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Demographics - Crash Course Chapter 15

Age distribution is too lopsided to support entitlements
Friday, September 26, 2014, 5:21 PM

Chapter 15 of the Crash Course is now publicly available and ready for watching below.

When Americas social security and health care and entitlement systems were first conceived, the country has much different age distribution. There were roughly 7 active workers per retiree, and the ability to transfer some of that employee wealth to support older citizens was supportable.

But with the arrival on the scene of the Baby Boom as well as advances in longetivity, the math changed dramatically. By 2005, there were only 5 workers per retiree. And by 2030, just 15 short years away, there will be less than 3.

Our national demographic architecture no longer can afford the entitlement system we have. And that's even assuming entitlements were currently sufficiently funded. But as the last chapter showed, the existing programs are underfunded to the tune of $100-200 Trillion. 

America's demographic situation is a ticking time bomb. The older generation is already competing more fiercely than ever with younger ones in the job market, as many seniors can't afford to retire. Youth also has to contend with trends like automation, outsourcing, and high unemployment/underemployment, which further handicap their ability to build capital and, importantly, to afford all the assets (stocks, houses, etc) that the Boomers are counting on selling to them.

For the best viewing experience, watch the above video in hi-definition (HD) and in expanded screen mode

Coming next Friday: Chapter 16: A National Failure To Save & Invest

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

Transcript: 

One of the great challenges that much of the developed world faces is demographics - the age structure of their populations does not align very well with entitlement and pension programs, or the idea of financial asset markets climbing ever higher.

To begin, recall that the US government has not funded any of its entitlement programs. As we calculated, it has a massive shortfall in them measuring in the tens of trillions of dollars. 

From as "little" as $55 trillion according to the Treasury Department, or as much as $220 trillion according to Boston University’s Laurence Kotlikoff. 

The situation we find ourselves in was largely inevitable because our entitlement programs are actually wealth transfer programs, not savings accounts, and they depend on a significant surplus of current workers to retirees. 

The shortfalls in these programs are being exacerbated by a troubling trend.  In  1950 there were seven workers per retiree and the system was more or less in balance. 

By 2005, that ratio had dropped to only 5 to 1 and the system was already exhibiting signs of distress. 

By 2030 that ratio will have plummeted to a thoroughly unworkable value of less than 3 to 1. 

These predictions are not hard to make, nor are they very disputable. They’re made using simple math based on the so-called ‘Baby Boom’ that occurred after WW2. 

This is a demographic chart of the United States. Each bar represents a clustering of all the people who are within a five year wide ‘age window’ as seen on the left axis, and shows how many millions of them there are along the bottom axis. 

The baby boomers number around 75 million strong and roughly occupy these four bands. 

While it may not seem like much, the ‘hole’ that exists in the population behind the baby boomers represents an enormous challenge – in fact, we can call it a threat -- to our entitlement programs.

This hole will greatly complicate our efforts to resolve our levels of debt and address our national failure to save. 

If we cast back to the year 1900, we can see a more ‘normal’ population distribution.

It resembles the kind of distribution that humans evolved with over countless millennia; and it looks like this:  A pyramid. 

Again, this shows five-year wide age brackets, with men in red and women in yellow. 

This distribution is capable of supporting an entitlement program such as the one in the US that is based on transferring wealth directly from current workers to retirees.

But when we cast this chart forward to 2000, the baby boomer bulge is quite apparent. 

Besides the challenge that this demographic imbalance offers to our entitlement programs, an even larger challenge is presented to both the debt and savings issues I painted in previous chapters, and even to the value of our assets.

Here’s what I mean. 

The boomers are the wealthiest generation ever, they hold nearly all of the assets, and they will need to dispose of those assets to fund their retirements.

Who exactly are the boomers planning on selling their assets to?  This guy? 

Even if Gen-X and the millennial generations somehow had robust savings – which they don’t -- there simply aren’t enough people within these generations to buy all that the boomers currently own – at least not at anywhere near today’s market prices.

So, in order to fund their retirement dreams, boomers are going to have to find buyers for their assets.  And again we might wonder “to whom” exactly?

And lastly, as we’ve discussed thorough in early chapters, the massive accumulation of debt over the past 23 years is predicated on the assumption that the future will be much larger than the present.

How exactly will that come to pass if boomers are retiring en masse and there are fewer behind them to take their place? 

Man…the next generation better be prepared to work really, really hard!  Too bad they are graduating with the highest levels of college debt ever recorded.

And too bad the boomers – many of whom have not saved enough to retire -- are hanging onto their jobs for dear life, competing against the very people that they hope will someday buy all of their financial and real estate assets from them.

In fact, the over 55 crowd has not only weathered the Great Recession without any job losses, it gained 4 million jobs over the past 5 years.

That means that the over 55 crowd has taken over half of all new jobs that have been created since the recovery in the job market beginning in early 2010.

After we subtract the over 55 crowd, just 3 million jobs were taken by those younger than 55 over the same time period.

The reason this really matters is that people typically hit their peak earning years between the ages of 35 and 55. 

To the extent that boomers are hanging onto their jobs, and almost certainly they are doing this for very understandable economic and financial reasons if not desperate necessity, we might anticipate that younger folks who should be in their peak earning years are unable to hit their own stride,

It's a simple story of competition. In this case, between generations.

Again, the point to be reinforced here is that financial assets go up in price when there are more buyers than sellers - a case that was true for the boomer bulge between the years 1988 and 2001.

Boomers hit their stride, took their earnings and bought stocks and bonds, and – voila! -- we had bull markets in both stocks and bonds the entire time.

Of course, the math works the same in the other direction, as well. 

Prices go down when there are more sellers than buyers which, given the sheer number of baby boomers entering their senior years and needing to liquidate savings for living expenses, virtually guarantees there will be a glut of sellers in the market for the next couple of decades.

This harsh math is compounded by the other additional factors locking younger generations out of the job market, such as outsourcing and automation.

Younger workers – the ones who are supposed to pony up for all the assets the boomers need to sell – are being forced to settle for a worse job market, with fewer jobs and lower real wages than their predecessors enjoyed. This is not a recipe for prosperity for either generation.

And this demographic friction will be with us for decades to come. It cannot be wished away or fixed by some new policy. 

It is simply a fact of life and one that we’d do well to recognize and plan for rather than ignore.

10,000 baby boomers reach retirement age every day. And this pool of aging seniors the will accelerate rapidly over the next 15 years – in fact, its influence has already begun making the twenty-teens quite interesting.

This new reality is one of the central reasons I predict the next 20 years will be completely unlike the last.

Please join me for the next chapter: A National Failure to Save & Invest.

Thank you for listening.

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12 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
McMansion Investments.

My plan as a baby boomer is rice and beans as a Yacht Grot.

"But aren't you afraid of dying?" And I look him in the eye and think to myself

"Check your assumptions, mutton chops."

"I am afraid of not living."

Man, there are going to be some disappointed McMansion investors. Thank God I have always been an outsider, looking in through the shop window, too scruffy to dare step over the doormat into the hallowed halls of consumer heaven.

Evolution is a powerful force.

Another excellent pod, thanks.

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
Joined: Jan 14 2012
Posts: 403
Nice addition to the crash course

A very important topic. Great job!

northsheep's picture
northsheep
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Joined: Jun 6 2009
Posts: 1
Demographics - Crash Course Chapter 15

A good critique of our present retirement entitlements policy. But why focus on demographics when it's only a problem under present policy? You fail to mention other policies that easily avoid demographic issues. Funding entitlements and retirement from the huge wealth concentrated in the 1%, for example. So the implication is that no other policies avoid the demographics issue.

zig's picture
zig
Status: Member (Offline)
Joined: Sep 28 2014
Posts: 1
Missed a trend

This video was good but it's missing a trend taking place in certain American cities with inflating home prices. I will refer to the case study I am familiar with, the San Francisco Bay Area. Boomers here are not selling their homes to the middle class younger workers. Boomers are selling their homes to foreign cash buyers ( i.e. Chinese and Europeans), and the new tech class ( annual salary of $150K +). Those of us that went to school and work are often  locked out of the market unless someone in our families dies and leaves enough money to compete with others attempting to  buy  a small home at an overly inflated price ( ~$700K for 2 bedroom is a typical price). I am sorry to be macabre but talk to people here with normal jobs about how they  ended up with a home. It's never a story of we shopped around and picked this house, it's more along the lines of a miracle. 

So the premise of this article is that the buyers of  boomers homes need to be the younger generation. This is not necessarily the case. America's weak dollar policy has attracted foreign investors to invest in real estate here in the U.S.  I don't see this trend stopping anytime soon. It would be interesting to hear a discussion on the implications of today's working generation participating less in home ownership. U.S. real estate is valuable and people want it. If boomers live in a major metropolitan area with a decent economy a buyer will appear.  I suggest looking into who that buyer is. 

~ Perspectives of a 34 year old making $100K in the Bay Area

MargaretBartley's picture
MargaretBartley
Status: Member (Offline)
Joined: Sep 30 2014
Posts: 1
Numbers?

I went to Wikipedia to get some age distribution numbers, (http://en.wikipedia.org/wiki/Demographics_of_the_United_States)  and it shows that there are about 14.2 million people 65 and over.  Since the age for full retirement is 67, that number is even less.  There are about 185.2 million people between the ages of 20 and 64.  That's a ratio of 12 to 1, not 3 to 1 as your article states. 

It sounds like the real problem is that Social Security is not really a retirement system, but a welfare program.

This is not an aging problem, as your article says, but a back-door welfare system.  How many 'disabled' kids, immigrants, and others of working age are being supported?  That sounds like it's the real issue, not a generational issue of too many old people.

The other possibility is that with all the foreign guest workers (L-1, green card, H1-b etc) who are working in the US, and not paying into the Social Security system, that may also be the problem.

This is a complex issue that deserves serious consideration, not some bumper-sticker sloganeering about generational divide.

climber99's picture
climber99
Status: Silver Member (Offline)
Joined: Mar 12 2013
Posts: 170
Interestingly

northsheep wrote "Funding entitlements and retirements from the huge wealth concentrated in the 1%". 

I think in terms of energy and resources.  The 1% may have the majority of the wealth (digits on some bank computer) but if the energy and resources that they consume, were to be redistributed to the 99% it would make very little difference to the 99%.

 ie the richest person in the world can only drive one car, live in one house etc at a time.

Unequal distribution of wealth should be eliminated in my view but redistributing this wealth won't increase the total energy and resources available on per capita basis.

ps We currently use about 200 kWh of energy per day on average in the first world.  The vast majority of which come from non renewable sources which will start to decline in the near future.

Ed

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5441
The Correct Ratio...
MargaretBartley wrote:

I went to Wikipedia to get some age distribution numbers, (http://en.wikipedia.org/wiki/Demographics_of_the_United_States)  and it shows that there are about 14.2 million people 65 and over.  Since the age for full retirement is 67, that number is even less.  There are about 185.2 million people between the ages of 20 and 64.  That's a ratio of 12 to 1, not 3 to 1 as your article states. 

The correct ratio is covered workers to retirees, not the total population numbers.  You can find that data here, at the Social Security Administration.  

The current ratio (as of 2010, the most recent year calculated by the SSA) is 2.9

 

cmartenson's picture
cmartenson
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Posts: 5441
Redistribution won't solve anything
northsheep wrote:

A good critique of our present retirement entitlements policy. But why focus on demographics when it's only a problem under present policy? You fail to mention other policies that easily avoid demographic issues. Funding entitlements and retirement from the huge wealth concentrated in the 1%, for example. So the implication is that no other policies avoid the demographics issue.

"Easily avoid demographic issues"?

Let's examine that.

What if we decided to really hit 'the rich' and tax 100% of income for everyone earning over $250k?  that would solve things at the federal entitlement level right?

Well, that would only raise $1.4 trillion per year which would allow the federal cash budget deficit to go to zero and drop the total debt accumulation figure from $1.0 trillion to zero leaving the princely cash sum of $0.4 trillion to 'fix' the entitlement system as you suggest.

Given that the yearly accrual growth in the entitlement system runs between $4 trillion and $6 trillion per year, this still leaves us short by a very large factor.  Let's average that all out and say we need an additional $5 trillion per year under current rules governing retirement age and benefits simply to prevent he current NPV deficit of between $65 trillion and $220 trillion (depending on whose numbers you believe) from growing any larger.

$5 trillion in additional yearly income, securely stored away from spendy politicians and preserved for future SS & Medicare obligations, merely halts the growth in the already massive shortfalls.

Now let's really soak 'the rich' and begin appropriating $5 trillion per year so that we can at least stall the growth in the entitlement NPV shortfalls.  In fact, let's just take from those really despicable folks, the ultra high net worth individuals.

Then there are the High Net Worth Individuals, those with investable assets of at least $1 million. CapGemini provides an overview of this group. They estimate that the population of HNWI in the US is 3.44 million, holding a total of $11.8 trillion dollars total wealth.

(Source)

Ha ha!  After taking and then selling all of their assets, we find that the growth in the entitlement program shortfalls has been stunted for about two years.

Excellent!  Now what?  Who's next on our soak the rich plan?

In fact, once you delve into the data you find that the only solutions are the ones I mention in video:

 

  • Raise taxes on incomes (by a lot)
  • Lower benefits (by a lot)
  • Some combination of the two

I'm thinking it's going to be #3.  Retirees won't be happy, in fact they are already saying that the SS payments are but a pittance compared to actual living costs,  and workers won't be happy because they'll have less take home disposable income.  

It's just math.  Nothing personal.  Time to adjust the fantasies is my point.

climber99's picture
climber99
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Posts: 170
Inevitable consequence of our energy decline.

Just to amplify what you describe, Chris.  It is the inevitable consequence of promising that we can continue to consume an average of 200kWh per day in the future at a time when the net energy available to society is declining.  This claim on future energy consumption will not be met. The wealthy may consume above the average amount of energy but not enough to make a significant difference to the rest of us.

Ed

Thetallestmanonearth's picture
Thetallestmanonearth
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Posts: 319
Unequal distribution of

Unequal distribution of wealth should be eliminated in my view but redistributing this wealth won't increase the total energy and resources available on per capita basis.

Ed, this is a fascinating perspective.  Thank you for sharing.  It is a lens I haven't used to look at our situation before.

jennifersam07's picture
jennifersam07
Status: Silver Member (Offline)
Joined: Oct 14 2012
Posts: 111
Pensions vs social security

This is very good and is helping me understand the current situation. I applaud this effort to outline the details and nuances of the current global economic predicament as it seems too late to really do anything to prevent catastrophe, but at least we should all know why the SHTF.

I am on the school board in a rural part of Illinois where most of the employed people buying mcmansions and spending $500 on their 9th grader's homecoming dance work for either the school system, the fire department or any of the thousands of municipal entities that exist in Illinois. They all are counting on their govt. pensions to continue to fund their lifestyles and retirements. Recently the school board has come to the realization that the pension obligations that won't be paid by our bankrupt state government will soon be shifted to local school boards. So during the last teacher contract negotiations, the board pushed back a teeny tiny little bit on the automatic pay increases, generous health benefits, and pre-retirement salary 'bump' promised to enhance pension benefits. The result was the teachers threatened to strike, so the board caved. 

Question: in your Crash Course calculations, do you factor in the total number of people that are dependent on govt pensions vs. social security, and do you have any data about how this varies state by state, as some states do a much better job of managing their state pensions than others. I'm just wondering how much a factor this will be on the local level as state pension payouts collapse and people stop showing up to work since they aren't getting paid. I guess Detroit is pointing the way in this regard.

 

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 402
Anyone who reads my comments

Anyone who reads my comments will guess that I take issue with a lot of these demographic arguments, as follows:

  1. I don't put much weight behind any analysis of our current and future debt burdens / entitlement programs that uses dollars as a metric. Dollars have completely divorced themselves from any meaningful connection to the real world. Really, if you wanted to be thorough, then it could be argued that I won't even be able to buy a cream cheese bagel in 10 years using any amount of dollars, so why do we even bother talking about them? Let's instead do what this site is trying to get us to shift our thinking towards -- using energy and resources as the ultimate metric. The current monetary system will blow up at some pint and we'll be forced back to those basics anyways. That's why I disagree with the assertion that taxing the ultra-rich is not going to provide enough wealth to help out the little people -- purportedly because it is just a drop in the bucket of what is needed, as per Chris's post #8. The dollar system is almost dead. let's move on.
  2. I don't buy the argument that because everyone is getting old that this puts a huge strain on everyone's resources and "we just can't do it anymore!" Firstly, societies have for millennia been able to care for their elders. I see no reason why we can't do that today simple because there are twice as many old people around now as before. Are they really that much of a burden? Secondly, the flip side of this situation would be a rapidly growing population as a result of lots of kids around, which has been the norm for the last few centuries (people used to have 8 kids!!). Well, it could be argued that children require just as much, if not more, resources to maintain for their first 20 years as do old people for the 20 twilight years of their lives. The difference, of course, is that the burden of effort and economic commitment required to raise children largely falls on the parents' shoulders, and it's not so easy to get out of that commitment... On the other hand, caring for old people requires a commitment on the part of the anonymous taxpayer, and the people with enough wealth to support this wealth transfer are getting wealthier and wealthier and getting very good at avoiding taxation, and even changing the rules so they don't have to pay tax. Furthermore, much of the population growth in N America comes from immigration, not babies. So we aren't even being burdened with huge numbers of kids to maintain, which further reduces the burden on the system. We're getting a bunch of ready-to-work adults coming in, which supposedly can get out there and start working and "producing" wealth! Well why isn't it working? Hmm....
  3. I would suggest that a lot of our burdensome entitlement programs have to do with the health care system, because everyone is so unhealthy, due to poor diets and the corporatization of food production and marketing, and the consequent health care / pharmaceutical industries that make money off sick people. We eat crap and then we inject crap into our bodies as an antidote to stay alive.
  4. I also don't buy the argument that we as a society will be unworkably burdened by this aging demographic as a result of the ratio of old to working people dropping from 1:7 in 1950 to 1:3 in 2030. That's basically a doubling. I can't help but notice that robots have greatly aided in workplace productivity. I am pretty sure that the average productivity of a worker today is at least double that of 1950 due to automation! What a perfect and convenient situation! All the old people want to retire, and as luck would have it, robots are now around to facilitate that! Then why isn't it working out? There are other deeper reasons: a) unwillingness of economic leadership to reduce the work week, b) US economy has been hollowed out due to outsourcing of manufacturing overseas as a result of Chinese and US currency manipulation (US dollar reserve currency status). So the problem is NOT that there are too many old people. It's that we've lost our jobs to China.
  5. I agree that the future generations are not going to be able to to buy up the older generation's stuff that they think is going to make them rich, so they can live like kings off their appreciated real estate and stock assets, etc. But there is a difference between being rich (which enables you to buy and consume a lot of energy- and resource-intensive stuff) versus being able to survive off a government pension with dignity. The former will not be possible; the latter is easily possible and essential for a society to stay together, at least for a few more decades until oil runs out.

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