Will Capitalism Save Or Destroy Your Retirement?

Daniel R. Amerman, CFA


Is capitalism the greatest threat to the financial viability of state and local governments, major corporations and the retirement dreams of tens of millions of investors around the world? Or is capitalism the only force that can save pensions, governments and individuals? 

Capitalism is often simplistically portrayed as a beneficial tide that “lifts all boats” when it comes to long term investment. In this short article we will take a look at a more complex capitalism, an amoral storm of sorts, that sinks as many boats as it lifts. For individual investors, understanding the crucial differences between these views of capitalism could very well determine the difference between a prosperous retirement, and decades of unnecessary impoverishment as the result of simplistic misunderstandings of how capitalism actually works.

Capitalism and Retirement


Did you ever wonder about where the real wealth is going to come from to fund all of our retirements? To pay for the cashing out of all those IRAs, Keoghs and all the investment portfolios upon which our pensions depend?

In theory, the answer is pretty clear. We save for retirement, our savings provide monies for companies and the whole economy to grow, and in return, we get our ownership share of a larger economy in our golden years. Sounds great! But, is that really how it’s going to work? 

A Powerful But Indifferent Force Of Destruction

I’ll start by saying that I think capitalism is one of the most powerful forces in the history of mankind, and it has played a key role in why you’re able to read articles from the Internet on your computer, instead of being a poor, subsistence farmer scratching out an impoverished lifestyle. That said, I think that it needs to be clearly understood that capitalism is not something to be worshipped, but rather is a tool with its uses.

Call it a power tool because of the extraordinary impact it has had on us all. Now, as an analogy, a power saw is indifferent about whether you build a masterpiece with it, or whether it takes your hand off. Capitalism is a tool that is completely indifferent as to whether it makes a particular individual rich, lifts the standard of living for an entire nation - or destroys every shred of financial security previously enjoyed by millions of people. So the key concept is tool usage, which requires tool understanding.

A popular way of explaining how capitalism works, is that it is the process of creative destruction. The key word there is destruction: it rewards the efficient, and destroys the inefficient. Keeping it simple, let’s say we have six companies in ferocious competition for sales and products. One company finds a way to build products cheaper. Another company finds a way to build better products for the same price. Another company comes up with a whole new product altogether that better serves some consumers needs. 

The other three companies build overpriced products of lesser quality that no longer serve consumer needs. In other words, they are inefficient, and are driven out business, while the three efficient and innovative companies prosper.

The efficient are rewarded handsomely. The inefficient are ruthlessly destroyed. Society as a whole gets more and better goods at lower costs. That is the heart of capitalism.

Retirement Dreams

OK, that was a very basic review of capitalism; now let’s talk about our retirements. I’ll start by sharing with you my vision of retirement. 

I want to be able live in a comfortable house, enjoy good meals, travel, and at least occasionally, enjoy some of the finer things in life. And I don’t want to have to work anymore. In other words, I want to be able to consume without producing.

Now what is consuming without producing? It equals inefficiency. Pretty much pure inefficiency. That’s right, from a societal perspective, my retirement hope and dream is to become remarkably inefficient. Or to at least to have that option if I need it, because I can’t work anymore due to health reasons. 

What makes my desire for inefficiency more interesting, is that I’m one of about 78 million Baby Boomers in the US, and about four million of us a year (on average) are hoping to become very inefficient over the next 19 years.

Historic Inefficiencies

Now, let me suggest to you that expensive promises to 78 million Boomers represent one of the largest inefficiencies in the financial history of mankind. 

Let me also suggest that every company with defined benefits promised to its pensioners is an inefficiency. 

Let me suggest that every company with health care benefits promised to retired workers is an inefficiency.

Let me suggest that when future wealth is created, it will be much more profitable for those talented individuals involved, to develop new products and new technologies through new companies that don’t have to pay most of the cash, and most of the profits, to millions of legacy investors who invested their own cash decades before. Cash that was spent long ago. 

Indeed, let me suggest that taking market share and profits from legacy corporations that are burdened with retiree pension and health care inefficiencies, as well as with retiree shareholders and retiree bondholders, will be one of the most profitable business strategies of the coming decades. For the destruction of the inefficient is the very basis of capitalism.

Let me finally suggest that it is entirely possible that we may be entering a generation long bear market with our current equities and corporate bonds, and that this is entirely compatible with a generation long bull market in new equities, as well as the equities of companies that used to have Boomer inefficiencies but don’t any more, because the bankruptcy courts have cleared out the legacy shareholders and bondholders, while slashing the amounts that need to be paid to retirees.

The bottom line is that whatever companies are not dragged down by Boomer pensions, Boomer health care plans, and Boomer shareholders and bondholders will be at an enormous competitive advantage. And those people who recognize and exploit that differential in the upcoming years are going to find arbitrage opportunities in numerous ways, you can count on that. Because this process of breaking impossible promises is going to be creating huge amounts of new wealth even as it destroys even more old paper wealth.

Not Just Theory

It isn’t just theory that anytime you have too many retirees with too good of a deal, you’ve eventually got a company in trouble. 

Look at the auto industry. 

Look at the airline industry. 

Look at the state of California and the massive crisis with their pensions, where a whole lot of retirees are seeking the simple justice of getting what was promised to them, so that they can enjoy a modest, secure standard of living in retirement. Such reasonable expectations – but so inefficient to meet.

This process is only just getting started, and will be building every year, even as more Boomers retire. 

What Is The Correct Answer?

So what’s the correct answer to the question posed at the start of this article? Will capitalism (A) save your retirement, or (B) destroy your retirement? 

I believe that the correct answer is (C), both of the above. I believe that for people who blindly follow the conventional wisdom, capitalism is going to shred many millions of retirement dreams, with the worst of the damage still to come. For many other people, capitalism is the hope for their retirement, it is what will allow them to recover and then increase their retirement savings. 

For capitalism is neither inherently good nor evil, but rather it’s a tool, and the operative question is one of tool usage. 

Tool Usage

My goal for this article is just to get you thinking. I likely can’t convince you, not in one short article, because you’ve been hearing some quite different things from any number of eminent investment authorities for decades now. Pretty much the same authorities who assured you that your retirement investments were safe.

In my years of working on these issues, in anticipation of the destruction of the conventional financial wisdom that I believed to be almost inevitable, I have spent most of my time trying to work out alternative solutions for individuals that are based in the very fundamentals of economics. Let me share with you something that I have come to passionately believe in my many years of working on solutions for these issues: if you're a long-term investor, and you seek a different financial and economic fate than 78 million Baby Boomers approaching retirement age, then the only way to do so is to fundamentally get out of step with the Boomer generation.

You can't do the same thing everyone else is doing. 

You can’t follow the conventional financial advice.

You need to change your generational allegiance.

You need to change your financial profile so that the fundamental forces of capitalism, inflation and the destruction of paper wealth are redistributing real wealth to you, even as they devastate your peers.

Working out the practical implications of what is discussed in this brief article means starting down a fascinating path. It means changing your entire investment framework. Looking at each decision from the perspective of whether you are aligning yourself with the wealth creators of the future – or setting yourself up as their victim.

If this makes sense to you, but you’re not sure how to start down that path, or if you want to speed up your learning, then let me suggest to you that the first step is one of education.