Things That Make you Go Hmmm....

Things that make you go Hmmmmmmnnn!

by Gavin Hamilton - Professionals Star Real Estate Ltd - Licensed Real Estate Agents  - view Gavin's profile here


John Maudlin, the consistently accurate financial commentator from the US, wrote a very provoking article arguing that the social security system there was a Ponzi scheme in every sense. (I believe NZ has striking similarities and is in fact much the same.)  Ponzi created a financial scheme whereby investment was sought from party A with the promise of over market returns. Money was collected from party B with the same promise but the money taken was used in part to pay returns to party A. Party C offered the same promises provided money used in part to pay returns to parties A&B and so on. The scheme must inevitably collapse as the requirement for new money exceeds the supply. Ponzi schemes are illegal, total failure is the only possible outcome and the failures are usually catastrophic – a la Bernie Madoff.

Previously I referred to Bismark and the creation of government funded retirement by means of universal pensions after age 65, beyond average life expectancy.  I have been able to access US data via John Maudlin  showing life expectancies in the US from 1908at  51.1 yrs. (33.8 years for a Black Male!) to 2003 at 77.5 yrs.; essentially our life expectancy increases by one year in each 4 year period.

Have a look at the graph and notice the rate of increase in the gap between life expectancy and ‘retirement age’.


Retirees today (PartyA) are living off the proceeds of their contributions, contributions from us (Party B), our children (party C) and maybe from our grandchildren. Problem is that when we retire the children of our grandchildren may be unborn and so in no position to contribute. Who will pay?  Kaboom!
Just a little scary.

The Aussies have been diligent savers and contributors to Super funds for decades and did build huge cash reserves toward the funding of retirement costs, the bulk of these funds have been placed in shares, managed funds etc. and unfortunately have been severely impacted lately. A recent visit to the Gold coast was a real eye opener with shops and businesses closed, long term retirees forced back to work and some even compelled to sell their homes to make ends meet. The Aus. super scheme is means tested so more of the population will qualify increasing the national; expense.

The cost to the country is unsustainable, probably would mimic the graph above. As has started to happen in the UK the government here will have no option but to modify NZ entitlements; I see an increase in the qualifying age from 65 to 70 and then to 75 as costs blow out and the population protests the increases in taxation needed for the funding. – Add the cost of Carbon tax and health to the costs of the aged and you start to see a problem. John Maudlin was kind enough to draw attention to the ‘Catastrophic Success” of the advances in medicine that see so many of the causes of death put on hold, simply we cannot be relied on to die on time as budgeted and planned for.

It becomes apparent that reliance on any form of government funded pension is a risky business; total reliance is just silly – especially if you are 45ish. The need to self fund is absolute.

When the share market goes Phut!, Gold softens by $100’s overnight, even if the value of your little investor rental falls it seems that rental values have held firm and/or increased without a hiccup during the entire Global Financial Crisis. Residential rental investors holding good family homes in good neighbourhoods have been immune to the storm going on about them, I see no reason for that situation to change; particularly as investors leave the market and rentals become ever shorter. Of course it is my pleasure to deliver to you such a beast , it does take skill and experience to hunt one down.

Rely on more storms, some almost perfect. Unbelievably in the US there is a govt. backed scheme that funds buyers into homes otherwise unsellable (must be outside of city limits) with 100% funding! 24 billion US$ ex the Dept. of Agriculture being used to buy new little homes when there is a colossal inventory of unsold existing homes. Go figure, the more things change etc. but you would have thought they may have learnt?
As always…………….