Why we should be saving *less* for retirement

We, as in Kate and myself.

Pivoting off this post by Andrew Sullivan: like him, we've always been the prudent types who've done what the government and economists have recommended. We've always put aside a decent chunk of our incomes for savings towards retirement, over and above what we pay into state retirement schemes.

When I started doing this I thought we were being forward-thinking. We were preparing ourselves for the future; we were diversifying our financial risk, by keeping some money back from housing costs, unlike the bulk of our generation who are making no significant savings at all because they're putting all their money into mortgage payments.

I changed my mind about this the other day. Like I said, the vast majority of our generation are not saving a penny, and are still piling their money into leveraged bets on the property market. And while I can see this is a horrible mistake in theory, in practice whatever the vast majority of your generation are doing with their money, you should probably do.

After all, what happens when we both reach retirement? The savers will be asset-poor, with cash and securities subject to capital gains tax and, if they've done well, a tax-free home that is small in proportion to what they've saved. The borrowers will be asset-rich, with minimal savings but likely, over the course of decades, extensive levered-up capital gains on a more valuable home. However, the savers' assets will produce an income and the borrowers' won't, which makes all the difference.

If you own liquid, income-producing assets it's politically very easy to tax your wealth. The opposite is the case if you own illiquid, non-income-producing assets, such as an owner-occupied home, or, in Australia, a loss-making buy-to-let property (none of them make profits, but that's a story for another day).

Without an income there's nothing easy for the government to tax. You can take the Georgist attitude that the land value should be taxed and impose a property tax, but for this to operate in any significant way would require aged owners to at some point sell their property to pay their tax bill--something that would be political suicide, especially when the market is unpredictable and likely to produce wildly divergent outcomes. Some sort of reverse mortgage set-up, where investors pay your tax bill in return for a claim on all or part of your property after a fixed period of time, could work in principle; but reverse mortgages already exist and don't have a great track record.

So the savers would be looking at a situation where, despite being less wealthy than the borrowers, they would have larger cash flows and would therefore be the politically easiest target for bailing society (read: the borrowers) out of its failure to save money.

This is a weird situation to be in. I personally think property is still in a huge bubble and will lose value over a 10-15 year timeframe, but if we wait that long to buy somewhere we will have very few income-earning years left to pay off a mortgage. And given I don't see much real-terms upside to prices, it feels like madness to tip in our quite substantial savings and double our housing costs for the privilege of owning the same sort of place we currently rent--which is the sort of calculation you would make to buy a house in Sydney at the moment.

I think there's maybe a 10-15% chance that buying a house in Australia right now would end up making us money; a 25-30% that it would be catastrophically loss-making, in the manner of people who bought in Dublin in 2007; and a 55-65% chance that we'd just end up paying about a half to two-thirds over the odds, relative to people born five years before us before the credit bubble started to inflate and those born 15 years after us who'll reach property-buying age when it's more deflated.

That doesn't sound like a strong argument to buy rather than rent, but when you throw in the long-term fiscal argument, and the short-term massive inconvenience of having no security of tenure at a time when childcare, schools etc are vastly oversubscribed and wedded to location, then I can see that we will end up doing it at some point. And of course, the moment that sceptics like us capitulate is always the moment that bubbles burst.