May 23, 2012
By: Anthony Mirhaydari
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 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.
Date 5/18/12 5:59
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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.