Imagine if Centrelink sent your children a bill to pay for part of your pension. That’s what’s happening to many rather surprised Germans whose parents failed to prepare for retirement.
In Germany – my country of birth – if the pension doesn’t cover the cost of living for elderly people, they can request for the welfare state to send their children part of the bill for the additional costs. And, thanks to a recent ruling of the Bundesgerichtshof, Germany’s high court, even parents who have practically disowned their children can still make the request.
What does that have to do with you? Well, the disastrous effects that declining demographics will have on financial and property markets are probably the biggest risk to your retirement finances. This is an issue that I often cover in my retirement-focussed newsletter, The Money for Life Letter. But troubled investments aren’t the only way demographics will affect you.
Government policy is going to come up with all sorts of odd ‘solutions’ to the problem of an ageing population. To get a taste of what’s to come, let’s take a closer look at Germany.
Germans practically invented the welfare state back in the 1880s. But German demographics today are particularly bad. A high level of immigration is causing social strife. There are state schools where German is practically a second language.
The lack of government support and the cost of aged care, thanks largely to horrendous government regulation, forces many cash strapped working age Germans to send their aged parents to Poland for cheaper care. It’s an incredibly depressing scenario, and utterly bewildering for many of the elderly who find themselves deported to another country. But it’s an increasingly popular solution to tough times.
With the requirement of supporting your parents in retirement legally affirmed, Germany’s working population is in for a rough time. The blogger Martin Armstrong declared the high court ruling ‘the end of the social state‘. Quite frankly, he misunderstood the ruling. The law is nothing new. The ruling only clarified the situation for parents and children who had fallen out.
But he has a point. The working populations of the future will not be able to support an ageing population, laws or not. In parts of Asia, parents have many children to ensure their retirement finances. In the West, the government is held responsible. But the same maths applies. You need several people of working age to support a single retiree. Whether it’s by taxes and welfare, or by buying up the investments that retirees sell. Either way, the funds for retirement must come from somewhere.
Worse still, the increased burden has another demographic effect. As Japan is discovering, the younger generation is struggling to support its own children and many are giving up on a family. Surveys report that many Japanese men have no interest in relationships. That means the demographic crisis will be even worse in the future.
The more I research this topic, the more worried I become. There is a real risk of a demographic divide occurring as the younger generations give up on supporting the older ones. Simply accumulating assets to sell isn’t enough of a solution. The young won’t buy them off you for a decent price.
I’ll be presenting my solution to the problem at our upcoming conference. If you haven’t already, you can register here. But fair warning, my solution certainly won’t be popular.
Nick Hubble+
Editor, The Money for Life Letter
Ed note: The above article is an edited extract for The Money for Life Letter.