2040 – America Becomes the Land of the Very Poor Old Baby Boomers
By 2040, the oldest of the infamous Baby Boom generation will turn 95. The youngest, born almost 20 years later will be 75. Unless there is a drastic change in course for the way that we generally prepare for retirement living, amost all of the Baby Boomers who survive until then, and many of us will, will be living entirely off of Social Security.
For more than half of the retirees, that will mean a big drop in the standard of living that we have grown accustomed to. Five factors will feed into that trend:
- Unless there is a sub prime like boom in lending, the part of Baby Boomers standard of living that is supported by debt, will lose that support. Lenders are quite likely to develop a lack of ability to understand that people with low fixed income and declining assets are not good credit risks, but I would not plan the future of the generation on that presumption.
- Real estate will NOT be the unbeatable asset that is has been most of the lives of the Baby Boomers. There will just not be enough demand from the smaller generations coming after the Baby Boomers to keep real estate appreciation at levels comparable to inflation.
- Inflation will be higher into the future. That is because there are two ways that future generations can afford to pay off the promises that have been made to Baby Boomers for retirement: Inflation and a Miracle. With inflation, wages can grow enough to fund the retirement and medical benefits if there are small differences in the ways that the inflation impacts on Social Security and Medical expenses and how inflation impacts wages and taxes. The Clinton administration started this trend by changing the definition of inflation, lowering it by 1%. Future changes will be needed to allow for balance without large tax increases. Medical costs inflation must be controlled to something lower than wage inflation, or health care will simply bankrupt the economy.
- It is well known that Baby Boomers are not saving enough for retirement. And the Boomers who started late were all putting much of their savings into stocks to roll the dice to hope that they picked up 30% per year returns to make up for 30 years of zero savings.
- Very few Boomers will have a significant part of their retirement income in lifetime guaranteed annuities. The most common approach to dealing with longevity risk is for retirees to plan to spend their retirement income over their life expectancy. That thinking is the same as planning to run across the street knowing that you have a 50% chance of being struck by a car. Half of all people live beyond the life expectancy. Life expectancy is another one of those very bad terms that totally misleads people, in this case will help for them to plan for a very poor old age.
This could be thought of as a Black Swan scenario, except that it is highly likely. It is probably much too late for anything different to happen. There are just not enough future working years for the Boomers to make a major change in their own future and there is doubtless little will for the rest of the world to sacrifice to focus yet one more period in history on our generation.
But this scenario needs to be seriously understood by both the individuals who will be a part of this and by the firms who are in the businesses that will be most impacted.
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