds. In the Australian system each person's funds are in their own account and the government can't use it for anything else, nor can the super fund, so it's impossible for someone to be paid out of someone else's account.
The sad thing is, that they probably paid enough, when considering purchase-power-parity over the decades. It is just the inflation that destroyed the savings. It does not matter, whether the government is running the fund or whether it is privately owned, the result will be the same.
This idea is usually promoted as a pretext for privatizing the public pension system. Ironically, that really will ensure that your pension gets raided.
The idea is ridiculous of course. People are not going to stop existing when you retire, and judging by the last hundred years of progress, they'll be richer and more productive, if less numerous.
I find the mandatory superannuation very refreshing and surprised the US doesn't implement something. I feel if everyone saves 10% of their income for the rest of their working life, it leaves you with something around retirement.
The closest in the US is the company you work for can match upto 4%.
So financial advice in USA is put away maximum into 401k/Superannuation that your company will match because if not, you are losing that free money.
As a current renter, the mandatory superannuation law allows me to make a rational choice to rent when it suits me.
Renting allows me the flexibility and freedom to go where the work is.
At least have the option to go where the work is. If I owned a home, I wouldn't feel as free.
I plan on buying when it makes sense, but right now, I do not see any benefit of tying up most of my wealth into home ownership.
I look at renting as a utility of life. I need to live somewhere and it costs me x dollars. In retirement, I plan to have x dollars in retirement money to pay for my rent then too.
On the other hand, I'm in IT. I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :)
The best thing about it is that it is an account that the saver has actual visibility on. It encourages retirement savings. It's a good base for employer and/or government contribution match schemes. It has obvious and fair inheritance implications (if you die at 64, who gets your pension?). It's far safer, with much less risk that the money will be gone when you retire. The systemic risk aspect is much better too.
The alternative is pension schemes, alarmingly similar to pyramid schemes. The company (or however it is centralized) pays out of current income, IE current employees or tax payers pay for old pension obligations. This works until it doesn't. If people start living longer, the company/tax base shrinks or no one bothered to do the sums 30 years ago, it collapses.
The reason pension schemes are so common is because it's easier to start a pension scheme and very hard to move from the pension scheme to a superannuation scheme.
When you start a pension shceme, the costs are very low at first while the number of retirees is low. You can pay out pensioners starting now. Superannuation only hits full speed once people have contributed to it for a lifetime start to retire. Way way longer then the horizon of CEOs, politicians or union bosses.
If you try to move from pensions to superannuations, you are in a problem. Your current crop of workers need to pay for their parents/grandparent generation of pensioners while saving for their own retirement as well.
Most existing pension plans were designed when interest rates and birth rates were both much higher than they are now. So they made more sense back then. Even a Ponzi scheme can be sustainable given high interest rates and a steady stream of new customers!
> The closest in the US is the company you work for can match up to 4%.
Is there actual regulation that limits how much a company can match? This [1] refers to 6% as a common practice, not a limit imposed on employers.
At two universities where I've worked, the university's contribution to a 403b (401k for non-profits) didn't require any contribution by the employee. At one the university's contribution was 6.25%, at the other it was 5% for employees under 40 and 10% for those 40 and older.
Most companies only want to do a safe harbor match (roughly 3%-6%, depending on how it's set up) on their 401(k) plans...otherwise the auditing (annual testing requirements) requirements are a real pain.
Different companies contribute different amounts, all part of their benefits package.
Ex:
Company A might pay a high salary but low match.
Company B might pay a lower salary but contribute x% to 401k.
It skews the market, of course. Currently, I stay in South Africa. Here they don't have a similar mandate, but a de-facto one by virtue of giving a large tax-benefit to individuals who put up to 25%(I think) of their annual income into a Retirement Annuity. This is a private thing (except for government employees), but withdrawal from it is regulated by government among other rules.
You lose an immeasurable amount of opportunity cost by putting away so much of your earnings there. Not to mention that most of these retirement products are heavily linked to equities, meaning you are very likely to lose a lot if the market down-turns. Short of going on a huge rant on the topic, I'll just settle to saying it's a huge scam that makes people indebted/vested into keeping the market system chugging along, no matter what.
And then we are being told that "rich people" are causing inequality. Right.
I'd be interested to hear what Americans think of a policy we have in Australia called mandatory superannuation. It essentially forces people to put around 12% of their income into pension funds (they can choose which fund, or possibly even self-manage it in some cases) that they can't touch until they're retired, meaning that people who rent their whole lives and save nothing can still have hundreds of thousands in savings to support them when they retire.