At the end of the 1983 movie “Trading Places,” the Duke brothers’ solid, long-established commodities business has been bankrupted in the orange juice pits by the insider-trading young sleazebags Winthorpe and Valentine, and the Dukes realize to their horror that trading has closed and the screens are dead. “Turn them back on” they cry feebly as they are led off the trading floor. The Baby Boomers are now in this position.
Like the Duke brothers, the Baby Boomers had it very good for a very long time. However, the Duke brothers brought their hard fate upon themselves, first by hiring private detectives to steal Federal crop reports, and then by ruining their promising young employee’s life for a $1 bet. The Boomers have been just about as foolish, committing avoidable errors that have brought them to this unhappy state.
Probably the most important contributor to the Boomers’ plight is not entirely their fault. Previous generations, notably the Greatest Generation who entered the workforce after World War II, were rewarded with remarkably generous pensions, set at a high percentage of their final salary immediately before retirement. These pensions often protected them against inflation and ensured that at least the early years of their retirement would be remarkably affluent (the high inflation of the 1970s made older generations suffer, as their pensions’ protection against inflation did not normally protect adequately against the double-digit inflation of the late 1970s.)
Final-salary pension schemes had one enormous disadvantage for the young Boomers: to pay a generous pension, they required you to remain at the same employer for the great majority of your working career, at least 30 years. Boomers had grown up in the late 1960s; they had difficulty doing the same thing for 30 days, let alone years.
On the other side, in the 1970s, when debt yielded a negative real return and equities tended to decline in price even before inflation, corporations found final-salary pension schemes cripplingly expensive. Companies could chisel workers once they retired, but the worker who got steady 10% wage rises in his 50s, to reflect inflation, imposed an enormous burden on his employer’s pension scheme when he retired at 60. Then there was the problem of union negotiations, where previous generations of management had “given away the store” on pensions to over-mighty unions, removing the burden of excessive pay awards on current Earnings Per Share, but burdening future EPS with the pensions’ funding. By 1980, most corporations were desperate to change their pension systems.
The stock market boom of the 1980s, and the invention of the 401(K) plan under which employers and employees could both contribute to pensions on a tax-deductible basis, enabled them to do so. Initially, 401(K) plans were well funded by employers – they had to be because even in the bull market of the 1980s, the young baby boomers could see that the withdrawal of final salary pensions reduced their security.
But with the stock market rising almost every year from 1982, and employees seeing ever larger balances in their 401(K) accounts (and having not the slightest clue about how those amounts translated into annuities on retirement) the switch to the new system was almost universal. Naturally, in downturns or for new employees, employers would chisel their share of the funding, so that from paying for 100% of an employee’s pension, they would now be paying for 20% or less of what was necessary – by 2009, Thomson Reuters was funding my 401(K) with 2% of my salary, which would not have paid me an adequate pension if I had stayed there a century or more.
Still, a bullish stock market and little knowledge of actuarial realities kept the Baby Boomers happy. 2008 was a nasty shock, after which many of them realized they would have to retire later, but the 10-year stock market boom of 2009-19 seemed to have made all well again.
Silly, silly people! Their retirement castle was built on sand, and no amount of frantic saving can now save them from an old age of poverty. The stock market fall is not going to be reversed, it will probably intensify, and their 401(K)s, inadequate when converted into pensions anyway, will never again be worth what they were in mid-February.
Another Boomer problem that is not really their fault, unless they participated directly in it, is the wreckage made of corporate finance in last 40 years. In the 1970s, CEOs were reasonably paid, corporate earnings were difficult to manipulate, company shares could not be bought back, and transparency ruled. Now derivatives have made it impossible to assess earnings, CEOs are grotesquely overpaid, most of it through stock options, stocks are bought back until companies have no equity, tangible or otherwise, and Wall Street manages its high-risk operations through a risk management system Value-at-Risk, which rests on Gaussian assumptions that are not true.
For Boomers who have been employed outside finance or corporate top management, these are inexplicable changes for which they should bear no blame. The Boomers in the guilty sectors have made pots of money by their participation but alas, like the Duke brothers they are now discovering that they are not as rich as they thought they were.
Even non-financial Boomers are guilty, however, for they have supported the most appalling short-termist monetary and fiscal policies. On the fiscal side, the Social Security system had been rigorously reformed in 1983, so that it was almost sound, albeit through making people retire at 67 from 2026 onwards. It only needed a modest further tweak, around 2000, to ensure its continued survival through the cash outflow bulge of the Baby Boomers’ retirement. It never got that tweak, as Boomer Presidents found more enjoyable things to do with the money, such as invading various parts of the Middle East. At this point, therefore, the system is due to run out of money in 2033 (and Medicare to run out of money several years earlier) and no politically feasible tax increase or benefits tweak is available to stop it doing so. In 2034, therefore, social security benefits will be cut by at least a quarter, almost certainly more for all but the very poorest.
Beyond this, while a Boomer President (the fiscally if not otherwise admirable Bill Clinton) balanced the U.S. budget in 1999-2000, successive Boomer Presidents thereafter have become increasingly irresponsible, increasing deficits and debts beyond belief, without any serious attempt to rein in spending. The United States will probably not declare bankruptcy before about 2040, when few Boomers will still be around, but it is Boomer Presidents and Boomer voters whose irresponsibility will lead to this civilization-killing disaster.
Bad though their fiscal policies have been, Boomer monetary policies have been even worse, holding interest rates below their free-market level since 1995. (Alan Greenspan, the Chairman who took the Fed off the straight and narrow in 1995, was not a Boomer, but his wife Andrea Mitchell, who introduced him to the Clintons and fashionably leftist ideas, most certainly was; subsequent sloppy Fed Chairmen have all been Boomers.)
Artificially low interest rates have had three effects on Boomers’ lives. In the short and medium term, they produced a crazy spiral of asset prices, in stocks, debt and housing, which made Boomers feel artificially rich and decapitalized many major U.S. corporations such as Boeing (NYSE:BA) through stock buybacks. Second, they made the rate of productivity growth infinitesimal because of all the stupid investment they encouraged, wrecking the actuarial basis on which Boomer retirements were built.
Third, visible to Boomers only when they try to turn their 401(K)s into annuities that will provide for their retirement, they have made annuity rates impossibly low, so that $1 of capital buys less annuity today than it has ever done before. (For those Boomers lucky enough to have final-salary pension schemes, for example in the public sector, this becomes a problem only when the pension scheme goes bankrupt, but most Boomers today bear the actuarial risk of low annuity rates themselves, rather than having an employer or municipality do so.)
Now, courtesy of the coronavirus, the chickens have come home to roost. The artificially high stock prices are no longer sustainable; markets have begun – unexpectedly rapidly – the process of finding their proper level, probably about 11,000 on the Dow Jones Industrial Index (equivalent, when you gross up for GDP growth, to the 4,000 at which the index stood when monetary policy was let off the leash in February 1995.) Over the next year or two, the same will happen to house prices, especially in the over-inflated cities of London, San Francisco and New York. Once this has happened, Boomer assets will run out very quickly indeed, and they will be reduced to penury in their old age.
Millennials will doubtless rejoice at the Twilight of the Boomers, a generation they dislike. But we Boomers in our impoverished old age can draw satisfaction from the growing likelihood that Millennials, trained to idiocy by their expensive colleges, will make an even worse mess of their lives.
(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.)