Boomers Dilemma

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

Bad News for Boomers

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.