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 Just weeks after the grant was officially withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting revealed that 45 per cent of first-home owners who entered the market during the past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
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.
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.
for The Daily Reckoning Australia