(Ed note: This article is an extract from The Money for Life Letter, 4th July 2013.)
Philio of Alexandra, a blogger, coined the term Reynold’s Law: ‘Subsidizing the markers of status doesn’t produce the character traits that result in that status; it undermines them.’ That doesn’t make much sense unless you look at the context the law was created in.
Another blogger, Glenn Reynolds, wrote the piece which led to the discovery of Reynold’s Law:
‘The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits – self-discipline, the ability to defer gratification, etc. – that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.’
The result of undermining these traits is an economic crisis.
In America, the kind of policy Reynold’s Law applies to was directed at housing. Owning a house was the American Dream. But the government policies designed to make the American Dream easier to achieve simply drove people into owning houses even though they never had the underlying traits you need to own a house.
They didn’t have savings, an income or stability in their lives. In the end, Reynold’s Law caught up with this policy and the sub-prime crisis began. People discovered that all those borrowers couldn’t repay their loans, and the financial system failed.
Before we get to applying Reynold’s Law to your retirement, here’s another example of it in action.
In Europe, the welfare state funded lifestyles people couldn’t have earned for themselves. Greece is the poster child of this. Public servants are paid bonuses if they arrive to work on time, and receive payment for two extra fictional months each year.
On the island of Zakynthos, hundreds of people declared themselves blind to receive welfare cheques while some work as Taxi drivers at the same time. But this economic mirage is now over and the Greek government can’t pay what it promised.
The trouble with these policies is that they encourage exactly the opposite kind of behaviour you need to reach the goal the policy is advocating. To encourage the American Dream, you need to encourage savings and a steady job.
But economic policies instead did the opposite – you needed neither to own a home. People who would’ve saved and worked no longer needed to. And that worsened the problem. The same goes for Greece, where the best and the brightest went to work for the lavish government sector and made their living off those who paid taxes.
Now that you understand how Reynold’s Law works, let’s apply it to your life. But not your retirement just yet.
When you flew the nest and set out on your own, a whole new set of traits were required. Budgeting, saving, planning ahead, looking for job opportunities, making a good impression and competing with your peers would’ve been the new skills you had to learn.
Reynold’s Law was in operation back then too. Those who learned these new skills fast, or took the time to practice them before stepping into the ‘real world’, had an edge. Those who stuck to the shelter of their family, school and friendships were naive and learned lessons the hard way when they really mattered.
Pocket money is a great example. Learning to budget by receiving a fixed income would’ve taught you the price of spending all your money the day you get it.
Back then, your parents would have had the biggest say over the application of Reynold’s Law. If they protected and subsidised you in the wrong ways, the traits you developed would’ve betrayed you in the real world. If they carefully allowed and encouraged you to learn some of life’s lessons before they had to be applied, you would have had a head start in life.
Now you can’t help who your parents were. So Reynold’s Law was either a painful or a pleasant experience to discover back then. But retirement is your opportunity to make the most of Reynold’s Law on your own terms. And, quite frankly, I hope you do.
You see, the government of Australia, like just about all other western governments, has subsidised retirement. But that has undermined the traits you need to secure that retirement. Now, the fact that you’re a subscriber to The Money for Life Letter is a big hint that you are aware of this and already trying to resist. But it’s still worth making the point in a way that will make you even more aware.
But what’s the need for this awareness if the government will take care of you anyway? Well, that emotion didn’t work out well for the welfare states of the past. Greece, Spain, Portugal and many cities in America are all struggling with their pension burdens.
The solution is always the same. In the 90s, Scandinavian countries went through a similar crisis as Southern Europe is going through today. Their welfare states had become so bloated, the country suffered. They reformed and pensions were cut and privatised.
Now I don’t know when such a crisis will happen in Australia. We’re much better off than Europe and America, for now, and have a very different retirement savings system with less government control.
But I am sure that relying on anyone but yourself for your retirement is dangerous, not just because those promises might not be kept, but because you’ll undermine all the traits you need to have a prosperous retirement no matter what.
So here’s what I suggest you do: Practice and perfect the traits that will serve you well during retirement before they really matter. Break Reynold’s Law.
If you don’t, subsidies from the government will slowly teach you bad traits and habits like indifference and ignorance. Of course, if you’re already retired, it’s never too late to realise what has served you well and what you need to change.
Well, it’s much easier to stay in work, or to transfer to less demanding work, than it is to rejoin the workforce. So knowing when to retire is the first trait. It’s pretty similar to knowing when you should give up on education and try and begin earning a living. Making the move too early or too late has costs.
Health problems in retirement can be a dangerous drain on your finances. And so avoiding them where you can is a major financial benefit. The traits you need for this are quite obvious – being health conscious about what you eat, drink and do is something you won’t regret. Unfortunately, you will never find out how many illnesses you avoided by staying healthy. But you’ll probably enjoy a longer happier retirement either way.
There are hundreds of ways to reduce your spending bit by bit without giving up on a lavish life. And in retirement, you have the time to figure them out. But it takes practice. There are people who give up their day jobs to compete in radio and online competitions, trivia nights, and other games.
Many people drastically cut their cost of living by making the most out of all the coupons, discounts and ‘freebies’ they can find. If these people can do it during the prime of their lives, when they should be earning and saving for retirement, you can do it during retirement.
You’ve been paying taxes all your working life. Retirement is a great time to recover some of that money you earned. At least that’s the way I see it. If Julia Gillard gets her enormous pension and a driver paid for by your hard work, why shouldn’t you get some cash back from the government to pay for the good life? Making the most out of government benefits, tax concessions and loopholes should be standard procedure for retirees.
Remember, the point of Reynold’s Law is that you shouldn’t be lulled into a poor set of traits by the government. Don’t rely on the pension, your Superannuation or anyone else when preparing for your golden years. Instead, you should begin practicing those traits which you can use to improve your resilience. Whether you need them or not, they’ll improve your retirement.
Nick Hubble+
Editor, The Money for Life Letter
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