Living on Half Pay
by Jim Davies, 12/14/2011
We all have to, of course, because when you add it all up taxes at the three levels of government come to about 50% of what we earn; but it struck me while reading some Victorian novels not long ago that people of that era who wanted to make something of their lives did the same thing voluntarily. They followed one simple precept of money management: each lived on half his income, and invested the rest in safe places that yielded 3% or 4% a year. Taxes totalled less than 10% then, so that was quite feasible.
I asked my PC how it might work out now. Earn $6,000 a month, say, but live on $3,000 and put aside the other $3,000 to earn 3.5% a year, compounded monthly. Inflation, remember, was zero or slightly negative in the 19th Century, so suppose that still applied - hence 3.5% woud be a real return, not just nominal. The result is extraordinary: after 20 years the nest egg is yielding $3,000 a month, at which point one could retire and live at the same, accustomed standard indefinitely; or after 32 years it yields a full $6,000 a month, enabling the saver to live the rest of his life at the doubled standard to which his earning ability has entitled him. That simple formula - live on half one's earnings, invest the rest - permits comfortable retirement in one's 40s or early 50s! More typically one would earn less at age 20 and more at age 40, so the math gets trickier - but assume a level earnings rate for simplicity and check it out.
This is a perfectly adequate principle for prosperity, and brings the enormously important incidental benefit that millions of individuals are investing money where they think it will earn a good, safe return. That is the other side of the savings coin; the saver saves, but the recipient of saved money employs it, to produce more with greater efficiency or to devise new goodies altogether; and the investing decisions are made not by politicians who may never have done a day's labor in their lives in the real world, and who dance to the tunes of big campaign contributors, but by actual participants in that real world. It's capitalism at work. Everybody wins. What happened to spoil it?
First, government devised a way to convert perfectly good money into stuff they could create at will, and which therefore had a purchasing power that varied with time - always, downwards. That meant that $1 today was not the same as $1 twenty or thirty-two years from now, and so the whole of the calculation above was skewed beyond the ability of plain mortals to make; indeed, angels too would have a hard time, if they existed, because governments don't decide how much money to create out of thin air until the latest crisis they created comes back to bite them. Retirement planning becomes a crap shoot.
Second, government fulfilled its perfectly natural function by offering voters what they wanted, and when voters woke up, they recognized that voting for a pension (and other goodies) is a whole lot easier than working for one. "Social Security" arrived first in Bismarck's Germany, then in Britain (so ending the classical meaning of the political term "liberal"), and after government had created a Great Depression to make voters desperate, even in FDR's America. Whence, therefore, the need to save and plan individually, as was the thrifty Victorian habit? - gone, wiped out by the illusion, so well expressed by Bastiat half a century earlier: "Government is that great fiction by which everyone tries to live at the expense of everyone else."
Third, what individuals no longer needed to save, government stole as taxes to pay for the goodies voters had ordered. So saving became for most folk impossible as well as unnecessary.
Fourth comes one delivered result: a population that must work until 62 or more and rising, in order to qualify for a government pension that typically meets one third of what they earned when working... if they're lucky. Let's repeat that:
- and each, remember, is derived from approximately the same 50% of earnings.
Fifth comes the other delivered result; as recipients of the money forcibly "saved", government actually spends it on what it wants, and while that includes "social security" to keep the plebs quiet, it also includes constructing a massive indoctrination scheme to train youngsters not to make this kind of analysis, and a wide range of exciting boy-toys like carriers and fighter jets and drones, with which the better to kill those who get in their way. Such is "investment" when government chooses where the money goes, and it has led to wars in the last century more horrific than any in all previous human history.
Now, it might be argued that the ideal is not a zero government society, but one constrained to a "classical liberal" scope such as prevailed in the highly productive 19th Century. Any who wish to make that case can go ahead and try. They will have to explain how to limit it so as to prevent it morphing into the full socialism of the 20th and the fascism of the 21st. I can see no such limiting mechanism, and so conclude that outright abolition is the only feasible solution.
In the coming free society, the fast rise in prosperity that sprang from the thrift habits of the 19th Century will appear again when they are back in place, only much more so. I can hardly wait.