What Happens to Market and Economy When Boomers Begin Consuming their Retirement Incomes?

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Australians all let us become more productive, for we are getting older!

It doesn’t quite have the same ring as the first line of the Aussie national anthem, does it? But even though the country is younger (and perhaps freer) than many other countries, it might not quite feel the same way about itself after reading parts of the government’s latest Intergenerational Report, released yesterday. You can find it here.

The burden of today’s Daily Reckoning is to figure out what’s going to happen when Australia’s millions of baby boomers retire. From the looks of it, the stock market will crash, government finances will be stressed, and the economy is going to slow. None of that sounds very promising. But let’s take a quick look to see what the best financial survival strategy is.

First though, a short look at the markets. The RBA comes out with its new interest rate decision. It’s going to be spun as a positive no matter what it decides. Higher rates mean the economy is growing and it’s bullish for the dollar! No change means the housing market will recover and new buyers could step in again. The market is up strongly today – mostly because it got ganked in January, falling 6.23% for the month.

One more side note. We’ve said all along that thousands of young Australians would come to resent the government for encouraging them, via grants, to get into the house market when prices were high and interest rates were low. It was in invitation to years of debt slavery to the big banks, sweetened with some “free” money the government borrowed in the bond market (which will also have to be repaid.

Young buyers are always at more risk of encountering mortgage stress. They are more likely to lose a job in this economy. And they tend to have less discretionary income. And today we read from Nick Gardner in the Sunday Telegraph that, “Almost half the first-home buyers lured into the market by the Rudd government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

“Thousands of young homebuyers are using credit cards or other loans to meet obligations, while those in ‘severe stress’ are missing payments. Just weeks after the grant was officially withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting revealed that 45 per cent of first-home owners who entered the market during the past 18 months are now experiencing ‘mortgage stress’ or ‘severe mortgage stress'”.

Perhaps this is why the Prime Minister is telling everyone that re-election is not a lock. Young voters favoured Labour over issues like Climate Change, an apology, and non-pocketbook issues. Now that their pocket books have been cleanly picked, they may vote a bit differently. We’ll see.

But today’s episode of the DR deals with the “weight of money” argument. That argument is that the share market will make higher highs as long as compulsory super directs baby boomer funds into Australian equities. The question is, what happens to the market and the economy when the boomers shift their weight from saving and investing to consuming their retirement incomes?

Yesterday we mentioned the long-expected move to increase compulsory super from 9% of wages to 13%. But there’s no guarantee this money would go to support equities. Instead, we expect a back-door transfer to pay for Australia’s increasing old age and health care liabilities. It’s a point made yesterday in the Intergenerational report.

The problem for Australia, like in all the Western world is that the population is ageing. You have fewer and fewer workers supporting more and more retirees. Those retirees are also drawing down their stock-market based savings vehicles. Their demand for benefits and income is increasing but their liquidating their asset portfolios to meet that demand.

This transfers the burden of national retirement from the stock market to the government. But as the government itself showed yesterday, the numbers don’t add up. The ageing of the boomers leads to increased national spending on healthcare as percentage of Australian GDP. As you case see from the chart below, health, aged pensions, and aged care all expected to up as a percentage of government spending and GDP

The Boomer Retirement Bill Comes Due

Boomer Retirement Bill

To pay those bills, you need more tax payers and higher taxes. Or you need more productivity. That’s what the government is counting on. It hopes that increases it output per hour by Aussie workers will deliver higher GDP growth and thus higher government tax receipts. But even so, the government itself projects a growing “fiscal gap”, shown below as the annual Federal deficit as a percentage of GDP.

Australia’s Growing Fiscal Gap

Australia's Growing Fiscal Gap

Granted, this fiscal gap isn’t as bad as it is in other places like Japan and the United States. Japan’s government deficits are even more pronounced, and its demographic math even more dismal. The U.S. is also in its own kind of “reality gap” in which expectations of government by the population far exceed what America can afford. The new Obama budget projects $3.8 trillion in spending a $1.4 trillion deficit. There isn’t much in the way of spending cuts to programs what are considered “non-discretionary (defence, social security, Medicaid, Medicare).

You could say America itself has a kind of national “mortgage stress.” The future has been mortgage for a higher standard of living today. But it was a national prosperity built on debt. It’s all falling down. About the only good news is that Obama’s dollar-busting budget may drive higher asset prices for gold, energy, and other commodities.

But Australia and Australian investors face a slow motion fiscal trap. The country receives a big boost from trade income with China and the rest of the commodity consuming world. The government can fund its deficits at reasonable interest rates for now. But what yesterday’s report set up was a fight between two generations.

The Boomers will slowly liquidate share portfolios to meet rising health care expenses. And what they cannot pay out of pocket, you’d expect them to vote themselves. It’s an effective strategy for shifting the retirement burden from the private sector to the public. We have no doubt that Super Funds will be compelled to own government bonds. And the government will sell bonds in order to finance its spending obligations to the Boomers.

But where does this leave the share market and the economy? Can the country really increase output per person and grow its way out of the fiscal gap? The highest paid and largest employing industries are financial services and resources. Are the Boomers going to migrate to those jobs?

Will you have 70-year old coal miners working in Queensland? What kind of work can an ageing population reasonably be expected to do? There are more questions to answer. But we’re up against our daily deadline so we’ll have to leave them until tomorrow.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. …australian government’s intergenerational report…it says…”we must import 35 million fertile female asians”, not surprising from a bunch of wrinkled horny middle-aged dudes…notice the picture in the bottom right hand corner…seems to say that australians have been getting married for recreation, but not procreation…too bad…we’re @#@#’d…

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  2. why are they even worrying about 2050? 2015 will be hard enough. By 2050 there will be bugger all oil being pumped and the western welfare governments will be well and truly finished. And how much super will we boomers have after the most expensive houses in the world suffer a bit of priceing reality?

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  3. According to most definitions of “baby boomer” by 2050 the youngest of them will be about ninety! (1960-2050). The Graph authors must regard anyone born before 1980 as a boomer, given a likely retirement age of 70 by then.
    I’ll be lazy and just link a wiki
    http://en.wikipedia.org/wiki/Baby_boomer

    I was under the impression the baby boomer retirement is starting now, a 1945 baby, is now 65.

    The rest of the article seems ok, but those graphs kind of detract from the point. Guess thats what happens when you get graphs from the government.

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  4. By 2050 there will still be oil. Peak oil is as likely to be a myth as solely human generated global warming – both convenient as they suggest the same reaction. The cartels are reporting limited reserves, but they will find oil when push comes to shove. By 2050 it’ll be a whole new lot of issues on the table as the world population tires of the old ones.

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  5. (that’s not to say that renewable energy (apart from perfectly good food) isn’t a good idea .. it is!)

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  6. My understanding is the actual percent of GDP spent on health now is more than four percent. This is the FEDERAL government amount. The STATE contribution takes it up to something like 7 or 8 percent now.

    Minor point
    February 2, 2010
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  7. Para 3: “But let’s take a quick look to see what the best financial survival strategy is”

    Para ad infinitum: “Woops; Got distracting by me gum flapping about anything that could go wrong between now and never never land – And hit my deadline” …. But tomorrow I’ll come back and … da-da-da – drumroll! … ALL SHALL BE REVEALED!!! – Honest Injun Ozzie! I’m a Yank FA – Would I fib to youse mob???

    OK DD – Ta – I look forward to it. ;)

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  8. “What Happens to Market and Economy When Boomers Begin Consuming their Retirement Incomes?”

    It goes round and round, such that amazingly they will still some how have enough money to eek out an existence, fitting with the general living standard (which may have fallen). What is more critical is WHO is going to do all the work for these retirees when they are old and decrepit? Therein lies the next boom industry … even the trade of the next half-century perhaps?

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  9. Unless Australia gets a government that puts a total halt to immigration the country’s doomed and things will be much worse than these politically correct, sugar coated reports suggest.
    The only good point is the burden will actually be borne by the same baby boomers that foolishly opened the immigration floodgates causing the disaster.

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  10. The country isn’t doomed, but “Australian” as a culture and a national identity are doomed. Western civilization, actually, is possibly doomed, unless there is major population culling over the fence – which is probably the biggest danger worldwide over the next few decades. It’s an ugly world, but of course people with their eyes glued to the TV set don’t realize quite how ugly it is.

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  11. Mike: “we must import 35 million fertile female asians” – And you imply this is a BAD thing Mike? Just which bit do you find offputting??? The fact they are are fertile? Or the fact they are female? Or the fact they are Asian?

    Or the fact that your missus might wag her fertile female non-Asian finger at you and proclaim, “Michael you lecherous pig! You stop oggling those little cuties or I’ll box your bloody ears!!!” :):):)

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  12. The welfare state will be proved a failed unsustainable exercise in socialist dogma whether the bludgers like it or not. All it has done is ruin once productive economies. There should be no pension, virtually no welfare at all actually. Government should be drastically cut and the public service decimated to a very few that actually have to work, abolish the useless states and their parasitic taxes while at it. With the reduced taxes not paying for all that blood sucking flotsam we can all easily fund ourselves into retirement at whatever age we can afford. I live in Asia where welfare doesn’t exist and everybody finds a way to get by, fancy that. And I am already planning self funded retirement as I wouldn’t trust the government to deliver. Just felt like sharing.

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  13. Chunkton, the problem is that besides big government we have big business, which will rapidly fill the void. Both are the problem and the socialist/capitalist dichotomy are the problem – it is both of these materialistic ideologies that are to blame, and they have common origins. If you can curtail the trillionaires, then I’d be interested!

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  14. Poorly worded.. but it’s too early in the day :) Cheers

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  15. One thing seems inevitable and that is the baby-bludgers will have to offload their properties which will cause a big collapse in prices.
    After all regardless of the ‘worth on paper’ value of an overpriced property as an income producer their the pits.
    If you want to buy a headache causing, 24/7 job then get into the landlord business.
    Tenants and the government have more control over your property than you do.
    Best case scenario for the BBs is the government just bleeds them dry with property related taxes.
    You can’t win either way.

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  16. Ahh, but there you go again Dan – an interesting article, looking at some provided numbers and data and disseminating what you think they may mean. But then I get concerned again when you say something like this:

    “Peak oil is as likely to be a myth as solely human generated global warming – both convenient as they suggest the same reaction. The cartels are reporting limited reserves, but they will find oil when push comes to shove.”

    no numbers, no data, no evidence, just a statement based on nothing. If oil production is going to carry on indefinitely being a matter of drilling a hole in the ground and watching black crude flow out under its own pressure, why is 20% of the oil bought by the US coming from tar sands production in Alberta – you have to shift 4 tonnes of earth to get at one barrel worth of tar sands, and producing three barrels costs you a barrel in energy. Hardly easy or economical really, so why are they bothering with tar sands?

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  17. Well I could be wrong, but like everyone else on this planet, I think I’m right. ;)

    Have a read of this:
    http://www.nytimes.com/2009/08/25/opinion/25lynch.html
    http://peakoildebunked.blogspot.com/

    The contention is not entirely that oil is running out (with the world ending and population crumbling into a heap), but that it is wasted and abused. Once the price has hiked, we’ll see that more efficient process take over – http://peakoildebunked.blogspot.com/2007/11/311-peak-oil-debunked-in-four-easy.html – basically, we are not all gonna die, and we may in the end hardly notice that oil’s gone for all the alternative means of transportation that we are likely to see.

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  18. America’s oil has peaked,
    in the 50s,
    peak oil,
    it happened.

    Iran’s oil has peaked,
    it happened in the 80s,
    peak oil, it happened.

    Oil, it peaks all over.
    It will peak globally,
    don’t worry about that.

    Like the ‘Great Aussie Housing Crash’,
    the only question is when.

    I do wonder tho, what will cause the ‘Great Aussie Housing Crash’?

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  19. I wasn’t suggesting Peak Oil to be a fact (well, it may be eventually, but not soon enough that I feel the need to start stocking up on canola oil and plastic toothbrushes) but that perhaps new oil fields are becoming scarce enough, either in reality or because of what we are being told, that digging up vast tracts of the earth to find bitumen and then melting it into oil is economically viable. Surely if oil becomes more expensive, energetically expensive schemes such as tar sands production may become more viable, rather than less so.

    I spent some time working with a real live eskimo from Northern Alaska a couple of months ago – he is a geologist. He and his people are in a very strange position at this point in time. When they look out to sea, they observe an ocean where sea ice cover arrives one month later and breaks up one month earlier than it used to only 30-40 years ago. In mid-summer, the ice extent has retreated so far from their coastline that the increased wave power is eroding the coastline their villages stand on. Their ice cellars, which have kept seal and whale meat frozen for generations are warming up, and people are getting sick from food borne diseases that haven’t been an issue before. When they look inland, they see the vast reserves of oil, shale oil and tar sands on their land that could be the answer to their long-term prosperity. They also know that if they don’t dig it up, somehow, at some point, some government will legislate that someone else can.
    I am curious Dan – do you think that global warming is a myth, or do you think that maybe it is happening, but not caused by us?

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  20. For a long time I accepted the idea of global warming and the greenhouse effect at face value, that it was due to pretty much solely CO2. Added to this depletion of the ozone layer (and the plainly obvious increase in sun intensity and rise in skin cancer rates in Australia), however I can also see how confounding is a problem in climate research, and how things are less certain than they are made out to be.

    The problem with a hot debate (pardon the pun) like climate change is that people think you have to take one view or another. Whilst I accept that CO2 has heat trapping properties, I also know that an atmosphere devoid of CO2 is not compatible with life. Also H2O is more potent in its insulating abilities, and something as simple as increased sun intensity on oceans could affect things. Also volcanic activity is poorly understood. I believe humans have an effect on climate, but that it nonetheless is overstated.

    I am very skeptical about the politics of climate change and attempts at blanket taxation (and globalizing same) – I think governments are not genuine about the environment.

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  21. Basically I am reading with interest as “Climategate” pans out, and the scientists defend their dignity with ever greater vigor. Knowing how much fraud there is in medical research, I am not surprised there is easily as much of it in climatology.

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  22. You couldn’t not be skeptical about the politics of climate change, no matter what camp you are in.
    But there is a difference between medical research and climate research, and that is solely the dollars that get put in. Part of climate gate was crowing that one of the scientists had attracted something like 13 million in funding over a ten year period (I can’t remember the exact figures), and that that proved he was complicit in some sort money-grabbing conspiracy. But anyone even remotely associated with research would know that in science terms, even for a very small research team, that is peanuts. I would be surprised if her was able to keep on his staff any more than a couple of postdocs and two or three postgrad students. And if this guy is/was a big wig in climate science, imagine what everyone else is getting by on.
    Basically, i think the oddest thing about climate change skepticism is coming up with the reason WHY such a huge consensus of scientists would bother coming up with some sort of global conspiracy. Why? What is the point? To secure a miserable amount of funding? They would be far better off working for an industry funded biomediacl group, because you are right – there is billions available to the clever scientist there.

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  23. I don’t accuse scientists of conspiracy, though some are dodgy, some are bought, some are patent frauds – like all humans. However, a valid issue can be hijacked and spun and mutilated until it serves an ulterior purpose. Anyone can think of examples of this – a topical one is the Iraq war. Like.. “oops, we accidentally invaded to save the planet from a lunatic and now we are _burdened_ with the _duty_ to manage these oil fields”. The people are still dying and living in fear, but the pipelines are apparently safe!

    So I’m suggesting the climate debate has taken a turn which no longer serves the purpose that climatology (as I see it) is intended for – observing and understanding and informing debate (is it somehow wrong now to question correlation vs. causation?). Right now it looks like everything is bent towards creating new commercial markets and giving governments increased power … perhaps working towards forging a world government. Big hmm! A lot of good may still come of it all, but I think it’s everyone’s duty to kick out treacherous politicians who act against the interests of their voters – oh sure they believe in sky-falling-in CO2 _now_, but what were they believing in when they signed off on toll-ways, highways, trucking company contracts, and sinking public transportation? What were they believing in when they handed logging companies the keys to pristine native forest, etc?

    Climate science can lead to mega profits if you can influence government policy, so I wouldn’t quite say it’s nothing compared to the health sector – it’s just newer, not necessarily different.

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  24. And the health sector is not always rewarding. It is high risk. Plus you need some serious education behind you.

    I agree with what you have said there Dan, good post.

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  25. …powerful people don’t have to waste their time thinking, they pay the smart people to do that for them…of course the smart people know just what it is that the powerful people want to hear, and waste no time in letting them have it…

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  26. I can’t speak for Australia, but I can tell you what’s going to happen in the U.S. when the boomers begin to consume their retirement.

    The government’s going to consume it before they do.

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  27. The big elephant in the intergenerational report is that, in order to meet the gap, the economies productivity must be improved. At the same time as this is being discussed, the CPRS bill sits there, waiting to reduce productivity by increasing the cost of energy. So you have a government, on the one hand, saying ‘we must increase productivity’, and on the other saying ‘we must decrease productions to meet targets’. You can’t have it both ways.

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