Tuesday, December 11, 2012

Capital Stock and Retiree Income

Social Security and pensions are a growing concern for many people these days.  Retired people and those nearing retirement are especially concerned about these issues as they affect such people directly.

Most people look upon this crisis as a financial or money issue and it is true that a growing lack of money available in retirement funds is the main indicator that a problem is at hand.

However, money itself is merely the means by which we measure the ability of the government or private employer to pay the promised retirement benefits.
No one can survive without access to the food, clothing and shelter needed to sustain life.  And, most want more than the basic necessities of life.

There are only two ways to obtain necessities and desired extras and that is to either work and produce these things or rely on the labor of others.   However, relaying on the labor of others assumes that the others in question are both able to produce more than they need and are willing to share the surplus they produce.

The ability of working people to support themselves plus those who are unable to work is dependent upon the availability of capital, developed land, knowledge and organization accumulated through past savings and investment. 

These tools make workers more productive and better able to produce sufficient quantities of goods and services to meet both their own needs and desires as well as the needs and desires of those not working.

Investment requires that some production be diverted from production of consumption goods and devoted to producing the capital goods needed to both replace capital stock that is wearing out due to use as well as creating the additional capital goods needed to keep the economy growing and expanding.
Savings requires sacrifice.  Sacrifice in the form of choosing to forgo consuming a portion of one’s income now by either setting that portion aside for a future emergency or investing it in tools that will enable them to produce more in the future.

In times past a farmer could increase his wealth by a combination of working extra hours clearing new fields for planting and then he and his family tightening their belts and saving and extra portion of the current year’s crop as seed to plant in the new fields next year.

Then, instead of enjoying all of the new, larger crop, some could be sold or bartered in exchange for better equipment and/or draft animals to enable him to produce more in the same amount of time.

Modern urban workers do the same by setting aside money out of current income for emergencies and as savings for retirement.  

This savings takes the form of investments in income producing assets such as bank accounts, stocks, bonds, real estate, a business, etc.  Unless the worker owns a business in which he is investing in and growing, the savings is usually assigned to organizations or professionals who do the actual investing on behalf of the worker.

It doesn’t matter whether the worker is a famer or small business person investing in their farm or business or simply one who places their savings with professional investors.  The result is the same, namely resources going into the production of tools to enable workers as a whole to produce more in the same amount of time.

Continuing investment is needed for two reasons.

First, a certain level of current investment is continually needed to replace equipment that wears out and is no longer operational.

Second as the population increases or, as is happening in many nations, ages and the aging workers retire, existing workers have to produce more simply to provide for themselves and the young, old and infirm who cannot work and produce. 

While older retired workers are still consuming but no longer working and producing the legacy of productive capital produced from their savings leaves the new generation of workers with the ability to produce and support both themselves and the retirees.

Next:  Why Social Security and Pensions are in Trouble

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