03 Retirement Chain Letter

I found the below newsletter from 2001 which is still relevant today. Especially read the section An Aging Population.     Also read the article  GRAY DAWN which is on this blog site. TLC

Gary North’s REALITY CHECK (copyright, Gary North, 2001)

Issue 72 August 2, 2001


The Nikkei index is well under 12,000. It was in this range in 1985, at the beginning of the great bubble, which carried the index to just under 40,000 in late December of 1989.

Unlike the NASDAQ, the Nikkei index represents the share prices of Japan’s major companies. The 1985-89 bubble was not confined to a narrow segment of Japan’s productive enterprises, the way the NASDAQ is. It was at the very heart of the Japanese economy.

Japanese banks have long used their profits from the stock market to serve as part of their capital requirements. The G-8 nations jointly raised these requirements a decade ago. To meet these requirements now that their stock holdings have shrunk, the banking system in Japan will have to adjust downward: curtailing lending, writing off bad loans, and generally contracting the economy. But Japan’s economy is already in a recession. A contraction of bank lending will force the stock market lower, reducing bank capital further, forcing more contraction. This threatens a classic downward spiral.

Japan is regarded as the second most productive economy on earth behind the United States. Japanese workers work longer hours than we do, and more intensively. A much smaller percentage of Japan’s women are in the work force, so the men take up the slack. Nobody thinks of the Japanese as lazy. Yet their economy has stumbled for over a decade. It has now moved from prolonged stagnation into recession.

But nothing fundamental ever changes. The Liberal Democratic Party remains in power. By any standard, its hold on the electorate is more monolithic than any democratic political party on earth, including Mexico’s PRI, which is now out of office. Japan has a new Prime Minister, but nobody really cares. To be Japan’s PM is like being Italy’s. He doesn’t get to attend more than one G-8 meeting.

What has gone wrong in Japan? Why can’t the country get its economy back in gear? And is ours headed in the same direction?


In his book, GRAY DAWN, Peter G. Peterson, the chairman of the Council on Foreign Relations, discusses the likely effects of aging on the budgets of the major industrial nations. All of them have legislated huge retirement/medical welfare programs. All of them have made promises to the voters that cannot possibly be kept. Their politicians are now trapped by older voters, who vote in higher percentages than younger voters, and who vote in a self- interested bloc. Every single retirement/medical system in the West is going bankrupt. Not one national politician has dared to say this publicly. Yet Peterson says that he has talked with several national leaders over the years—as the CFR’S chairman, he has such access—and they all were aware of the demographic statistics.

Peterson offers a projected set of dominoes. Which nation will hit the demographic brick wall first? His answer: Japan. According to his estimates, sometime in 2003, the Japanese retirement system will be forced to make major changes: reduced benefits, higher payroll taxes, or both. Italy will hit the wall in 2005.

A worldwide recession will speed up this timetable. Government tax revenues will fall. Unemployment benefits will rise. None of the major analysts is saying it publicly, but Japan’s stock market and falling productivity mark a turning point for the nation’s economy. Obviously, the Japanese do not have a problem with the work ethic of the work force. Their savings rate is high. So, what is their problem? Analysts focus on the cartelized nature of their overall economy. This is legitimate. Japan is highly structured by a government-oligopoly alliance, which reduces output. But Japan has had this structure, or something like it, ever since the Meiji Restoration of 1868.Why has it failed now?

I think the Japanese stock market is incorporating the effects on the nation’s economy of the retirement fiscal system. The Nikkei is pointing to the crisis that will hit every G-8 nation over the next two decades. A rising share of national output in each nation will, by existing law, be directed to support people who have left the work force and will not return until the checks stop coming or the money they represent collapses in value.

This week, an official with NEC, the huge Japanese computer maker, said that the economy is the worst in history. Well, that means his personal history and the history of NEC’s senior executives. NEC plans to lay off 2,500 Japanese workers and 1,500 outside the country. Japanese companies resist such cutbacks until they are bleeding to death. Lifetime employment has been a major mutual promise: employers to workers and workers to employers.

These laid-off workers must seek employment elsewhere, in a falling economy, in a cartelized economy that has few jobs for them. The tradition is lifetime employment. Those workers who nevertheless get fired must re-enter if different businesses. They cannot re-enter in similar positions because these positions are staffed by men in a lifetime employment track.

The Japanese stock market is being hit by falling profit prospects on the company side and increasing sales by retired workers on the ownership side. The sale of these assets will continue as an aging population moves into retirement. There is no reason to believe that Pareto’s 80-20 Law does not operate in Japan. I have repeatedly discussed the recent study that indicates that 80% of personally owned shares in the U.S. stock market are held by the top 20% of the population. 


In every country surveyed since 1897, the 80-20 rule prevails: 80% of the capital is owned by the top 20% of the population. This means that the assets owned by the other 80% are predominantly their labor. Anything that reduces their ability to sell their labor makes them poorer. The rich are less affected by this.

This means that most members of Japan’s aging population do not have sufficient savings to enable them to maintain their lifestyle after retirement. I single out Japan because their situation is more obvious and closer at hand than ours, but the same principle exists everywhere else. The 80-20 law guarantees it. There is no way that the investments made by the retirees can sustain them. They must rely on the government, and without exception, the G-8 governments face bankruptcy if they attempt to maintain the level of benefits that exists now.

The Japanese economy is about to get poorer, faster. Older workers have to leave the work force. This is necessary to make room for the younger workers. Their system is built on the principle of slow but steady advancement. Only the senior executives are allowed to remain on the job into old age. Anyone older than 55 who has not advanced into senior management is on the slow track, and he will be asked to retire. Generally, this will be by age 65, although some companies may go longer.

 Worldwide competition is putting pressure on all companies to extract greater productivity from workers. The cartelized economies are losing market share to aggressive companies from export-oriented cartelized nations. The smaller Asian countries that do not have large retirement/medical programs funded by the government are in a strong position to give Japan a run for its money. They have imitated the Japan of 1950: exports, exports, exports. They also have much younger populations.

Europe is in a similar situation: cartels (labor unions), aging populations, and huge welfare commitments. Europe’s output will fall. It is now moving into recession. Its welfare state is more advanced, especially its socialized medicine. They will begin to hit the demographic brick wall in this decade, beginning with Italy

. * * * * * * * * * * * ADVERTISEMENT * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 

The landing approach has begun. The flaps are down. A moderate slowdown has hit the U.S. economy. Investors are still optimistic. But corporate profits are way off. Has Alan Greenspan has engineered a soft landing for the formerly high-flying tech bubble? Or is there a lot more pain to come? According to one of the world’s leading economists, belief in the Fed’s high-octane ‘new paradigm’ propaganda is worse than blind faith…it can ruin you. Here’s what you need to do – right now – to prepare yourself for:

The Coming Economic Crisis  http://www.agora-inc.com/reports/RCLF/RealityCheck
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *


If we look at the spending of G-8 governments, three components loom largest: (1) education, K-college; (2) retirement; (3) subsidized medical care, especially for the aged. These expenditures are similar to what Western families have spent for thousands of years. Children are capital-absorbers, and so are old people. But the twentieth century has increased the percentage at both ends. The wage-earners in the middle must pay a far higher percentage of their income to those outside the work force than was true before 1900.

The producers in the middle used to be motivated by personal concerns. They supported their children own and their own parents. There were strong family ties. The twentieth century has broken these ties economically. Old parents are kept out of the homes of their children by Social Security payments and Medicare. Children are removed early for 8 hours a day, plus travel. When they go to college, they move out entirely. The State has replaced the traditional role of the family as the agency of education for the young and the agency of old age care. It has substituted taxes and bureaucratic management for personal family welfare.

This policy is about to be changed. The change will begin with spending on oldsters.

Old Americans live longer than ever: almost 20 years after the husband’s retirement. Widows live, on average, another 4 years. No annuity system on earth could sustain these people in such freedom and luxury as they now enjoy. No tax system can do it, either, as we are about to find out.

Tom Brokaw calls the generation of Americans born in 1915-25 the greatest generation. This generation went off to World War II. Those who survived that terrible foreign war, we can accurately call the luckiest generation in the history of man. They were kids during the Great Depression—either no or low economic responsibilities—and they have been the winners in the greatest chain letter scam in history: Social Security. They will be gone before the worst of the statistics hits them. The sons of this generation must pay the piper.

 The sons in Japan are about to begin paying. But they are used to this idea. Aging parents already come into a son’s home. Daughters-in-law are minor figures in the home until the son’s mother dies. Culturally and psychologically, Japanese families are more prepared for the New Economic World Order, which is really the traditional world order. Family ties are stronger in Japan. The hierarchy of generations is tighter. Unlike families, the State is prepared to default on its obligations. Political warfare is not considered the same as family warfare. A voting bloc of younger voters can mobilize to cut the benefits of an older bloc, and nobody outside the older bloc’s political agents shouts, “Shame!” Putting old people in general on tighter budgets is not the same as putting your own parents on a budget.

What keeps the system going is this dream, which is not possible to come true: “I paid into this system. I want my share. Keep it going until I’m gone.

” Too many Americans are praying this prayer:

Our Father, which art in Washington

Callowed is thy name.

Thy kingdom’s come; thy will is done From Hawaii to Bangor, Maine.

Give us this day our daily bread.

And forgive us our debts, as thou forgavest the S&Ls

And lead us not into deflation, But deliver us from trouble.

 For thine in the kingdom, and the power, and the glory.  Say when. YOUR MOST VALUABLE RESOURCE

For the 80% at the bottom of the wealth pyramid, and who are also in the bottom 80% of the demographic pyramid, their most valuable asset is their willingness and ability to stay in the job market. Most men don’t want to think about this, but it’s true.

At age 65, health insurance companies automatically drop us. Medicare takes over, like it or not. The only way out of the way out is to be employed full time by some organization that has group health insurance, and even in this case, some policies drop employees over age 65.

People are not thinking about finding employment that does not place them into dependence on a government that is going to stiff them. The lure of a pension is very great. Social Security is a supplement. It is very difficult psychologically to say, “I’m going to keep working.” If you have a medical condition that prevents your employment, you become dependent on the State early.

What most men need is a non-retirement plan. Forget about puttering around the house. Forget about sitting in the shade of the old apple tree. Mentally, the transition from retirement to work is a hard one to make. The two great American dreams are a paid-off home and a paid-in future. But you won’t be able to afford to maintain your paid-off home after the chain letter ends.

My guess is that the Social Security system will ratchet up the age of retirement. It will also adopt means-testing: “You’re rich; you’re not going to receive maximum benefits.” The same for Medicare. If you have assets, you won’t get all of what was promised to you. To evade the means test, aged parents will give their paid-off homes to those children who promise to take care of them. This was how old age planning worked for millennia. It will return before I reach my father’s age.

In the Old Testament, Abraham began the great patriarchy. We forget about the obscurity of his demise. When his son Isaac married Rebecca after his mother died, Abraham gave Isaac Sarah’s tent. Then he moved away, remarried, and had a bunch of children. (If I could discover the secret of his potency, my retirement income would be assured.) He made a transfer of assets early. He kept his independence as long as he could. He was buried by Isaac and Isaac’s half brother Ishmael (Genesis 25:9). No mention is made of what happened to his much younger widow, but presumably their children cared for her.

I think this is the ideal: independence for as long as possible, but a transfer of some of the assets before death, on the assumption that the heir will take responsibility for caring for the aged parents. Americans rarely talk with their children about money. This includes inheritance. Sons don’t know what they will receive, and parents don’t really know what care sons will provide. Everyone in the middle class assumes that Washington will cover the major expenses. No one, especially Congress, knows how long this assumption can go on. It must end, but no one plans for this. Nevertheless, the end is in sight, statistically speaking. Yet even in Japan, this statistical inevitability is not widely discussed in public.

How many people continue to upgrade their abilities through education in the broadest sense? Not many. I know a dentist who decided 40 years ago to attend at least one seminar a year to keep up, and not just in dentistry. He is very successful, and not just in dentistry. There are not many professionals like him.

The problem is, the resource of an inquiring mind and entrepreneurship can be dissipated. Most people (80%?) neglect it. They assume that something, somehow will assure them of the life that Brokaw’s great generation enjoyed. This is the dream of the chain letter, for which men never seem to lose faith. Middle-class people ridicule those poor people who buy lottery tickets, but they do not look closely at the statistical reality of the Social Security chain letter or the looming bankruptcy of Medicare. They assume, as Dickens’ Mr. Macawber assumed, that something will turn up.


Get a calculator. Then get out your yearly budget. Begin making plans. What income will you need, yearly, to sustain your lifestyle, beginning at age 65?

No one likes to do this, which is why the religion of the chain letter still has millions of worshippers. I beg you to do this exercise.

 Assume at least 3% price inflation per year. You will need this much after taxes just to stay even.

Assume that Medicare will cover, at best, only your major medical expenses—say, above $5,000 in any year. It will move to a high-deductible, means-tested system. This is the hardest part of the exercise for most people. You will be cut off from private health insurance, and Medicare will short-change you.

Now divide this annual expense by .05. This refers to 5% generated year by year from your investments. This is the capital you will need to sustain your lifestyle and not consume capital.

It’s too big, isn’t it?

Now what?

Forget about the Social Security chain letter. Forget about winning the lottery. Talk to your son. Make plans.

The best plan you can make, in all likelihood, is a job where you will not get fired. What you need is what the Japanese worker cannot get from his employer: true lifetime employment. The safest employer is you.

If you remain dependent on the good judgment and good will of others, you are at risk.

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