This is bill Ackman, the billionaire hedge fund manager of Pershing square capital.
Bill has been featured on this channel a few times before, most notably because of his
trade made in early 2020 which netted him over 2.6 billion dollars in profit.
Since then he has become a bit of an internet darling which is just great for him because
a lot of his trading strategies require him winning over hearts and minds to change people’s
opinions on a stock, bond, cryptocurrency or whatever else it is that he has some kind
of vested interest in.
Now this is nothing new, influential stock traders have been trying to create news stories
that suit them ever since there were stock markets and newspapers.
But this most recent announcement has been a little bit different.
Ackman along with a selection of business leaders and economists have started advocating
for a plan that would give everybody a few thousand dollars in cash on the day they are
borns all in order to solve the retirement crisis.
It sounds crazy, but there may be more merit to this whole plan than you think.
Most advanced economies around the world today are dealing with aging populations and declining
birth rates. A future where the dependent elderly far outweigh the productive young
is fast approaching, current pension infrastructure may just not be able to cope.
We may see a future where the quality of life for elderly citizens rapidly declines, or
young people are taxed very heavily in order to support them, neither of which sounds particularly
appealing to anyone, so perhaps radical solutions are what we need.
And to understand this plan we are going to need to look at a few key areas.
How would handing out money to babies solve problems amongst the elderly?
How would nations afford this?
And is this actually a sound idea? Or just another scheme by a savvy businessman to profit
off front page news.
Intro Add
The age of retirement in most nations has been steadily increasing over decades almost
out of necessity.
Government pensions were originally put in place by a select group of advanced nations
from the late 1800s to the early 1900s. These were put in place to take care of people that
were too old to be able to work, but too poor to be financially self-sufficient.
To this day that’s still their core goal, nobody wants to see our elderly population
starve to death in their golden years.
But the problem is that when schemes like this were introduced life expectancies were
lower than the age of retirement. The US life expectancy in 1875 when the pension was first
introduced was less than 40 years old. So only a fraction of the population actually
ever got a pension cheque despite working their whole lives and paying taxes to support
them.
What’s more is that life expectancy back then was drastically influenced by wealth.
Richer people had access to better food, healthcare, and a healthy environment, and also had the
distinct advantage of not working on pre-occupational health and safety factory flaws. Or as I like
to call them, human meat grinders.
This meant that of the lucky few who did grow old enough to receive a pension most of them
would have been too wealthy to qualify.
Even today life expectancy does depend a lot on how wealthy you are. The difference in
life expectancy between oglala lakota county in south Dakota and summit county in colorado
is more than 20 years.
That’s larger than the difference between the average life expectancy of the united
states and Uganda. Studies have concluded that the biggest determining factor between
this disparity inside the nation is income.
Now all of this is to say as people around the world are getting richer and richer they
are also getting older. Life expectancies in modern advanced nations today are hovering
around 80 years old where most pensions kick in anywhere between the ages of 60 to 65.
This means that on average the state is having to look after people financially for 15 years
or more, which is ultimately not sustainable.
Most often state pensions are far more generous than unemployment benefits because the idea
is that they provide a comfortable lifestyle to senior citizens instead of providing a
living allowance to someone looking for a job.
To most people that is fair enough, but this is an expensive program. In Australia, assistance
to aged care along with the old-age pension accounts for 75 billion dollars, worth of
government spending, this is 7 times more than what is spent on regular unemployment
benefits and twice as much as what is on the military.
In the US pensions for public servants have become a 3.5 trillion dollar unfunded liability
and the news is similar all around the world.
Now one solution is to increase taxes on people still in the workforce in order to pay for
this older generation. That might sound like a really bad idea to you the predominantly
working-age viewership of this channel but hear me out.
Historically the burden has fallen on children to directly look after their parents in their
old age. Multi-generational housing is still commonplace in most developing nations where
pensions are not a thing. If it were a question of paying an extra few percent in taxes or
living with the inlaws, which would you pick?
I am actually genuinely curios about this, for what it’s worth I am Australian, and
multigenerational housing is quite rare here but I actually quiet like the idea so long
as everybody has enough space. So leave a comment below with which you would prefer
and whereabouts in the world you are from, it helps the video in the youtube algorithm,
and It would be really interesting to see.
Now of course one other solution is to reduce these benefits and let elderly people fend
for themselves. Now socially this would have some terrible repercussions, but it wouldn’t
necessarily hurt the overall economy.
Hong Kong is a perfect example of this, the city is a glistening beacon of wealth and
prosperity, but a large portion of their elderly population live in cages because they can’t
afford anything more.
Now Mr Bill Ackman here decided that he didn’t want to pay more tax, he didn’t want his
parents taking up room in his 100 million dollar new york penthouse, and he also didn’t
like the idea of old folks starving. So he has presented a potential
Win win solution
Ackman has proposed giving a few thousand dollars to children at birth, which they can
only access at the age of retirement, which would be set to 65 years old.
This was a proposal specific to the united states where the billionaire investor has
said that a sum as modest as $6,750 could be sufficient, but obviously the more the
better.
Other nations adopting a similar strategy would either have to provide more or less
depending on their cost’s of living.
This money would then be locked away and invested into a diverse portfolio of assets which would
generate returns of around 8% annually based on historical trends.
This would mean that everybody would have a comfortable nest egg to retire off by the
time they are no longer able to work themselves.
Now you might say this just sounds like a socialist 401k and while there are similarities,
there are also some key advantages to this scheme.
For starters, it covers people who would not be in a financial position to contribute to
retirement savings of their own volition.
But it’s also a cheaper solution.
Giving a few thousand dollars to newborns once is a lot cheaper than giving tens of
thousands of dollars to elderly people for as long as they live.
Based on the number of newborns in the USA in 2019 this scheme would cost around 150
billion dollars, which is far less than hundreds of billions that are attributed to old age
welfare between the federal government and the states today.
It shifts the revenue burden from the taxpayer to the financial markets. Which is another
big win. We have said time and time again on this channel that the stock market is not
the economy, and one can sometimes do really well while the other is doing really poorly,
perhaps never has that been more apparent than in 2020.
By giving all citizens of a nation, investment into that nation’s companies they have a
portfolio to call their own and will share in the collective success of capitalism, rather
than being left behind by it. This alludes to the biggest benefit of this scheme over
more traditional retirement vehicles. time.
Due to the marvels of compound interest, we can reverse engineer that $6,800 at birth
given current market rates of return would give people 1.2 million dollars at a retirement
age of 65.
At that point they could draw a yearly income of 92,000 without reducing the size of this
portfolio at all. Now of course after we have factored inflation into the mix, 92,000 in
65 years won’t quite be as generous as 92,00 today, but if inflation rates stay at the
1-2 percent that the fed targets this $92,000 salary would be in line with current government
pensions.
Hypothetically if this was instead raised to a gift at birth of $30,000 which is an
average pension for most developed nations, then people would retire with a nest egg of
5.3 million dollars which will be the equivalent of around 1.47 million 2020 dollars. It would
achieve this while still being on average 15 times cheaper to implement in the long
run.
Imagine a world where everybody would at one point become a millionaire, and then imagine
what it would do for worker morale, national unity, and general tensions over inequality.
The reason this is able to achieve such fantastic results is because it is being compounded
over 65 years. Which is far longer than most traditional retirement vehicles.
To match this result a 25-year-old would have to invest a lump sum of $190,000 into an investment
portfolio, which is obviously not possible for most individuals. 25 years’ worth of
compounding goes a long way.
Now you might be thinking, well this is great, but a more elderly population is going to
be a burden on society no matter how creative you get with shifting money around the place.
But the thing is, in our modern world, that is not necessarily true. To show why, consider
this hypothetical.
Tomorrow Elon Musk announces a robot that can, cook, clean, and perform other basic
tasks. It’s not more efficient than the current robots we have on assembly lines,
so don’t worry it doesn’t take anybody’s job… yet.
but this robot has one final feature, if left alone for a full year it can build a perfect
copy of itself. But it’s relatively expensive and costs $30,000 dollars.
Now say that robot is given to a child at birth, and instead of doing anything else
it is sent away to make more robots, well in the first year you would have 1 robot,
in the second you would have 2, and then the second robot can also make copies so there
would be 4 and then 8 and 16 and well you get the drift.
By the time they reach retirement at age 65 this person would have an army of robots that
they can then use to take care of their every need instead of having to rely on one of the
few young humans left roaming about.
Of course, this is an extremely oversimplified example, but it shows the basic mechanics
of capital investment. If people put enough money towards machinery and technology that
it lets existing people in the labor force do the work of two or more men, then the person
that contributed that machinery and technology can effectively retire without an economy
losing any productive output.
Cool, so so far this strategy is cheaper for the taxpayers, more beneficial for the recipients,
and better for citizen morale all while channeling money towards local companies that will work
to create more wealth for their shareholders which just so happen to be the citizens of
the nation.
Why didn’t we think of this sooner?
Well of course,
There are some major problems
A common criticism of this proposal is that it is expensive, and yes while long term it
would work out much cheaper than brute-forcing pensions through taxpayers, there would be
a significant upfront cost.
Assuming that this program starts and only gives money to newborns from after the commencement
date, there would be an entire 65 year period where a government would need to pay for regular
pensions as well as socking money away into this new scheme.
65 years is basically someone’s entire life, so for people just entering the workforce
today, they would likely pay for this over their entire working careers, retire and die
before they ever see someone fund their own retirement through this scheme.
This problem could be written down to making sacrifices for future generations, but we
all know we aren’t great at that either.
A more technical issue with this scheme is that it probably puts too much faith in the
markets and people.
The examples we used before to demonstrate portfolio growth used 8% average market returns,
now based on historical data that actually shouldn’t be an issue, what could be is
that these returns are not perfectly consistent.
There are up and down years and if someone retired in a year like 2008 or early 2020,
they might find that their portfolio is half of what they were expecting it to be, meaning
that they will either have to reduce their spending or keep on working until things get
better.
Those returns themselves might also be problematic. These were based off returns from the American
stock market over the past one hundred years and I don’t know if anybody has noticed
but America has done particularly well for itself over the last 100 years.
Past performance is not an indication of future growth, and this is why we see that stock
market returns in older more established area’s like Europe are historically lower than that
magic 8%. This would either mean that the initial payment needs to be made larger, or
people will need to retire later.
The other issue is, what would happen if people burnt through all of this money.
What do you imagine would happen if you gave The average worker who has been unable to
save for their own retirement a cheque for 1.5 million dollars.
Look to the retirees from your favorite sporting league for the answer.
Still not sure? They will blow it. Money is very easy to spend, and recipients of major
windfalls like this more often than not end up filing for bankruptcy.
So what happens then? Do we let them starve? Or do we put them back on a pension? If they
go back onto a pension, not only are the savings from this whole scheme eliminated, it would
actually encourage people to blow all of this money rather than living frugally of dividends
for the rest of their life as intended.
Why live modestly when you can live like a king for a few years and then live modestly
afterward.
One final criticism is that this would just cause inflation, if everybody in the world
became a millionaire the day they turned 65, then being a millionaire wouldn’t be that
special anymore, the cost of housing and consumer goods would just rise to meet this new demand
right?
Well, that’s actually really complicated.
Inflation is the increase in the price level of goods, if goods get more expensive over
time that’s inflation if goods get cheaper over time that is deflation.
Now the inflation rate ultimately boils down to two factors, how much money is being circulated
around the economy, and how many goods are available in that economy.
If you increase the amount of money in circulation by printing more, or encouraging people to
spend more or take out loans all while reducing the number of goods available you will get
inflation, more money is competing for less goods so people have to offer more to buy
the same.
The opposite is also true, if you make more goods but less money is circulating in the
economy because people are afraid to spend it or it’s hard to get a loan, well then
retailers will be forced to put those goods on sale to attract what few consumers remain
and you get deflation.
It’s basic supply and demand at a national level.
Also a quick side note is that the demand side is determined by money in circulation,
not the total amount of money. You could print trillions of dollars every day but if that
just sits in a vault it won’t impact the economy at all. You may hear this referred
to as the velocity of money and I need to make this distinction because it is really
interesting and the comments section will shout at me if I don’t.
Why this is important to the debate over our proposed retirement scheme here is that everybody
with their newfound wealth will certainly influence this money in circulation right?
And well yes they will, but not as much as you might think, these people have become
rich because they have invested in public companies over a long period of time not because
it was printed out of thin air. With more investment, these companies will be able to
make more products and balance out this extra cash in circulation with extra goods in circulation.
The one distinction will be fundamentally supply-constrained goods, where you can make
any more of them no matter how many factories exist. The most notable example of this would
be land for real estate.
Overall it still sounds like a feasible plan or at least one that sounds a lot less crazy
than it might first appear. But as always leave a comment and let us know if you think
it is a workable solution.
Now finally as for Mr Ackman here. What does he personally have to benefit from spending
so much of his extremely valuable time pushing this agenda. Well, if we were to retitle this
article to "Hedge fund manager desires the government to adopt a predictable large scale
stock purchase" you might get a slightly clearer picture.
Of course, a billionaire investor wants continuous government investment into the stock market.
It will make him far richer than any of those retirees.
Outro add