​Retirement: An Economic Disaster and a Health Catastrophe?

Guild Investment Management  |

A letter to Financial Times columnist Michael Skapinker last week brought our attention to a personality we hadn’t heard of, but who is well-known in Europe. Dr. Charles Eugster is a 96-year-old British resident of Switzerland who took Skapinker to task for a column in which he’d praised the health benefits of retirement. Nonsense, Dr. Eugster said -- retirement is “a financial disaster and a health catastrophe.”

Eugster has limited personal experience with retirement. He retired from his dental practice outside Zürich at the age of 75 when he noticed a slight impairment in his manual dexterity. Until the age of 82, he continued publishing a professional newsletter, and then gave it up -- imagining he likely wouldn’t live past 85.

The boredom and physical degeneration he observed over the next few years induced him to make a decisive change. The widower, who describes himself as being extremely vain, wanted a beach body (to wow the young ladies in their 60s and 70s), so at 87 he hired a personal trainer and joined a bodybuilding club. At 90 he was gainfully employed once again, working for a German fitness group. At 95, he dove into competitive athletics, and has amassed medals in rowing, track, and weightlifting.

A Six-Pack At 96 -- Not Too Shabby

Source: charleseugster.net

Dr. Eugster’s enthusiasm is infectious and his energy is high. His TEDTalk, which you can find on YouTube here, is inspiring. However, he has an axe to grind on substantive issues that are worthwhile for our readers to consider, because they will have a profound long-term effect on our personal health, as well as on the social and economic health of the world.

Demographic Troubles

Many of the world’s developed economies are now entering into the thick of serious demographic problems, and some developing economies (notably China) are following close behind.

We have often commented on this phenomenon. Japan is a case in point, where increased longevity and declining births famously led to adult-diaper sales outstripping baby-diaper sales a few years ago. This is a problem because of the rising dependency ratio -- there are fewer working people to support more retirees, and thus support for those retirees seems set to devour an ever-increasing portion of the nation’s total productivity.

Some developed countries, especially in Europe, are approaching the problem by encouraging immigration. As Europe’s experience has shown, mass immigration can create many social problems, even when managed effectively (which it often isn’t). Japan so far has resisted the siren call of immigration, preferring to tackle the problem by using robotics to make workers more productive and to help with the burdens of caring for the disabled elderly. Some countries have engaged neither strategy, and face a truly grim demographic future -- Russia comes immediately to mind.

“Retirement”: A New-Fangled Idea

However, Dr. Eugster makes a point that strikes at the problem more radically. We also believe that he is right, in the sense that he expresses a truth that will work inexorably to change the social pattern of retirement.

First, the fact is that “retirement” as an extended period of voluntary or involuntary inactivity at the end of life is a recent invention. When Social Security was introduced in the United States in 1935, the retirement age was set at 65 -- but life expectancy was 58 for men, and 62 for women. In 1940, over-65s represented about 6.8 percent of the population; now that figure has more than doubled, to 14.5 percent. In Japan, the figure is now 26 percent. Plainly, the architects of the 20th century’s socially funded retirement programs never imagined that a quarter or more of the population would be out of the work force. Since the retirement age was set close to average life expectancy, it was obviously thought that most people would work until very close to the time that they died.

Physical, Social, and Economic Costs of Retirement

Dr. Eugster brings forward a great deal of evidence that this period of ever-longer enforced inactivity is very bad for our health. As he discovered personally, and then confirmed through research, retirees tend to suffer from more physical and psychological illnesses than older people who keep working. This effect is sometimes visible immediately; for example, risk of stroke and heart attack increases markedly in the first year after retirement.

As we are aware from our demographic study of the economies of countries with an aging population, this enforced idleness is also problematic from an economic perspective. The swelling ranks of pensioners draw their economic sustenance from an ever-shrinking workforce, who must, by the nature of the case, see gains that they would have enjoyed from rising productivity be used instead to support the elderly. This problem is at the root of all discussions of the solvency of Social Security in the U.S. -- and the U.S. is not nearly as bad off as Europe and Japan.

Another Way Forward

The good news we take away from Dr. Eugster’s inspirational story, though, is his conviction that the limits to productive and healthy human life are much higher than people think who have been conditioned by the past 50 years of “retirement expectations.” Intelligent physical training (including weight training to stop the loss of muscle mass), good eating, and continued engagement in work can make us happier and healthier as we stay in the workforce for another 20 or even 30 years. Rather than expect decades of inactivity, we could expect instead to find and explore a second or third career. (The rise of the “gig economy” will encourage this process as well.)

We believe that increasing economic pressure on the “long retirement” model -- which was never intended to be what it has now become -- will lead inexorably to workers pursuing longer working lives. The capacity for a longer working life has been created by gains in health and longevity -- and eventually the positive effects of a longer working life will act as an incentive by themselves, even if “necessity is the mother of invention.” (That necessity can already be seen in one surprising statistic -- the proportion of women over 65 who are still working. In 1992 it was one in 12 -- by 2024, it is expected to be about one in 5.)

In short, aging demographics do not doom economies -- foolish and impractical notions of 20 to 30 years of enforced idleness at the end of life, those might doom economies. Fortunately, we have the tools, knowledge, and soon, economic motivation to shepherd developed economies onto a better path. Rather than a slow decline into senescence, there could well be a more positive path ahead for the U.S., Europe, Australia, and Japan.

Investment implications: The developed world is aging, and with more and more retirees and fewer and fewer working-age citizens, the long-term economic consequences for Japan and Europe look troublesome. However, the idea of retirement as a period of 20 or 30 years of idleness at the end of life is a new one. When modern social retirement plans went into effect, they universally put the retirement age near or above actual life expectancy. We think that health gains -- and the psychological health benefits of continued work -- will lead to the re-emergence of the old pattern: workers will remain employed and productive well into advanced old age, and it will make them healthier and happier too.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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