Interview with Moshe Gerstenhaber, author of the book
‘Have You Ever Seen A Retired Tiger In The Jungle?’
Editor: Governments current and cumulative deficits have made Sovereign Debt a global ‘laughing stock’. We live in dislocating times. Many of the giants of the banking and financial services industry have been obliged to seek urgent Government ‘life line’ in order to stay afloat. This includes Citibank, our investment banks, AIG and many other hallowed institutions all over the world. Furthermore, even the once mighty GM was obliged to seek chapter 11 protection. I congratulate you on writing a very interesting book on pensions, but, do you think the pension issue will attract the attention of your designated audience – when the ‘skies are literally caving in’?
MG: In a way the issue of the recent collapse of the banking, financial services and the Stock Exchange throughout the world and the issue of how do we finance the provision of a ‘living wage’ pension to every pensioner are connected.
Editor: In what way?
MG: I believe that we have an opportunity to implement a novel system for the long-term accumulation of pension savings which in the fullness of time will not only produce good pensions for all but also stabilise participating economies.
Editor: You have my full attention. Please explain.
MG: The economic model which the ‘Western’ world is employing at the moment has ‘proven’ itself to be very fragile. Our economic and financial systems are susceptible to frequent ‘boom and bust’ cycles. Each time we go through the ‘bust’ end of the cycle much of the ‘wealth’ which we thought to have created during the ‘boom’ years just disappears. Each time the Stock Exchange goes through the ‘bust’ experience a great deal of the growth of pension savings melts away too. Moreover, Government and Business Sector employers who still offer Defined Benefits Pensions find themselves exposed to substantial additional pension liabilities. My book is proposing a new economic paradigm. A detailed plan which, as stated earlier, will produce a good pension for all but at the same time also substantially reduce the frequency and volatility of economic cycles. A ‘shallower’ economic cycle will not have the same power to destroy value. Each time value is destroyed the individual and society also lose time and ambition. When it comes to the accumulation of pension values timing is crucial. To say to a pensioner who – on paper – has lost half of his capital that in 10 years time the ‘lost value’ will have been fully recovered is not of much solace. In 10 years time this individual may already be dead. A pensioner needs income in the present, not a vague promise in the future.
Editor: Is the pension situation so dire at present?
MG: The problem with the provision of a ‘living wage’ pension to very pensioner is quite complex. A Government Employee who expects to receive a lifelong pension of some 70 – 80% of Final Salary (sometimes even indexed to, say, the ‘cost of living’) will cost the taxpayer a ‘small fortune’ because average retirement is expected to last 20 – 30 years. In some sectors and in many European countries Private employers too are pressed by the trade unions or Government to commit to a Defined Benefits Pension Plan. A Defined Benefits Pension commitment for an employer is like signing a ‘blank cheque’. The employer has no idea how much each such undertaking is going to cost over the lifetime of the work force. The financial drain of expensive pensions upon the company will inevitably impact its ability to compete in the market place. We know for a fact that the generous ‘retirement and health benefits’ which the GM employees were granted were part of the problem at GM. Private Sector Employers are obliged to plough cash into their Pension Schemes (whether Defined Benefits or Defined Contribution Plans). Governments, on the other hand, fund their pension commitments from current tax money. Well, the more Governments (local and national) have to fork out to their employees on pensions the more the average taxpayer has to cough up in tax. Another aspect, which has a bearing on the discussion, is the fact that many private pension funds are invested in the equities of private sector companies. We seem to have created a classic lose-lose ‘viscous circle’ situation i.e. high Defined Benefits Pension contributions are sapping the energy of many companies, yet, the stock of the same companies (GM?) is used by large numbers of Pension Schemes for long term investments! This means that in order to grow the pension value of future pensioners we invest in the equity of companies which have themselves been weakened by the pension contributions which they too have to make. Does that sound to you like a smart concept?
Editor: Not really. But, are we seriously talking about retirement periods of 20 – 30 years on average?
MG: Definitely. In fact, I believe that within 20 – 30 years time life expectancy of 100 years will be fairly wide spread. In Switzerland already in 1990 twenty five percent of females lived to age 90 and 10 percent of males.
The pension paradigm which the ‘West’ has been using for the past 120 years was initiated by Otto von Bismarck in Germany. The retirement age was set at 70 years when the average life expectancy was below 50. A few years later the Germans reduced the retirement age to 65 years, still a very safe bet. It has remained 65 until some 20 years ago when employees were encouraged to retire younger. Can you imagine how much pension money an individual is going to collect if they were allowed to retire aged 50 and were to live to age 90? They may have worked for Government for say 30 years and will be able to draw a good pension for 40. This in not sound economics. This is pure folly. In many ways this is economic and social suicide.
The other side of the problem is that a large proportion of the people who do not work for the Public Sector are simply not covered by any pension plan. Most people either can’t allocate the monthly pension contributions needed or don’t want to. I personally believe that the traditional concept of saving for a pension when you are young is ‘counter-evolutionary’. When an individual is young they are mainly motivated to ‘procreate’ not to think about their decrepit old age. Most people in fact don’t feel they earn enough to be able to make, every single month, a meaningful contribution to their pension plan.
Another important aspect is timing. Like everything else in life the time when a pension plan is started is essential. It is practically impossible for most people to draw a lifelong pension from capital alone. It is essential for the pension contributions to have time to grow and compound. Unfortunately, when someone starts to accelerate their pension contributions age 50 their additional contributions have too little time for growth if they wish to retire age 65. In addition, neither the stock market nor the bond market offer adequate and reliable growth prospects.
Editor: Please explain the new pensions paradigm which you are proposing in your book.
MG: I have laid out my ideas by way of a program which contains 10 elements. I call my concept The Ten Pillars Program. The most important single aspect in the program is the pillar I named the ‘Government Grant At Birth’. In this Pillar it is proposed that every child born in a participating country (to parents who live formally there) will receive at birth a cash grant. The grant moneys will not go to the parents. The funds will be invested in the name of the baby with a new investment organisation which I call the Super Trust. The Super Trust will not invest in the Stock Exchange. The Super Trust will buy assets and companies and manage them directly for long term growth. The Super Trust will not be interested in high valuations – like the Stock Exchange. The Super Trust will be interested in cash flow and profits. In order to build a basic pension safety net for the individual the Super Trust needs to produce 5% p.a. net compounded growth throughout the life of the individual. The potential for value building is mind-boggling. For example: US Dollar 5000 invested at birth and growing at 5% p.a. net compounded growth will be worth US Dollar 150,000 age 70 (30 times growth). In fact, the US Dollar 5000 invested at birth will produce for the pensioner (no longer the baby) an US Dollar 11,000 p.a. pension for 20 years (age 70 – 90). This means that each dollar invested at birth pays dollar 2.2 each year for 20 years. The dollar invested at birth becomes US Dollar 44 in total (4400% growth). A Warren Buffett type of capital growth for all pensioners.
Editor: We all know the power of compounded growth. But, this is truly a very impressive outcome. But, most parents will not be able to invest US Dollar 1000 at the birth of each child, let alone commit US Dollar 5000.
MG: This is very true. Since my idea was that every child born in the participating country (whether from rich or poor family) would have a Personal Pension A/C opened for her at birth it was clear that the funding has to be provided externally and not by the family. The Ten Pillars Program proposes that a new tax be legislated. We call the tax the Special (Investment and Pensions) Levy. In the UK we are proposing that each male child will receive Pound Sterling 5000 (US Dollar 7500), each female child Pound Sterling 7500 (US Dollar 11,250) and that children from the poorest families (assumed to be 20% of those born every year) will receive an additional Pound Sterling 5000 (US Dollar 7500). The rationale for the females is that their average retirement years are probably 30% longer than the average male. The rationale for the children from the poorest families is that research results tell us that on average they are six times more likely to be poor when they reach age 30 than the children from professional families. This means they are much less likely to invest in their future pensions (and much more likely to become a cost burden to society).
The Special Levy will be raised (it is proposed) from a payment of Pound Sterling 176 p.a. (US Dollar 264) by every Household (the 30% poorest will be exempted) and Pound Sterling 100 p.a. (US Dollar 150) flat fee paid by the employer for each of their employees. The total cost to the Nation (UK) will be about 0.463% of GDP p.a. (current prices).
Editor: What about the other 8 Pillars?
MG: The other 8 Pillars include a Government First Job(s) Pension Subsidy to be provided only to the low paid employee. This Grant could be paid for up to 7 years. The Grant will vary according to the earnings of the individual and the Minimum Compulsory Pension Contributions made by both employer and employee. (One of the other Pillars also proposes legislating relatively low cost Compulsory Minimum Pension Contributions by both employer and employee (Pillar 4)). The maximum cost exposure to Government per individual under the First Job(s) Pension Subsidy (in the UK) is Pound Sterling 8400 over the 7 years (US Dollar 12,600). The estimated funding for this subsidy is already included in the Special Levy costing (as provided above).
One of the other Pillars (No. 8) proposes that Parents and Grandparents (especially grandparents) be encouraged (if they can afford it) to transfer some pension assets from their own pension arrangement to that of the child. The economics is very sound; with the grandparent the assets may double in value one more time. In the account of the grandchild they are expected to double 5 times to age 70 (an increase of 30 times in value) and grow some more during the projected 20 retirement years (44 times in all).
Editor: I am sure that our readers could pick up all the technical data from your website. I am certain they’ll want to revisit your Ten Pillars idea and the impressive growth in value being proposed.
We have also posted a 12-page summary. This will await your readers. In addition, your readers could download the whole book free of charge. However, I would like to tell you about MAXILIFE (Pillar No.10).
Editor: What is MAXILIFE? A new food supplement?
MG: A recipient of the US Congressional Medal of Science reacted by saying that he believed the MAXILIFE concept could become “the new evolutionary step for mankind”.
Editor: That is definitely intriguing. What do you think he had in mind?
MG: Darwin explained to us 150 years ago nature’s ‘rules’ for survival. We were told that to survive an individual animal has to compete for food and procreation opportunities with all the other members of its species that forage locally and with all the other species which share the same habitat. Over time (could even be millions of years) a specific species may gain an advantage through behavioural adaptation or genetic change (mutations) which allow it to surge ahead of its own ancestry. Human beings are a good example. Over millions of years and a substantial number of genetic changes a succession of animals evolved which finally led some 100,000 – 150,000 years ago to the birth of homo sapiens. It then took human beings over 90% of their existence (in terms of time) to discover (by adaptation) that through agriculture and animal husbandry they could settle down in a fertile location and develop a more sustainable life style. During the 10,000 years which have elapsed from the Stone Age to Current Age mankind has made vast and ever accelerating progress. They say that without agriculture and animal husbandry (and mobile phones?) the world would probably still be populated by not more than 500,00 people. At present world population is more like 7 billion people (14,000 times more people!) and growing fast.
The combination of the increasing world population, the impressive speed with which technology is producing new products (and bringing obsolescence and ‘death’ to others) and the positive progress of the developing economies (China, India, others) is putting enormous pressure on the ability of the average individual to find his/her place in the world of employment. It is becoming very clear that our modern life and the speed of external change constitute a great challenge to the majority of the population, especially in the developed economies. To help the individual better cope with the opportunities and challenges of the 21st century, we are offering MAXILIFE.
In short, MAXILIFE (which is yet to be developed) is a software product which will be available cost free to every individual – for life. The idea is that every individual will establish at the heart of MAXILIFE his/her own ‘secret garden’. MAXILIFE will be the one friend who knows everything but tells nothing. MAXILIFE will accompany each participating individual for life. MAXILIFE will help the individual to maximise their life potential by harvesting the opportunity to update and upgrade skills, by being able to identify excellent employment opportunities and by being able to join networks of likeminded individuals for the pursuit of social, business or charitable experience. MAXILIFE will lend a helping hand to serendipity. ‘Chance’ will not disappear altogether from our life but will not be allowed to dominate it.
In the past 5 years or so a number of products have been developed like Google and the social networks - which in some ways resemble the concept behind MAXILIFE. However, MAXILIFE is still different. It’s not only that MAXILIFE will be offered cost free – neither will it bombard the individual with indiscriminate advertising. The main idea is that MAXILIFE will work for the individual and the individual alone. MAXILIFE will continue to accumulate data about the individual and his/her preferences. At some point in their life the individual will readily admit that MAXILIFE understands his/her innermost needs/abilities much better than the individual himself/herself. Darwin spoke about an evolutionary process which combines the physical and the behavioural. MAXILIFE, too, will provide both but will not need thousands of years to become effective.
The implementation of the Ten Pillars Program in its entirety has the potential to help humanity capitalise on the technological evolution of our existence and harness it to establish a successful and sustainable society. Something we are failing to do at the moment.
Editor: It all sounds very interesting. Now it is up to the politicians to lift their heads a bit higher and seek to harness the future for the benefit of the citizenship. Thank you for sharing the Ten Pillars Program, especially MAXILIFE, with me and our readers. Good luck.
