5/23/2012 3:23 PM ET|
Are baby boomers to blame?
Behind a lot of our current economic woes and hanging over the future is a simple problem: A huge generation that has to keep working because it hasn't saved enough for retirement
You don't have to be a hedge fund manager or a Wall Street CEO to know that something's very wrong with the economy and the stock market right now. I'm not talking just about the embarrassingly bad Facebook (FB) initial public offering. Let me count the problems.
Inflation-adjusted wages have been steadily falling over the past few months, the first time that has happened in a nonrecession environment, as people turn to credit cards and tap savings in response to higher food and fuel prices. Last year, we had the weakest nonrecession annual growth of gross domestic product since the 1940s. The credit channel is broken. Home prices are down to 2002 levels. And the stock market has yet to retake its 2000 or 2007 highs.
Beneath all this is a simmering government debt crisis, as long-postponed hard choices on debt and deficits in the rich world come home to roost. Europe is on the front lines of this. Here at home, a combination of higher taxes and spending cuts in early 2013 worth nearly 4% of GDP -- the "fiscal cliff" I recently warned of -- is set to throw America back into recession.
The longer-term picture is even scarier: If nothing is done, by 2024 -- according to a Credit Suisse estimate -- 100% of U.S. tax revenues will go to entitlement spending and interest payments on the federal debt. That's it. Nothing left for tanks, jets, food stamps and SEC regulators. Nada.
While this seems intractable, the root of the problem is really quite simple: too many old people.
Specifically, the nearly 80 million members of the baby boom generation are quickly aging, with most in their mid-50s now. This simple dynamic is the undercurrent beneath many of our problems, from a stagnant stock market to a bleak jobs outlook and the debt/deficit problem. Here's why.
Not to spoil the surprise or anything, but you've probably gathered that I'm not a boomer. And I'm not here to go after boomers on social issues, or on the way they wasted the Greatest Generation's legacy: America as the world's sole superpower, a dynamic economy, a vibrant middle class and state-of-the-art infrastructure. OK, maybe I'm a little miffed.
Although there are grounds for an intergenerational fight, I'm more interested in the tragic nature of all this. Boomers, fully committed to the postwar consumerist culture and suffering from the rise and fall of two epic asset price bubbles, haven't saved enough for retirement. They also didn't have enough kids -- you know, sexual revolution and all. I'll have more on that in a minute.
Rising life expectancies make the problem worse. And long-stagnant wages for the middle class haven't helped.
The 2012 Retirement Confidence Survey (.pdf file) by the Employee Benefit Research Institute paints a grim picture. Only 14% of workers are very confident they will be able to afford a comfortable retirement. Some 60% of workers report that the total value of savings and investments, excluding the value of their primary residence, is less than $25,000. And while 56% expect to receive benefits from a defined-benefit plan in retirement, only 33% report that they or their spouse currently has such a plan.
Clearly, false hope and procrastination are at work.
Thus, instead of enjoying the twilight of life atop a Harley or upon white sandy beaches, a lot of these folks will be staying in the workforce -- often at low-paying, menial positions -- just to survive. The percentage of respondents expecting to retire before the age of 60 has fallen from nearly 20% in 1991 to just 8% now, while the percentage of workers expecting to clock out at 70 or older has jumped from 9% to 26% over the same period.
With the stock market coming off its worst 10-year performance since the Great Depression and with housing still in the tank, that's not surprising. But here's the kicker: By clogging up the job market, this army of gray labor will make it harder for the cohort of would-be workers ages 16 to 34 to get any traction. And that will only get worse, because the oldest boomers are now 66.
Younger workers are the folks who put money into housing and the stock market; they're the buyers who allow older folks entering retirement to cash in those assets. They also pay the taxes that keep entitlements like Social Security going.
It's a vicious cycle. Boomers are working longer because they can't retire, and they can't retire because their homes and nest eggs aren't holding their value, much less gaining. This keeps younger folks from taking over their jobs, which would allow the younger folks to buy those homes and start building their own nest eggs, pouring fresh cash into investments. (Instead, it seems, a lot of those younger folks are moving back in with their boomer parents. The cycle of misery is complete.)
No wonder net household wealth in the U.S. is down 15% from its pre-recession peak.
Young and old, both going nowhere
I saw this demographic debacle in action last week at the Las Vegas MoneyShow. Attendees were -- how should I say this -- of a certain vintage: baby boomers and even older. What I heard was a far cry from the popular excitement with which investing was viewed back in the 1980s and 1990s. The people who are still actively managing their investments are focused on capital preservation, thrift and income -- as they should be as they age -- not capital gains and investing fads like social media.
The young, bloodthirsty risk-takers were MIA.
The shift can be felt in many ways. Here at MSN Money, reader traffic often spikes during market meltdowns, while quiet uptrends are largely ignored. Since the recession ended, the action has focused on things like bonds and dividend sources as money is pulled out of equities. Mutual fund data show that over the past three years, private investors have been net redeemers of stocks two-thirds of the time as they sell into rallies and tuck the cash into more defensive, income-producing assets.
So it's not surprising that New York Stock Exchange primary market volume has fallen to levels not seen since the late 1990s. It was then that the share of the population focused on risk and capital growth (those ages 25 to 49) peaked at around 39%. Since then, the share of the capital preservers (ages 50 to 74) has grown from around 20% to 28%.
In short, investors are checking out. Data from the Investment Company Institute show that the portion of financial assets in retirement accounts peaked in the late 1990s at around 35% and has been flat-lining ever since.
You can see it in the labor market, too, as Gluskin Sheff economist David Rosenberg recently pointed out in a note to clients. Since the Great Recession ended, folks 55 years old and older have seen their employment jump by 3.8 million; for everyone else, employment has dropped 8.2 million.
Labor participation rates suggest that boomers are keeping youngsters out of jobs. The employment-to-population rate for the 55-and-up crowd has hovered near 38% over this time; for everyone else, it's dropped from 73.3% to 68.5%. As a result, the unemployment rate for teens ages 16 to 19 is a Europe-like 25%, while for the 20- to 24-year-olds it's a painful 13%.
Rather than fight their parents and grandparents for jobs, many choose to hide out in college, pushing up tuition costs and student indebtedness. Total student loan debt has reached more than $1 trillion. Now, 94% of those graduating with bachelor's degrees are in the hole, versus 45% two decades ago.
That's why these post-baccalaureates are landing on their parents' couches.
Feeling sick yet?
The other dynamic here is that as the boomers age, they will put increasing strain on the social entitlement system, since there are fewer young workers available to pay into the programs. At the same time, the biggest bugaboo -- health care -- is suffering massive cost inflation. We're just beginning to feel the pinch. Right now, the ratio of those 65 and older versus those 15-64 is right around 20%. By 2035, it'll be closer to 35%.
The math gets ugly when that happens, according to Credit Suisse economist Neal Soss. The surge in retirees pushes up costs for Social Security and Medicare (cost as a percentage of taxable income) while the income rate (tax revenue as a percentage of taxable income) remains more or less flat.
Looking only at Social Security, the cost exceeded tax revenues in 2010. Should this continue, the disability insurance fund will run out in 2016 and the Social Security trust fund will be empty in 2033.
Given the situation with retirement savings, more and more people depend on these funds for basic expenses. Indeed, the share of income for those 65 and older from Social Security has increased from 31% in 1962 to 37% now. Given the data I just outlined, this is likely to continue to rise. So cutting benefits isn't a realistic solution.
Politicians will probably choose to raise taxes on younger workers -- the ones who can find jobs and are repaying their student loans. The Social Security Administration's 2012 trustees report projected that if the payroll tax rate were immediately increased by 2.67% of income, the trust could keep going through 2086. Just try to sell that to indebted, underpaid youngsters. We'll have our own version of Spain's indignados movement.
It's the same story with health care. Health expenditures in the United States are among the highest in the world -- and focused overwhelmingly on the very old, courtesy of the government -- while spending on the 20- and 30-somethings, the people we need to keep healthy to pay those Social Security taxes, is relatively low.
Still, until we find a solution to the underfunded entitlement programs, the government's overall debt/deficit problem isn't going away.
Stuck in limbo
So, what's the takeaway from all this?
For investors, stocks probably won't break out of their 12-year funk until young workers start generating enough income to pay down debt, overcome high tax burdens, buy homes and start saving for retirement in a big way. And they won't be able to do that until other structural issues -- especially the debt/deficit problem -- are resolved. We're in a trader's market, searching for special stocks going up rather than marketwide gains, and we'll be there a while.
For all of us, it's time to pressure politicians to take action and break this cycle. We're only 12 years from all tax revenues going to aging boomers and interest payments. We're only 21 years from the Social Security trust fund running dry.
And we can see these moments coming. They've been in the cards since the first boomer was born on New Year's Day in 1946. There's no excuse for not getting ready. And now, my generation will have to pay for it.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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You take the pensions away and you replace it with the 401k or the IRA, neither of which are pension plans. And you lie about it.
Then you plunder and "under-fund" the pension plans that are left until most of these pensions do not exist.. And you lie about it.
The Social Security Program that was supposed to be in a blind trust is slowly but surely moved into the general fund (robbed from, plundered from). And you lie about it.
Then, on top of all the lies, "the powers that be" run the economy into the ground so hardly anybody will be able to survive into their old age anyway -- before starving to death first on a poisoned food supply in their under-water homes. In a society that requires that you either work or you starve, we know find ourselves in a country that has exported its manufacturing to China, along with the tens of millions of American jobs that will never be coming back.
Oh, yeah. And it's all the boomers fault.
Isn't anybody tired for the lies, too?
Of course it is the boomers fault . They wasted their time working for depressed, stagnated wages, wasted their time taking the money out of their homes and pension funds or not saving enough for their own retirement. They did all this to send their ungrateful, offspring to college and financing their spring break vacations etc, so that these insufferable children can grow up to be a bunch of selfish self-centered spoiled brats who feel they are entitled to their parent's jobs, so the boomers should step aside and just die off quickly, also leaving them an inheritance plus the family home, which should by then have had the stainless steel appliances and granite countertops and the open plan kitchen so they can entertain their friends even before their boomer parents are cold in the grave.
If it was not for the boomers some of you would not be able to be writing any negative articles or critiques about them in the first place. If the boomers had saved for their own retirement instead of wasting their financial resources on their kids helping them out. The boomers should have been as self absorbed as their offspring. Raise the kids until they are 18 years old and then tell them they are on their own from there. Some boomers were even stupid enough to finance their childrens second degree, instead of looking out for their own future retirement.
Well what goes round comes around, and so those who criticize the boomers for their sacrifice to give their children more than t hey had when they as boomers were growing up are also going to be criticized by their own ingrate kids too soon enough.
You've got it backwards. The Baby Boomers willingly funded social security and defined retirement benefits for the generations the generation retiring before them, even though it was apparent to an observant person as early as the 1970s that there would not be this type of support when the Boomers themselves hit retirement.
Why blame the Boomers for working hard and unstintingly funding earlier generations?
Mismanaged government to blame??? You got it, Bunky!
Who died and made you the authority on baby boomers. I worked all my life and saved for retirement...some of my friends did not have great jobs and could not save much.
Younger workers aren't putting money into housing or the stock market...they are still living at home draining their parents retirement funds because the job they went to school for doesn't want them.
Too funny Anthony,
Don't put this on the back of boomers... The politicians have had this information, the numbers, the math for many years. They knew about the baby boomers many years ago as the were taking SS money for all their pet projects, wars, on and on ect. Place the fault where it belongs, on the back of politicians. I have been paying into the Social Security system along with my employers for 45 years!!! The politicians are the ones who need a reality check. Again, we have known about this for years, now it is here. Do not blame old people!
So Michael, you want my job? You want me to get out of the way..? Why..? Because you think the world owes you something. You're the perfect spoke person for the generation of instant gratification. You want today what took your parents (and myself) 30-40 years to aquire. Got to have it all..TODAY. The generation that failed to launch...isn't that what you're called. Its not that you can't get a job, its just that you want to start at the top, and you want everything handed to you. You're upset because you stamp your feet and scream, but noone will listen to you and that hurts your feelings. You actually believe you have all the answers...but you're just a nobody who doesn't matter.
"And while 56% expect to receive benefits from a defined-benefit plan in retirement, only 33% report that they or their spouse currently has such a plan."
OK, let's just take one on your selfish little misconceptions and correct it. 100% of boomers that have contributed Social Security taxes HAVE a defined-benefit plan for retirement and it's called Social Security and backed by the full faith and taxes of the US Government. It's not an entitlement but everything you're whining about are entitlements. The Boomer Generation paid taxes so that the Great Generation, their parents and grand parents, could collect their SSA defined benefits in retirement. The Boomer Generation was drafted and earned $86 a month as a PFC to go to Vietnam and fight the Mongol Communist Herds that the religious right had painted as atheist heathens. The Boomer Generation ala Ellison, Gates, Jobs and millions of others designed and built the information age you're using to convey your generational crap. So suck it up litte A. Thank the greatest and boomers that your little a didn't ever have to serve your country, that you have a cozy job writing dribbble and not working at labor in a factory and that someday you may get to retire too if you earn and pay enough taxes to keep your country sound.
I think a better question would be as follows- After generation X goes into retirement age, who screwed up are we going to be then? Have you seen the youth of America these days?
If it doesnt involve texting, eating Cinnamon, sucking down things to get themselves high, or the Kardashians, they have no thoughts or ideas about it...
And these people are going to be running the world or the country?
I'm so angry after reading this article that I can hardly type this comment. Social Security and Medicare are NOT "entitlement" programs, like welfare or a free handout. (Yes, I'm a Boomer and I'm an angry one!) The Federal government has been taking money out of my pay for Social Security for over 50 years and money for Medicare since that withholding started. Social Security and Medicare are not free handouts to me. My money has been taken from me for a long time to pay for them. My savings and my property all lost value with the Grand Debacle started by Lehman! Many of us DID save enough until the economy went sour and our savings and assets lost most of their value. Don't blame us for that!
Wait until the millions that have the crap jobs with no retirement or health care, retire.
Crap jobs, that you can't even exist on, much less save anything for retirement. Stock up on food and weapons. You will need them.
The fault lies with our Government. Both parties, who have squadered this country's wealth and resouces. Those Corporations who would run over the graves of our soldiers to make a buck with the Communists and worst of all, leave us in debt to them.
It's time to clean house. I mean a Ten million man, women march on Washington to take back control from the Corporate/Military special interests. Bring our jobs home and the heck with the rest of the world, before our country is in ruins.
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