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

Income vs Wealth

Many people tend to confuse income and wealth. We automatically assume that rich people have high incomes or, more frequently, that people with high incomes are rich. This may be true but, while working as a mortgage loan underwriter in a savings and loan years ago I frequently reviewed loan applications from people with rather high incomes but little or nothing in the way of net assets. Oh, they often had a number of items listed in the asset column of their loan application – expensive cars, boats, etc. however, in the liability column to the right of the asset column were debts that more than equaled the stated value of the assets. While the incomes of many of these people enabled most of them to obtain the mortgage they were applying for to purchase their dream home, they could hardly be considered rich or wealthy.

Income is the money one receives from their work (this is the most common source of income) or from owning a business, property one can rent or from other income producing investments. Wealth, on the other hand, is the ownership of income producing assets. All wealth originates as saved income – a person either saves and invests a part of their income or they inherit assets from someone who saved and invested their income. Most truly wealthy people will use the income produced by their assets but generally will not sell their assets and spend the proceeds on consumption as this will reduce their wealth and the income it can produce.

I mentioned above that a high income does not necessarily mean that a person is wealthy. Ironically, a large number of the self-made millionaires do not have high incomes. Instead they accumulate their wealth over time by regular savings (and prudent investment of that savings) or by starting a business and plowing much of the profit back into the business each year to grow the business. While some people with high incomes do save and invest regularly and build that savings into true wealth, many people with very high incomes – sports figures, movie stars, some entrepreneurs whose businesses take off and makes them a millionaire over night as well as most people who hit it big by winning a lottery frequently end up spending their money as fast as they acquire it and end up broke when they lose the job that is producing the income for them.

Just as in the old fable about the hare and the tortoise, it is usually the person who steadily saves and invests money over time who retires wealthy while the person who begins the race by being first out of the gate with a high paying job, ends up with little or nothing to show for their efforts in the future.

Economizing on Groceries

One of the ways to measure a society's economic progress is by comparing the percent of income spent on food now with that spent by our ancestors. Our prehistoric ancestors devoted most of their waking hours to seeking food. As society has advanced the time and money spent acquiring food has steadily decreased. When I was in college the it the average household spent about 25% of their income on food. Today that average has decreased considerably.

Despite the fact that the portion of income spent on food is decreasing, most of us spend considerably more for food than is necessary to sustain life. But then most of us seek more from life than just keeping ourselves alive. The fact that we do have the luxury of choosing food on the basis of what we enjoy eating rather than struggling to get what we can in order to keep ourselves going is a tribute to the economic progress which has allowed us to fewer and fewer personal resources to the acquisition to this basic ingredient of life. I can still remember my macro economics professor in graduate school who cited a study which claimed the average person in the 1970s could live on $75 worth of food per year. As we looked on in astonishment, he made a face and said "Of course the diet consists of mostly sauerkraut and beans!"

Given that the portion of our income spent on food is decreasing (and this is especially true for people whose incomes are rising) and that much of what we spend on food is discretionary, the household grocery budget is a place where cuts can often be made when money is tight or we just want more funds for other things. climate

The obvious first place to start is to look at food consumption in the household seeking to first identify and eliminate waste. Next, check for substitutes. If you can't tell the difference between the brand name soda, cereal, etc. and the generic equivalent then buy the generic. However, despite the fact that the taste may be the same, if you get more pleasure from drinking soda from a red Coca Cola can than the brown store brand can then, by all means, continue to purchase the Coca Cola. The goal here is to improve your life style by spending more wisely not build cash by sacrificing and lowering your standard of living. Similarly, if you shop at the local Mom and Pop grocery store but can purchase the same products at a lower cost at the Wal Mart down the street go to the Wal Mart. Again, only make this change if your level of satisfaction remains the same. If you enjoy shopping at the Mom and Pop store then continue shopping there.

However, what if you cannot find waste or substitutes? Savings are still possible by managing your spending on groceries. By making some alterations in the way you shop, you can reduce spending on groceries without changing what you buy or where you buy. The suggestions below apply to both those who are unable to find savings through elimination of waste or by making substitutions as well to to those who have achieved savings through one or both of the above.

Below are six suggestions for achieving savings simply by altering your shopping habits:

1 Make a list before going to the store. This can be very elaborate or very simple. At a minimum you should have a general idea as to what you will be eating during the next week and then check the pantry and refrigerator to see how much you already have. Your list will then contain the items that you need but don't have. The more elaborate method would be to plan each meal and then list what you need to purchase to serve those meals. Once in the store stick to your list and limit or, better still, avoid impulse buying.

2 Don't shop when you are hungry. When you are hungry you have a tendency to purchase what looks good. The end result is you use a good portion of your budget for the week's food on a couple of days worth of meals. In conjunction with this try to do all of your grocery shopping in one trip as this will give you both better control over the amount you spend and limit the number of times you are in a store and subject to the temptation of impulse buying.

3 Set a spending target, then keep track of the price of each item you place in your cart and try to keep the final total close to your target. Again, if you do all of your shopping once a week it will be relatively easy to determine how much spend in an average week on groceries. Once you determine a realistic average try to make that your spending target so as to maintain the average.

4 Take advantage of sales. Most cities have multiple stores and they are very competitive. Check the flyer's you receive in your newspaper or in the mail from each store to see who has the best deals. The time to review these flyer's is when you are making up your shopping list. If practical, divide your shopping between a couple of stores, buying the items on your list from the store with the best price. But, be realistic and don't chase all over town buying an item here and and item there just to save five or ten cents. What you spend on time and gas will be more than what you will save on food.

5 Buy frequently used, non-perishable items in bulk or on sale. Things like paper towels, toilet paper, flour, sugar, etc. often offer significant savings per unit when purchased in larger sizes. So long as you use these items regularly and have room to store them, it makes sense to take advantage of the savings. These items are also often either on sale or have coupons which further reduce your final cost. Warehouse stores, like Costco and Sam's Club, often carry these items in bulk at significant price reductions.

6 Sign up for and use a grocery store savers card. Many stores have done away with paper coupons and offer the same sale discounts when the shopping card is presented. Sure, the store will be tracking what you purchase. But, what is so secret about what you are buying? The store's purpose in collecting this information is to enable them to determine what items their customers prefer the most and stock their shelves accordingly. In some places stores also use the information to send targeted coupon mailings to customers. This not only saves the store money on marketing but saves you, the customer, from having to leaf through a 20-page newspaper insert trying to find the two or three coupons for items that you want.