Monday, March 19, 2012

Boomers Dilemma

The Wall Street is interviewing Robert Arnott, a manager of two of Pimco’s mutual funds.

Demographic trends will depress portfolio returns, this researcher warns.
Karen Damato, Wall Street Journal, 4 March 2012 (Hat tip: Big Picture: somehow I missed it in the hardcopy)

If you're a baby boomer, you've got a big problem when it comes to the investment returns you can expect in retirement: It's the sheer number of other boomers who are also getting ready to leave the workplace and rely on their portfolios to help pay the bills..

The problem in a nutshell: The ratio of retirees to active workers in the U.S. will balloon. As retirees sell stocks and then bonds to support themselves, there will be fewer younger investors to buy those securities, keeping a lid on prices. Meanwhile, strong demand from boomers and a limited supply of workers will boost the prices of goods and services the boomers need.

He continues…

This very year, for the first time in U.S. history, the population of senior citizens rises faster than the working-age population. Less than 10 years ago, when the baby boomers' kids were coming into the labor force and the very skimpy roster of Depression babies was retiring, we had 10 new additions to the working-age cadre for each one new senior citizen.

It goes to 10-to-1 in the opposite direction in 10 years. There will be 10 new senior citizens for each new working-age citizen. If that's not a political, economic and capital-markets game changer, I don't know what is.

Note that Pimco is huge.  Their money managers are smart, but they unashamedly talk (up) their book (a.k.a. market positions).  His purpose here is to push investment in markets with a better demographic mix – Brazil for one – as if a surplus of Rio street kids is going to lead to happy-camper-investor-land.

But the point he is making about U.S. demographics is very valid.

I would also add that our economy to some degree came apart at the wheels under the demographic bulge that was the baby boomers.  Their entrance into the job market roughly happened to coincide with the first material shortages (1974 Oil Embargo).  You can say that innovation cured some of these shortages, but that innovation was purchased with borrowed money.   Not so much the money borrowed to find the oil and pump it, but the money to keep the spending going so that it was worthwhile to pump in the first place.

I have seen some discussions that push the baby boom peak a little latter, but most (like the chart from Wikipedia below) have the birth rate really dropping off after 1954.    Using some census data, with the whole big blob spanning from 66 to 48 fyears of age,  I am going to put the typical boomers age in 2012 at 57.  That means the about half of them will be at the 65 year retirement age in 8 years, and all of them within 17.  They will be replaced with the much smaller echo-boomers (boomer’s kids) and immigrants.  As the quote noted above, there is going to be a very small number of people keeping the economy afloat.  Although in theory the youngsters should be in high demand, it is hard not to suspect that the large grouping of retires will vote themselves a continuing paycheck.

The article notes that Japan is ahead of us in this process.  Japan is a much more homogenous society than ours is, and even they seem to be showing some cracks in their façade.

This will also be the time that we are supposed to be transitioning over to more sustainable fuels.  Granted retired baby boomers may not need as much fuel, but it still seems a bit difficult to see how our poor echo boomers/immigrants are going to be productive enough to recreate our energy economy and still make payouts to all the retirees.

Even if you pretend that a dollar backed up a fraction of our current workforce will maintain its value, the going Certificate of Deposit Rate is just over 1%.  It is going to be very hard to live of the interest on your retirement savings: even if you have them.


PioneerPreppy said...

The perpetual growth machine is going to throw a cog. I have always held that the reason no one in power really does anything about immigration is because of the demographic shift you mention. It's going to be interesting.

russell1200 said...

PP: You very much hit the nail on the head. The Democrats want the votes, and the Republicans want inexpensive labor.

I wonder what the people who are fleeing the U.S. for Cost Rica, etc. do to protect the value of their retirement $?

Humble wife said...

My husband had an accident that changed our lives forever. We have no retirement and are building our retirement with our sweat now.

We are transforming our farm into a duplex of sorts-that will give us residential care from either kid/or relative niece/nephew and their family. We are kind of mirroring the Amish retirement, where we will have food-from the farm, clothing-as we are old and wont need much...and care within the same house.

Probably sounds crazy but we have nothing else to bank on. Here we bank on care-and shelter until we die. As to meds, we are already studying, growing medicinal herbs, and utilizing natural treatments.

I guess it sounds scary-in a world where we rush to care/hospital for everything. We learned through a catastrophic situation-that things we bank on may not be there, so looking to the simple/or old ways may be the solution.

Well anyhow-now you know-I believe doing/preparing/caring as much for ourselves as possible.


russell1200 said...

HW (J): Your retirement plan doesn't sound any crazier than saving notional dollar values of unknown future worth. I am not knocking the notional dollar value (I do have my Roth) but it is a bit dubious of a concept. I think about the only part of any plan that makes much sense to me is to try and get out of debt and live within your means. After that, it is just a best guess.