Demographic Dilemma

“The early classical economists — Smith, Ricardo, Malthus, Mill, Marshall, and others — were keenly interested in the role that the young and the aged played in building wealth. Living at a time when birth rates were high and populations were expanding, they wanted to determine how demographic growth changed wages, savings, and output; which classes benefitted; and whether a larger population was a long-term blessing… Two centuries on…we might pose a different question: What happens to the wealth of nations when the populations get old and begin to shrink?”

— Bill Bonner and Addison Wiggin, Financial Reckoning Day Fallout

We begin by parroting Auguste Compte: “Demography is destiny.”

In America’s case, demography is like a train wreck that you see coming from far away; you know it’s going to be ugly, and you can’t avert your eyes as you watch it unfold.

And so, wincing at a distance, we watch these trends unfold… thinking about how they affect your your wealth, your everyday life, and more…

Fewer Young Workers to Replace Retiring Workers

This one seems obvious, but people just aren’t making babies the way they used to.

My grandmother was one of nine, my father one of six, and I’m one of four. With each subsequent generation, there are rapid, dramatic changes in the number of children being born.

According to the Organization for Economic Cooperation and Development:

On average 2.1 children per woman should be born in a country for there to be long-term population stability: when it is significantly lower than this the population falls. By the beginning of the 21st century, only two OECD countries – Mexico and Turkey – were still above the 2.1 line. This is in sharp contrast with many developing countries where fertility levels remain high.

Looking at this infographic, you can see just how significant the drop in birth rates has been. The OECD average was over 3 births per woman aged 15-49 years in 1960, which has been cut in half in only 45 years.

Take a look at Korea, where the drop in newborns has been truly dramatic. The country had one of the highest fertility rates of the 30 countries, and now it has one of the lowest.

Overpopulation fear-mongerers crusading for Mother Earth and her resources would be ecstatic at these figures. But in reality, having less young blood to replace retiring workers is a major problem, for a host of reasons. Bill and Addison explain:

In 1960, there were nearly seven working-age people for every person over 65. In 2000, that number had dropped to 4.5 working-age people. By 2030, the OECD expects there to be only 2.5 people working for every dependent elderly in the developed world.

In addition to the shift in demography, people across the developed world are retiring younger; thus, the pool of taxpayers supporting retired pensioners is rapidly evaporating.

In the highly developed welfare states of Western Europe, the decrease has been striking. In France, Germany, and Italy, fewer than 5 out of 100 men over the age of 65 are working. By 2050, the IMF projects, each of these countries will have only one taxpayer (or fewer in Italy’s case) supporting each pensioner.

Speaking of retirees, you, and your children, may never get the chance to call yourself one.

You’re Never Going to Retire

“With longevity increasing and the retirement age decreasing,” wrote Bill and Addison in Financial Reckoning Day, the financial burden placed on the world’s working-age populations may be unbearable.”

There has never been a time when people lived longer than they are today. Life expectancy has increased in almost all countries around the globe, so what does this mean for the sustainability of our pension practices?

According to the OECD:

Life expectancy from 1820 to the end of the 20th century had more than doubled everywhere in the world. The largest increases in life expectancy has been realised in the past 100 years, associated with factors such as improved living conditions, hygiene and preventive health care.

A woman reaching age 65 could expect on average to live to over 80 in 1970 (65+15), while for men in 1970 the OECD average was under 78. Life expectancy after retirement age goes up steadily in the 1980s and 1990s for both men and women and for women is approaching the 85-year mark (65+20).

Living longer has profound consequences. Not only does it affect the population age structure of our societies, with relatively more people over 65 than ever before. It also affects the sustainability of social policies: the retirement age was set at mid-sixties, for example, when on average people expected to live for only a few years afterwards.

Now, men can expect to live for another 16 years on average and women nearly 20. Longer life also affects the meaning of old age: it means enjoying potentially many more healthy years, but also more of us becoming very elderly with possible losses in the quality of life.

Are we simply living in a fool’s paradise? Can we really just rely on the pay-as-you-go myth that we will all be able to retire at someone else’s expense, despite the fact that we know that most retirees will love longer than expected, and draw out far more money than they have a right to do?

The government has made guarantees for retirement and medical insurance systems, but the math makes it clear — the number of workers coming into the economy is not enough to fund the old-age pension systems.

Even 50 years ago the majority of population structures were like pyramids, with a broad base of young age groups and a small top of older people.

That is no longer the case, as populations are being transformed into “top heavy” shapes with a narrower base, a bulging middle moving steadily up toward retirement, and a long, tapering top.

The OECD reports:

Dependency ratios compare the size of the age groups often characterized by financial independence with those who may well be dependent, such as children or the elderly. Very significant increases in the ratios of the 65+ age group can be expected, compared with the middle 15-64 year-olds, with potentially far-reaching consequences on resources available for other necessities.

On a more social note, a more “bottom-heavy” society — that is, a society with more youths than elderly folks — tends to have a more rebellious and revolutionary impact on society, and is more receptive and open to change and new ideas. When a society becomes the opposite (“top-heavy”), you’re looking at a nation in which the majority is fearful, apathetic, and resistant to progressive change.

Not to mention, older people lose their desire to accumulate impressive material items, instead insisting to hold on to each and every last thing, for fear they may not be able to get it otherwise.

The elderly tend to contribute to the economy much less than the carefree youths always looking for the latest and greatest. Retirees don’t directly produce anything, they don’t spend as much money, and they’re more likely to depend on someone else for help, like their children or the government. Bill and Addison continue:

…a demographic shift from young to old throughout the developed world is likely going to be as challenging ‘to the existing political and economic structures’ as any youth revolution of the past.

Imagine millions of people preparing for retirement. They no longer borrow money to finance a bigger home. They no longer buy bigger cars for their family vacations. They have all the time-saving devices and household appliances they need. And they are no longer buying stocks ‘for the long run.’

Essentially, the older a population gets, the more conservative it becomes, and the less likely it is to embrace risk-taking by entrepreneurs or accept the kind of change that comes with innovation.

Resistance to change can be a problem that has long term impacts on economic growth, financial gains for individual investors, and even how people work, play, or raise their kids.

Encouraged savings, investment innovation and entrepreneurship are all keys to a flourishing economy.

Juan Enriquez is the chairman and CEO of Biotechonomy, a life sciences research and investment firm, not to mention an expert on the economic and political impact of life sciences. Enriquez bolsters this idea, writing:

I listen to entrepreneurs and they tell me the things they’re building that day, or that year, or that month. There’s this absolutely enormous wave of opportunity coming to generate wealth on an absolutely unprecedented scale.

People are richer today than at almost any period in history. And, by the way, it’s entrepreneurs, discoverers, scientists and researchers, who are generating this world. They’re doing so at a speed which is mind boggling.

Instead of trying to keep things exactly as they are, instead of trying to spend more than we have, we should just build an infrastructure for entrepreneurs to be able to ride these waves of knowledge. These waves are accelerating.

God help those societies that are scared of entrepreneurs. God help those societies that don’t support, live with, and educate their kids for this kind of change because they are going to become old, poor and jobless very quickly.

Most societies and countries over time have disappeared precisely because they were resistant to or hadn’t learned how to adapt to change.

Blame It On The Baby Boomers

What was once a looming threat off in the distant future has now fully arrived; the retirement of baby boomers.

Nearly a quarter of Americans were born between 1946 and 1964, also known as baby boomers.

That’s more than 75 million people.

On January 1st, 2011, the very first baby boomers started turning 65, and there are millions right behind them, all rushing toward retirement with a promise that the rest of us will take care of them. From that day forward, more than 10,000 Baby Boomers will reach the age of 65 every single day for at least the next 19 years.

There’s only one major problem; we don’t have the money to follow through on those promises.

With a flat-broke economy on the verge of disaster, an elderly population living longer than ever before, and healthcare costs that are skyrocketing, we’ve got a serious — and expensive — dilemma on our hands.

Info Wars writes:

Today, America’s elderly are living longer and the cost of healthcare is rising dramatically.  Those two factors are going to make it incredibly expensive to take care of all of these retiring Baby Boomers.

Meanwhile, the sad truth is that the vast majority of Baby Boomers have not adequately saved for retirement.  For many of them, their home equity was destroyed by the recent financial crisis.  For others, their 401ks were devastated when the stock market tanked.

Meanwhile, company pension plans across America are woefully underfunded.  Many state and local government pension programs are absolute disasters. The federal government has already begun to pay out more in Social Security benefits than they are taking in, and the years ahead look downright apocalyptic for the Social Security program.

If we are not careful all of these Baby Boomers are going to push us into national bankruptcy.  We simply cannot afford all of the promises that we have made to them.

With nearly 3 out of 4 people filing to claim Social Security benefits as soon as they’re eligible at age 62, there are going to be a lot of retirees to answer to. The availability of retiree benefits is on decline, plain and simple.

Frank Holmes, founder of U.S. Global Investors explains the impact an aging society will have on the healthcare industry:

According to health care information and technology company IMS Health, total pharmaceutical spending around the globe is expected to reach $1.3 trillion in just three years’ time.

Indeed, in many parts of the world, the fastest-growing demographic is those aged 65 and older, a cohort that is much more likely to be prescribed medicines and require other health care treatments and services. Because of rising life expectancy, the number of centenarians—those over 100—is projected to grow 10-fold between 2010 and 2050, according to the National Institute on Aging.

As a result, the number of people over 65 will, for the first time ever, make up a larger percentage of the world’s population than those under five. This bifurcation should continue to widen as even more people live longer and reach advanced ages.

And just how much money will be needed to cover these medical care costs? Newsmax reports:

A 55-year-old man with typical drug expenses needs to have about $187,000 just to cover future medical costs. That’s if he wants to be 90 percent certain to have enough money to supplement Medicare coverage in retirement, according to the Employee Benefit Research Institute.

Because of greater longevity, a 65-year-old woman would need even more to cover her health insurance premiums and out-of-pocket health expenses: an estimated $213,000.

Take a look at the chart below to see how the U.S. compares to the rest of the world, and where we’ll be by 2050.

The aging of the baby boomers — a significant chunk of our population — will no doubt cause an increase in the ratio between workers to retirees. This increase will undoubtedly put a huge strain on society and our already-dwindling retirement resources.

Pension Poverty and Social “Security”

“After the stock market began to fall in 2000, private pension benefits became increasingly vulnerable. Having invested in stocks with the same reckless confidence as the individual investors, corporate pension plans are in trouble.”

–Bill Bonner and Addison Wiggin, Financial Reckoning Day Fallout

“Promises made in flush times cannot be kept in lean times…”writes Charles Hugh Smith, “regardless of what was promised, what can’t be paid won’t be paid. The federal government can print money, but state and local governments cannot print money to pay soaring pension and healthcare costs. Push taxes and junk fees up enough and you will spark a taxpayer rebellion.” He elaborates:

The core problem with pension plans is that the promises were issued without regard for the revenues needed to pay the promises.

Lulled by 60 years of global growth since 1945, those in charge of entitlements and publicly funded pensions assumed that “growth”– of GDP, tax revenues, employment and everything else–would always rise faster than the costs of the promised pensions and entitlements.

But due to demographics and a structurally stagnant economy, entitlements and pension costs are rising at a much faster rate than the revenues needed to pay the promised benefits. Two charts (courtesy of Market Daily Briefing) tell the demographic story:

As the 60+ million baby boom began qualifying for Social Security and Medicare entitlements, the percentage of beneficiaries rose quickly from a decades-long level of about 16% of the total population to 18.5%.

This might not seem like much, but what’s troubling is the steep rise in the number of beneficiaries while the number of full-time workers who pay the vast majority of the income taxes has remained stagnant.

Social spending is soaring as a percentage of the economy (GDP) while revenues to support that spending are limited by the slow-growing economy and the correlation between high tax rates and recessions.

When Social Security was first founded, the average U.S. worker at age 65 was expected to live another 11.9 years, but if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years.

If you crunch the numbers, the normal retirement age, indexed to longevity since 1935, would be 73. That’s right — we may all have to wait until the ripe old age of 73 to receive full benefits, so just imagine how long your children and their children will have to continue working.

With populations aging in almost every developed country, the kind of population-based increases in economic growth are going to be harder to come by in the future with more and more people reaching retirement and living off of unfunded entitlements that cost more every year.

Parallels to Japan

For the people of Japan, what sounds like a blessing is actually a very dire national problem: Its citizens live a very long time. In the early 1980s, Japan was the youngest developed society in the world. But fast forward to 2005, and it became the oldest, with 105 aged people for every person under the age of 15.

Reason.com explains:

With an average life expectancy of 85 for men and 87 for women, Japanese people are the longest lived in the world. Combine that with a low birth rate—just 1.41 children per woman—and you get a top-heavy country, with 22 percent of the population aged 65 or older.

Japan spends almost 30 percent of its annual budget on its social security program, the vast majority of which goes to medical care and pensions. But the budget is already overburdened; with a 227 percent debt-to-GDP ratio, Japan is also the most indebted country in the world.

One estimate by the Japanese government found that by 2060, the population will have dropped from 127 million down to 87 million—and that as much as 40 percent of the country could be seniors.

Japan now has the highest percentage of elderly in the world, with a top-heavy society of young workers supporting the never-ending masses of retirees, and a population estimated to drop from 127 million to 100 million by 2050. 35 years from now, more than 42% of Japan’s population will be 60 or older, with 15% over 80 years old.

Marketers and economists studying the trends in Japan as an early warning test are not wrong — what’s happening there could most certainly happen here at home. By 2040, the Census Bureau expects the number of aged people (65-74) will grow by 80%, and the over-80 age group will explode by 240%.

Imagine all these millions of people preparing for retirement; downscaling their lives, cutting back on spending, paying down debts, adding to their savings, selling their stocks, and ceasing to borrow money. Our economy, consumer society, and retirement programs are all in jeopardy in the face of this looming demographic disaster.

How to Protect Yourself

There are a few things you can do to circumvent this demographic dilemma. The first thing is to save your money. Seriously.

Seems pretty elementary, and it is, but saving (as we can see with baby boomers) is not a typical hallmark of Americans. Take the tale of Micael Vanatta, as told by News Max:

Many retirees banked on their homes as their retirement fund. But the crash in housing prices has slashed almost a third of a typical home’s value. Now 22 percent of homeowners, or nearly 11 million people, owe more on their mortgage than their home is worth. Many are boomers.

Michael Vanatta, 61, of Vero Beach, Fla., is paying the price for being a boomer who enjoyed life without saving for the future. He put a daughter through college, but he also spent plenty of money on indulgences like dining out and the latest electronic gadgets.

Vanatta was laid off last January from his $100,000-a-year job as a sales executive for a turf company. And with savings of just $5,000, he’s on a budget for the first time. In April, he will start taking Social Security at age 62.

“If I’d been smarter and planned and had the bucks, I’d wait until 70,” says Vanatta, who is divorced and rents an apartment. “It’s my fault. For years I was making plenty of money and spending plenty of money.”

Vanatta is in the majority. Some 51 percent of early boomer households, headed by those ages 55 to 64, face a retirement with lower living standards, according to a 2009 study by the Center for Retirement Research at Boston College.

Too many boomers have ignored or underestimated the worsening outlook for their finances, says Jean Setzfand, director of financial security for AARP, the group that represents Americans over age 50. By far the greatest shortcoming has been a failure to save. The personal savings rate — the amount of disposable income unspent — averaged close to 10 percent in the 1970s and ’80s. By late 2007, the rate had sunk to negative 1 percent.

You heard it here first — save your money. And you can’t rest on your laurels believing someone else is going to take care of you in your retirement. Dave Gonigam reports:

The Social Security trust fund “can’t be trusted and isn’t funded,” once quipped David Walker, the former U.S. comptroller general and protagonist of I.O.U.S.A. — the documentary Agora Financial produced in 2008.

The actuaries who oversee Social Security say the fund will be exhausted by 2033 — a mere 18 years from now. At that point, only incoming Social Security taxes would be available to pay benefits, and benefits would have to be cut by 23%.

Last week, however, researchers at Harvard and Dartmouth suggested those figures are, shall we say, optimistic. They say the actuaries have been relying on suspect numbers for the last 15 years. Alas, the researchers wouldn’t be drawn on how much sooner the fund would be depleted or how much more benefits would have to be cut.

What’s more, Dave reports that Boston University’s Laurence Kotlikoff  says Social Security is sitting on $24.9 trillion in unfunded liabilities through 2088. Unless the average 65-year-old baby boomer is planning to live to 138, don’t put all your faith into the system taking care of you.

Regards,

Genevieve LeFranc
for The Daily Reckoning

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