There are times when it’s good to be young – the 1960s, with its prosperity and hedonism, were one such. Being old has fewer joys, but you can argue that the 1990s were a halcyon period for the old, when pension funds were swollen by stock appreciation and the senior citizen generation was relatively small. However with the current trends in demographics and national budgets, the younger generation of Baby Boomers and the older Gen-X’ers (we older Baby Boomers will mostly no longer be with you) can rest assured of one thing: being old in 2040 will be very unpleasant indeed. And this isn’t just a U.S.-oriented problem; it’s more or less true for the world as a whole.
Different generations enjoy halcyon and hellish periods at different times. The 1960s, for example, were a pretty good time for most people in most countries, with high employment and living standards rising above all previous records, but they were especially a good time for young people worldwide, at least in rich non-centrally-planned countries. The combination of high incomes, the availability of plentiful unskilled jobs that didn’t require half a decade or so in a boring college and the sexual revolution made youth satisfaction – and indeed self-satisfaction — hit an all-time high in recorded history.
The 1960s, at least in Britain, were however nowhere near as attractive for the very old. Middle class people like my Great-aunt Nan, who retired before the British retirement pension became universal in 1948, putting their savings in government bonds, saw their savings eroded to nothing by inflation and rising interest rates from 1947 to 1974. The sixties were a thoroughly miserable time for them, with sharply declining real incomes and a new youth culture in which they could not participate and which regarded them as irrelevant.
There have, conversely, been bad times to be young. Turning 18 in 1861 in the United States or 1914 in Europe was no fun at all, and even capitalists like me have to admit that the early years of the Industrial Revolution, with massive child labor, almost no safety standards and very low wages in the new factories, must have been very unpleasant indeed for those participating.
William Strauss and Neil Howe, in their splendid 1990 “Generations” claimed that old people thrown out of work by the 1893 recession had a uniquely unpleasant old age. For many, this may well have been true, but it should be remembered that the U.S. economy had undergone a generation of deflation in the 1873-96 period, while interest rates remained well above their present levels; thus provident citizens will have received high real rates of interest on their savings. In that respect, the U.S. late nineteenth century was much kinder to aging citizens than the early 21st century has been.
The best period in the whole of human history for old people was the 1990s. That’s true more or less worldwide. In the U.S. the stock market soared to record levels while interest rates, while still at satisfactory real levels, declined steadily, giving large capital profits to those who had invested conservatively in long-term bonds. Demographically, the generation reaching old age in the 1990s was relatively small, mostly born in the inter-war period (and having mostly suffered miserable childhoods in the Great Depression and World War II), so pension and social security systems were easily able to bear the burden of their retirement.
In much of Europe and in some U.S. occupations, retirement ages had been set absurdly early, at 55 or even less, so that generation were able to retire on index-linked pensions, while taking retirement jobs in the still-booming economies to boost their incomes and savings. Even in Japan, savings had been boosted by the fantastic stock markets of 1950-90, and it was not yet obvious those years were not coming back. Japan Government Bonds were also an excellent investment in that decade, with high real yields and capital appreciation.
The prospects for those entering old age in the years ahead don’t look anything like so benign. We can already see how the politics of it will play out. In most countries, the period since the 2008 financial crash has seen very low interest rates with unprecedented budget deficits. Both are very dangerous indeed for the long-term prospects of the aging. Low interest rates prevent them from earning a return on their money above the inflation rate except by investing in stocks, real estate and speculative bonds. In the short term, the stocks and real estate go up in price while interest rates remain low, while the junk bonds are subsidized by easy money and hence mostly pay the interest and principal due on them. Thereby aging savers are lulled into a false sense of security by the steady rise in value of their portfolios. With similar policies being followed worldwide, the false sense of security for the aging is a worldwide phenomenon.
Meanwhile in the public sector, deficits have not been brought down and so the stock of public debt is rising steadily as a percentage of GDP. Low interest rates and the last years of favorable demographics before the baby boomers retire have lulled both politicians and the electorate into undue fiscal optimism, so deficits are remaining at a level far above what is actuarially sustainable in the long run.
Once the crash hits, reality will dawn on the world’s savers, causing a global eldritch political scream that may well cause policies to become even worse. It must be remembered that in most countries, the old vote and the young don’t. Hence politicians will be attempted to apply short term band-aids to their budget problems and the actuarial deficits in their social security systems, punting the problems down the road for a decade or so.
In the U.S., the latest Congressional Budget Office figures show the Federal budget deficit has already bottomed out this cycle, with the deficit in the year to September 2015 now forecast to be just a smidgin above the previous year – that’s even with the economy expanding at a satisfactory rate and unemployment declining steadily. By 2025 the deficit is forecast to exceed $1 trillion again – and that’s without any recessions intervening.
The next recession will thus see a poisonous mix of savings value collapses and tax increases inflicted on the aging. However, because of their political power, the aging will be able to postpone the true reckoning for at least a decade or so. If nothing is done, the U.S. social security system will run out of its mythical “trust fund” in 2033. Coincidentally, that’s also about the year when U.S. federal debt, excluding actuarial deficits on social security and Medicare/Medicaid, will rise above 200% of GDP. Around that time U.S. medical costs will peak as the early baby boomers, consumers of resources to the last, exercise their God-given right to absorb half their lifetime medical costs in their last six months of existence before sloughing off this mortal coil.
In 2030, when the early baby boomers are mostly still with us, politicians will still be pushing problems off into the future as far as possible, in order to avoid the wrath of geriatric voters. Taxes will have risen, savings will have been decimated, but with the application of copious short term remedies, the problem will still not be in its acute stage.
By 2040 however, with the first half of the baby boomer cohort departed, Nemesis will have arrived. The social security trust fund will have run out, leading to sharp cuts in payouts to retirees. The comforting idea that because we will be richer by then, a 25% (or whatever) cut in benefits will still leave recipients better off than today’s retirees will prove to have been rubbish. With excessive regulation, government bloat and funny money, productivity growth in the U.S. is running at unprecedentedly low levels (and in Britain has even been negative since 2007). Thus wages in 2033 will not be much higher than today, and the cut in benefits will bite hard.
What’s worse, the voters of that day will see Medicare and other old-age costs apparently rising inexorably over several decades, both absorbing hefty tax increases and making U.S. debt soar to dangerous levels at which its repayment is doubtful. Round about 2040, a debt crisis will occur – at which point the obvious solution will be to cut back drastically the benefits available to old people, who are no longer producing incomes that can be taxed in order to repay debt, and who collectively bear much of the guilt for the parlous U.S. fiscal position.
The Millennials and their successors will blame the old for their predicament and relative poverty, and they will have a substantial amount of reason on their side. Their revenge will be severe, and the old folk of 2040, those born between say 1955 and 1975, will see themselves reduced to a penury reminiscent of the British old of 1965 or the American old of 1895.
The details of the problem and its timing differ in most rich countries, but the problem itself doesn’t. In Japan, by 2040 the demographic problems of its aging society will be dissipating as longer working lives and robot geriatric care allow that admirable country to surmount its difficulties. However it’s likely that Japan won’t get to 2040 without a debt crisis, so the true nadir of Japanese geriatric welfare may come about 2025.
France and Italy will be more or less bankrupt well before 2040 and their living standards will correspondingly have declined sharply, but the problem won’t be confined to old folk. Germany, with its high productivity and well-ordered fiscal policy, may avoid the problem altogether, while Britain looks to be following a trajectory very much like that of the United States. Finally China will have a demographic problem similar to those in the West, so its old folk of 2040 are unlikely to share fully in that country’s increasing prosperity – but those born in 1955-65 will still have living standards much better than in their childhoods.
Maynard Keynes invented today’s lunatic bias against savers, calling for the “euthanasia of the rentier.” The old folk of 2040 may find policymakers taking Keynes’ call for euthanasia all too literally.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)