18 October 2007

Foreigners Will Fund Your Retirement

Our attitude towards immigration and trade could cost us our retirement.

In a great column on American exceptionalism, Fareed Zakaria explains that Americans rank dead last among countries surveyed on their belief that trade between countries is a good thing. Americans acceptance of immigration has also precipitously dropped in recent years. This new anxiety comes at a bad time.

This month, the first baby boomer began to collect social security payments. She's merely the first of a very large parade. During the next twenty years, 46 million college-educated baby boomers will retire. There will not be enough American-born workers to replace them. By 2015, the United States and Europe will face shortages in workers. In 1950, the ratio of working age to elderly was 7 to 1; by 2030, it is projected to be 3 to 1.* No matter how we structure retirement, it ultimately rests on this: the people who are working have to make enough to pay for their own lives and the lives of those who aren't.

There are four things that will either make this coming demographic shift a non-issue or make it a huge issue.

One is productivity gains. If a person in 2030 is 3X as productive as a person in 1950, he can more easily take on the task of funding more retired people. To the extent that these productivity gains come from capital investments, returns to capital can help to fund retirements.

Two is the total ratio of non-working to working people. It is true that there will be more retired people for every working person in 2030, but at the same time there will be fewer school-age children for every working person. Non-working = in school + retired. As the retired number goes up, the in school number will go down. Factoring in school-aged children makes the ratio of working to non-working look less worrisome. Plus, real advances in medical and psychological treatments could make it possible for a higher percentage of the working age population to be productive.

Three is the number of immigrants. Just as we're projecting a drop in working age population, Africa, Asia, and South America is projecting an increase. Inviting immigrants to maintain our population of window washers and brain surgeons will help them and help us.

Fourth is trade and investment across borders. If my retirement fund pays me from returns to capital invested in a foreign company, I've helped to create jobs for foreigners and they've helped to fund my retirement.

The truth is, we need a combination of these four factors in order to smoothly sail past this jarring and unprecedented shift in demographics. No one factor listed above would be enough, on its own, to ensure retirement funding.

I've written before about how oddly inflated is the concern about immigration in this country. The truth is, we have only two choices: take a step back in prosperity or step further into this age of globalization. Insulating ourselves from the outside world is not an appealing option. The politicians who feed Americans' fear of immigrants or trade are doing worse than pandering to phobias - they're setting us up for failure.

The facts from the * paragraph are taken from James Canton's The Top Trends That Will Reshape The World in the Next 20 Years.

9 comments:

Life Hiker said...

A very timely post. Yes, we need immigrants and it is in our best interests to educate them to the greatest extent possible.

And, democraphics showing fewer oldsters and youngsters help us. Productivity may help as well, and it would be wise to invest in foreign (Russian and Chinese stocks may be good bets!).

But, the falling dollar and the U.S.'s unbelieveable unfunded entitlements have the potential to drown us. What do you think about these critical topics?

David said...

Things aren't going well. Would you like the name of the D-CA who promoted the notion of dressing down the Turks although it wasn't carried in Congress. I like today's blog Ron. It's you at your best. By the way, it's illegal immigration that concerns people, however inflated, not immigration. BTW, I discovered Dan Dennett today. Things aren't going well.

Life Hiker said...

Speaking of immigrants, I've recently become involved (as a financial consultant) with an old-line downtown church in Rochester, NY. Membership is way down, but they have some resources and committed members - and one amazing thing going.

They have taken over a project to help over 100 Burmese refugees get resettled in Rochester. These people came here with nothing but the clothes on their backs, and most do not speak any English.

Guess what? Many of them already have jobs within two months of arriving here. In a city with heavy unemployment and many "poor" people, they have found full time jobs. What's wrong with this picture?

We need immigration, legal or illegal, although I prefer we would find a way to bring people in above board. Immigrants are taking jobs - sure - but we got lots of citizens who won't work.

Anonymous said...

"Factoring in school-aged children makes the ratio of working to non-working look less worrisome." I take it the tooth-fairy and Santa Claus are feeding your kids and funding their education?...

Although, this type of thinking is becoming popular: The Fed is talking about "core" inflation; food and energy are removed from the equation ("they are subject to volatility and as such they add noise rather than signal")

I can hear it now: "No! of course you're not experiencing hyperinflation: look, core inflation is a mere 3%; just quit eating, using electricity and driving - I'm sure you will agree with me!"

Ron Davison said...

LH,
two comments! First of all, I feel about unfunded entitlements the same way I do about climate change or our foreign policy. These are big issues that need to be addressed, but issues that could probably be solved if we got serious about them rather than kept all discussion of them contained to hypothetical and hand-wringing. One doesn't have to tweak the forecasted economic growth or tax rates or retirement ages by much to overcome the funding deficit projected in 20 or 30 years.
And yes, there is lots of opportunity in this country but part of it is a game of expectations, no? What you and I would be content with - in terms of income and housing and extras - is probably different from what first-generation Burmese would expect and hence they have a bit of an advantage when it comes to finding employment, as odd as that sounds.

David,
Thanks for the compliment. I will say that what I read about illegal immigration seems to package all kinds of immigration: the arguments from cultural warriors about the importance of protecting our country from being overrrun sound like they'd be little different whether the perceived wave of immigrants was legal or illegal.

Anon,
I guess I don't follow your point. It takes money to put kids through school. It takes money to fund retirement. If the money spent on the first (because lower birth rates means fewer children) drops as the money spent on the second rises (because previously higher birth rates means more seniors), its very possible that the two will offset one another. (They won't, exactly, but it'll help.) I must be missing something.

Anonymous said...

Ooops! No you didn't miss anything, I did... I should know better than to read anything more cerebral than the funnies when I'm tired. I guess my eyes hiccuped and missed the offset concept - all I saw was a subtraction of numbers.

Something like the text version of "I know you believe you understood what you think I said, however I'm not sure you realize that what I think you heard is not what I meant..."

Profuse apologies.

Ron Davison said...

Anon,
Phew!

Life Hiker said...

Hello again, Ron. And Good Witch and I are so happy the flames are calmed down a bit.

I agree with you on Social Security - tweaks can go a long way toward saving it. Not so with Medicare; it's going to be an anchor on the economy which will take much more than tweaks...to save it will require a whole different approach to the ills of the old folks, and that will be tough.

Burmese, Mexicans, etc. They get jobs that Americans won't take due to inflated "expectations", and they work hard. The libertarian in me says we need to work on those expectations.

Ron Davison said...

LH,
You've got me on this. I really don't pretend to know much about medicare, I guess. But I'm simple minded enough to wonder why we could not just finance medical. Every country does (including us) and it is just a matter of how we account for things and when we pay them and who pays them. Ultimately, it's coming out of the GDP anyway, no?