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.

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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 anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.