Tripods are stable.
Photo: Eriger. Source: Pixabay
They allow us to keep things steady. Their three legs lean upon each other making the entire structure more stable than any one leg could be. We use tripods in photography, weapons, surveying, and for offshore wind turbines – anywhere we don’t want things shifting around.
Tripods are often used as metaphors, as well, for any area where we need constancy. Our military depends on a nuclear triad: missiles, bombers, and submarines. English teachers use grammar, literature, and composition to teach students how to use our language. Ancient ideas of investment diversification rested on the three pillars of land, currency, and business. And our retirement triad rests upon the three legs of government support via Social Security, corporate support via pensions, and personal support: our own savings.
These three parts of our personal financial picture come down to prudence: personal prudence via savings, corporate prudence in pension plans, and government prudence in its entitlement programs. But we’re not very prudent people. The personal savings rate is around 5%, and that seems about right. It seems that about 5% of people are ready for retirement. Corporate prudence is penalized, both by the IRS and by shareholders. Companies that set too much aside for their pension plans can’t deduct those excess contributions. And government prudence? Our entitlement programs never seem to be adequately funded.
Source: St. Louis Fed
But modern retirement is a modern creation, facilitated by the demographic dividend of the baby boom. During the ‘50s and ‘60s, it was easier for a smaller retirement cohort to receive transfer payments from a large, young workforce. Now, retiring boomers are putting more stress on the system, as the ratio of workers to retirees declines from 3:1 to 2:1.
Source: Social Security Administration
An older model of retirement depended on three legs too, but they were different: work (at a slower pace), savings, and children. A slower pace of work isn’t necessarily a bad thing. Work provides social connections as well as income, and gives people a sense of purpose. Agrarian societies depend on grandparents to mind the children while the adults are in the fields. Children can be an issue: some are helpful, some aren’t. We can look at close social communities as proxies for families – although in a culture that prizes independence and individualism, it’s hard to see what will keep younger folks connected.
Savings are part of both the modern and ancient retirement tripods. If one portion is weak, the others have to make up for it – but only to a degree. Tripods are designed to be stable – but only if all the legs contribute.
Douglas R. Tengdin, CFA