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.
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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.