I think the Japanese example is more likely the path we are heading.
Actually, if you look at the three graphs, in this big picture post, probably the 1st and 3rd are the similar through out the industrial world, savings rates have declined to the point they are almost non-existent and that would be absolutely related to the flattening or even falling wages. I have done previous posts that have basically shown that the buying power of wages for those in their 30s today is far less then their parent's generation.
Personally I think this trend started in Vancouver as I became an adult, but it was 10-15 years later in most places. Vancouver had massive immigration which increased the labour supply and increased demand for housing so housing costs increased at the same time wages flattened and anyone that had read my blog knows I go on about the division of wealth, and it cut by age. Generally older people have more wealth, but these days 30-somethings are figuring out they are debt slaves to their student loans, never mind trying to carve out a base of wealth to help with retirement.
Anyway, perhaps the difference between Japan and North America is that they didn't spend what they couldn't afford to the same degree as North Americans.
We never had jobs that came with pension plans so getting the mortgage paid off and putting some into retirement savings was a high priority for us. I felt quite ripped off about it for the longest time, crap for wages compared to those who got the good jobs and held them for long periods, and ended up with pensions far in excess of my salary. It never was that they were more qualified or capable, it is simply that there aren't enough of those jobs for all of us capable and qualified to have one. And then the jobs that were out there were completely stripped of all benefits.
I used to say that of the rest spent the way we did the economy would move at a snails pace, and now that reasonable restrictions have been put on credit people will no long spend what they don't have and have little hope of paying back.
North American kept spending by borrowing from their future and going about business with a false sense of wealth, in over valued homes that people expected to extract cash from for retirement. Now it is clear that isn't going to happen.
The other thing that is going to happen, yet people are completely ill prepared for it, is pensions are not going to pay what they promised.
They were calculated with stupid, snake-oil math. I always look at it in real time and ignore inflation. Ultimately it should not go up faster then inflation so it is fair to work out if the inputs match the expected outputs. Between employee and employer funding was typically about 15% of wages, so for simplicity, and around here they tend to promise 70% of wages, so for simplicity sake say 14% and it takes 5 years working to pay for one year of retirement. Well, if you work 40 years that means your pension is funded for 8 years on average, yet we have people living about twice as long as the pension can reasonably last. If it is 60% then it is funded for 10 years.
So, reasonably, pensions can really only afford to pay about 35%, maybe 40% of wages. You are not any more likely to see business just start forking over an extra 7% of payroll costs to fund pensions as you are likely to see workers agree to have an additional 7% of their wages go to their pensions. But, it is too late anyway because there are years upon years of underfunding and stupid math used.
I do go on, from the original article...
Economists blame this slow spending on widespread distrust of Japan’s pension system, which is buckling under the weight of one of the world’s most rapidly aging societies. That could serve as a warning for the United States, where workers’ 401(k)’s have been ravaged by declining stocks, pensions are disappearing, and the long-term solvency of the Social Security system is in question.
Well, if you were reading and taking what I had to say seriously you were out of the market and didn't lose a cent in the down turn. I got out and I am content with my big 3-4% I made during this time when fortunes have been wiped out.
What one does about not having the pension they think they have is quite different, but there is still time to make realistic life adjustments based on solid math facts rather then unsustainable fantasy. It means delay retirement, make sure all debt is paid off, cut daily living costs... I loved my home that I sold last year, but realistically the carrying costs were such that even when it was paid for, well, they didn't seem so bad before a 23% pay cut... But that propably was a small cut compared to what people will have to prepare for in terms of retirement income.
But, I think there will be a second wakening where people will cut back on spending because somehow income will decline enormously relative to expenses and even those who it appears can afford to spend won't because of fears of yet another hit to income somewhere.
So, I'd say now is a good time to down size.