Future of their Retirement? Boomers Don’t Want To Know

Do most boomers ask why they have experienced near 30-years of increased wealth in homes and 401ks? Probably not.  Why look a gift-horse in the mouth.  Yes, when you tell these same boomers that the same demographic trends that created their wealth will eventually take it away, do they want to ask why?  Another saying from their childhood.  “What you don’t know can’t hurt you.”  Or from our parents, “Whatever may be will be, the future isn’t ours to see…”

Let’s play some “what-if” games.

If you had to swap a ten year period of your income with your best friend’s, which decade would you choose?  Would it be between 40 to 50, or 35 to 45?  Certainly not 70 to 80, right?  We agree that whatever period you pick, it would be an implicit prediction that your friend’s income will decline afterwards. (So far, for me, the right pick would be my working years between 45-55.)

If you average all the boomers income there is also has a optimum decade in which its productivity can go towards retirement savings.

So let’s pick a decade at which you believe your friend’s retirement savings will reach maximum value.  If the stock market and real-estate continues to outpace wages, that would probably be between 70 and 80, right?  If you are ten years younger, would you switch with him?

If you say ‘No,  But I would have 20 years ago’, then realize, subconsciously at least, that you have some idea what’s going on.

When was the U.S. was most productive? It’s up for debate. I’d pick between 1985 to 1995.  I’m picking this period because before 2000, GDP growth often passed 4%.  It hasn’t since then.

I believe people are getting older and it’s no coincidence that GDP is falling.  Of course, you probably see many critics saying “GDP is a phoney number, it means nothing.” Because if productivity is falling, why does the stock market continue to rise and prove the retirement doom-and-gloomers wrong?

The reason is that we may have not reached what I’d call “peak dead-weight”.  I use the word “peak” because it is also a reminder of how economic forces (like oil, in peak-oil) can change in ways never predicted.  I used “dead-weight” because that’s what old people are.  They are a drag on economic productivity, even if small.  Of course, I can only speak for myself and I will.  At 57 I’m nowhere near as productive as I was at 45.

If you’re like my wife you’d like to tell me that age is a state of mind.  Yes, but this issue is about the economy as a whole.  We become less productive as we age.  I need to push this point.

Fact.  Muscle strength declines with age.

Fact. Memory strength declines with age.

Sure, everyone might be fully capable through their 60s.  But that only puts the question farther out.  Certainly, no one would argue that a nation of 80 years old is going to out-produce a nation of, let’s even say, 60 year olds!

There is still a point where society becomes less productive based on how many young people it has pushing it forward.

In addition to the fact that the number of people older than 65 is growing, the ratio of old people to young people is also expanding. This has been a fact and continues to be a fact; that is, it will continue short of a plague or asteroid exploding over California or Florida.

I’m showing a graph from Canada because it shows this fact, common to all Western nations, including the U.S., in the clearest, simplest way, possible.

This is not a graph of the stock market or interest rates where prices could change in the future. This is a graph based on current ages in Canada (US) with future ages projected based on actuarial data. Again, unless old people start dying very quickly, or birth rates skyrocket, assume the future depicted in this chart for the next 30 years!

The overarching question is how the growing ratio of old people to young people affects the economy, and by extension, financial markets. So here’s the first big question I put to you. If you’re over 65, in a group of 50 million and growing, and you hire people between the age of 15 and 24, to run errands, and their group is 42 million and shrinking, who will have the bargaining advantage?

Your group has stock in Exxon and Amazon which you can sell. Your group generally controls how the Federal Reserve sets interest rates. But the young people control whether they will work for you or not. And like all groups that sense another group has more demand than there is supply, wealth shifts from one group the other.

There are many reasons why old people can maintain a greater value of their stocks over the labor of young people. For starters, robots built by old people may be able to perform the tasks that young people would have done.

The question remains, how long can they keep it up? How long can old-people stocks stay more valuable than young people productivity?

What the media glosses over is that the effect of demographics is not a business cycle, at least, not a short one. Again, demographics is not a three year recession or one year market crash. Everyone born is generally in the retirement game for 80 years.

If it happens that young people are able to price their labor higher than the value in old people’s 401K accounts then old people would probably not recover in their lifetime.

Whenever society makes the turn from young to old there will be no going back in most people’s lifetimes.

Many believe there have already been two significant battles between old and young. The first in 2000, the second in 2008. As the ratio between old and young continues to widen, some predict that the severity of the battle, and it’s ultimate harm to the combatants, will be greater than most can fathom.

Mutual Funds are a good proxy for the amount of value old people will be able to spend down in their old age. The following shows both how much net new money has entered mutual funds from, say, a person’s paycheck, after taking out the money that was redeemed. And how the general tide can be measured in 10-year blocks.

What this data says to me is that old people are pulling more money out of their investments than people are putting in. However, one can dispute this conclusion. One might argue that more value is in real estate than mutual funds, which are oh so 1980s. So I’m just going to leave it here.

The next is an interesting chart from Yardeni Research.

The blue line shows what we saw above. No new money is going into mutual funds. The red and green lines show the increase in mutual fund assets. This data suggests that mutual funds don’t need more money to grow. Old people can assume that their savings will continue to grow in value, asset appreciation, even if they don’t put more money into the retirement accounts.

So why all the doom and gloom?

What if more money starts going into mutual funds but their value goes down? That doesn’t make any sense right? But that’s not far from what happened for people who bought equity stocks and houses in the 1970s through the 1980s.

Asset appreciation without new money is relatively recent.

If you look closely at that graph you will see that net inflows grew from the 1990, leveled out around 2008 but the value of the assets in 2008 dropped to a high they had experience in 1998. Put another way, based on new money into funds the market said it was ultimately worth $3 trillion dollars, bottom of 2002 and 2008. All the run up since then is artificial (I won’t go into) and the market will eventually back down to value it was once all the money had entered the market.

The value of the past generation’s productivity has been going up. But also seems to keep stumbling. At some point, the new generation’s productivity will be the driver of value. When one looks at the demographics it’s hard not to believe something won’t happen in the near future which will be generational in scope.

That is, the whole stock market will be re-priced to reflect the cost of the young taking care of the old. Or it will be re-priced simply based on what the new generation says its worth. Maybe whatever prices the young want to set to get rid of their student debt. Wages, or debt, will be restructured to favor the new generation.

Where are we today?

Today, in 2019, there are more jobs posted than people looking for jobs. Of course, there are fake job postings and some might not really want a job. Either way, the government calculates that for every 100 people who look for a job, 96 get one. That’s certainly what I see around me. Sure, it seems there are fewer high paying jobs, types of jobs that are disappearing, etc. But again, if you need a job–if I need a job–there is one out there, even if low paying.

What this means is that any 65-year-old person who is forced into retirement today could find work to support themselves. It may not be what they want, but it would be enough to remain off the street. If they had the average of $200,000 in retirement savings, for their age, they could dip into it only as their desire to live more than a simple life demanded.

Does that person feel as if they were forced into working through retirement? How do we know if that person wouldn’t have taken a job even if they had $50 million in retirement savings? There’s only so much we can talk about retirement because what retirement means is different to everyone. It’s different person to person. It’s different when you’re 50 to when you’re 70. It’s a moving target. Therefore, we need to stay focused on our simple question. Looking towards the future, what is the probability that most people would be able to stop working, and maintain their basic lifestyle, based on where the economy might be?

The probability is that old people won’t be able to spend as much money in their retirement as their current accounts suggest.  It’s also likely that they’ll be too old to care.