Effects of Demographic Shift and Baby Boomers

[fourthirtysix]

In a switch up from the main talking points of global economic imbalances or bubbles, I was interested to get opinions on the demographic shift that will occur as massive numbers of baby boomers retire starting in a few years.

Some things I've read say that US baby-boomers and the aging populations around the world will buck the "old trend" and continue to work, and that they control a large amount of wealth and that their spending could spur huge amounts of growth across the US and the world.

On the other hand, I read other articles that focus on the problems that government entitlement defecits and withdrawls from the equity market will wreak on the various countries' economies.

Some say that all of this is inherently deflationary, but others say future global growth is set to be strong in the long term future after existing imbalances are worked out. Again I find myself reading two rather different takes on what could occur when this major shift sets in. I'd appreciate any comments or ideas anyone has on the subject.

Some articles I've read on the matter include:

http://www.clomedia.com/content/temp...=976&zoneid=24

http://money.cnn.com/2006/06/13/maga...tune/index.htm

http://economics.about.com/od/health.../baby_boom.htm

http://www.frbsf.org/publications/ec...el2005-21.html

[hoodoo]

Re: Effects of Demographic Shift and Baby Boomers

Hi,

I need to read the items you posted but wanted to add this work-in-progress to your list of readings.

http://www.the-great-retirement-expe.../pamphlets.htm

Cheers,

Cory

[jk]

Re: Effects of Demographic Shift and Baby Boomers

the most interesting pieces i've read have focussed on the fact that the nominal value of retirees' assets will be meaningless, since all they can buy is what is produced by the smaller successor generations. that leaves out the possibility of buying the production of foreign countries. but of course that will just continue and amplify the processes already in place which are transferring america's wealth abroad.

[EJ]

Re: Effects of Demographic Shift and Baby Boomers

Ok, here's mine.

Greenspan Undermines Bush's Social Security Plan
February 14, 2006 (John M. Berry - Bloomberg News)

As he has in the past, the Fed chairman acknowledged that the long-term, gradual decline in the share of the U.S. population of working age already under way creates a huge problem. That's the basic reason some projections show Social Security's financial sustainability to be questionable. Greenspan believes the difficulty is more fundamental.


"Unless productivity growth increases significantly, the per capita GDP must very significantly slow, and that means either the retirees or active workers, say in the year 2030, must have a significant slowdown in their standard of living," he said.


The way to create the needed productivity growth "is for savings to be put aside to be invested in capital assets, and those capital assets, by increasing relative to the labor force, tend to create increased output per hour."


"Our problem with respect to retirement has got nothing to do with finance; it's got to do with real assets, real physical resources, and goods and services that people consume," he said.


At another point, in response to a question from Democratic Senator Jack Reed of Rhode Island, Greenspan said, "We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."

The easy political solution to the baby-boomer demographic problem is biased toward inflation. I don't see any politicians jumping in to push for the hard solutions Greenspan says are needed.

[fourthirtysix]

Re: Effects of Demographic Shift and Baby Boomers

the most interesting pieces i've read have focussed on the fact that the nominal value of retirees' assets will be meaningless, since all they can buy is what is produced by the smaller successor generations. that leaves out the possibility of buying the production of foreign countries. but of course that will just continue and amplify the processes already in place which are transferring america's wealth abroad.

so then too much retiree wealth chasing too few goods produced by a shrinking workforce would lead to inflation.

and then you have to fund all these new entitlements for the boomers, again through huge inflation i suppose, because even if you raise taxes there will be fewer people working.

that leads to higher interest rates, declining dollar and reduced purchasing power and standard of living for the united states, and a whole variety of outcomes depending on the economies of different countries..

perhaps im starting to understand this.. perhaps..

[Finster]

Re: Effects of Demographic Shift and Baby Boomers

In a switch up from the main talking points of global economic imbalances or bubbles, I was interested to get opinions on the demographic shift that will occur as massive numbers of baby boomers retire starting in a few years...]

It's a vastly overrated issue. The real problem is not that people are living longer, it's that our entitlement programs haven't adjusted accordingly.

The whole issue is thus commonly framed in the wrong terms, cast as if it were simply some natural phenomenon that we are helpless to do anything about aside from tighten our belts. It is nothing of the kind; it is a problem made in Washington.

If we simply raised the age of SS benefits eligibility one year for every year of increased life expectancy, it wouldn't even be on the radar screen.

[jk]

Re: Effects of Demographic Shift and Baby Boomers

It's a vastly overrated issue. The real problem is not that people are living longer, it's that our entitlement programs haven't adjusted accordingly.

The whole issue is thus commonly framed in the wrong terms, cast as if it were simply some natural phenomenon that we are helpless to do anything about aside from tighten our belts. It is nothing of the kind; it is a problem made in Washington.

If we simply raised the age of SS benefits eligibility one year for every year of increased life expectancy, it wouldn't even be on the radar screen.

if only the world were as rational as we! on the other hand, we could say that inflation is a vastly overrated issue, since it too is an issue made in washington. same thing for energy policy, taxes, trade regulation and so on. overrated all of them!

shall we rededicate this board to baseball, football or the weather?

[DemonD]

Re: Effects of Demographic Shift and Baby Boomers

Another anecdotal report:

Working in a place with a lot of active, older people, I have a little bit of a biased viewpoint. But here, in los angeles, many people of retirement age work. Some work because they have to to be able to afford living in Tinseltown, with our beautiful weather, our hot babes, and our 90 degrees plus voting days on the first Tuesday in November. Some work because the WANT to work, and because their (mostly white collar educated) personas are geared towards A-type, healthy and active lifestyles. Part of the productivity issue is the so-called "brain drain," that is, educated boomers who are leaving jobs that require a lot of skills and education. I think a lot of boomers are going to continue working, likely enough to mitigate some of the productivity issues that Greenspan mentioned.

By the way, how old is Alan Greenspan now, and how much does he travel, and how much work does he do?

There definitely will be some issues in the coming years. I think more than SS, Medicare and health care in general will be our country's biggest entitlement issue.

Overall in terms of the main topic of this thread, I don't see as much pain and suffering coming as many would predict. But I would agree with those that tend to think that the overall effect will be inflationary in nature (just like pretty much everything else that seems to be going on with the US nowadays).

[Finster]

Re: Effects of Demographic Shift and Baby Boomers

if only the world were as rational as we! on the other hand, we could say that inflation is a vastly overrated issue, since it too is an issue made in washington. same thing for energy policy, taxes, trade regulation and so on. overrated all of them!

Poppycock and balderdash. With inflation etceteras, we at least recognize the issue as inflation. Calling a catastrophically mismanaged entitlement policy a "demographic" problem diverts our attention from the real problem. I'm surprised you are having such a hard time telling the difference.

[Finster]

Re: Effects of Demographic Shift and Baby Boomers

The easy political solution to the baby-boomer demographic problem is biased toward inflation. I don't see any politicians jumping in to push for the hard solutions Greenspan says are needed.

There's another wrinkle to it now that we didn't used to have. Before benefits were indexed to wages and prices, their real value could easily be cut by inflation alone. Now that we have that indexing, the same effect can only be realized from the difference between actual inflation and what is reflected in the indexes.

For inflation to work, the indexes must understate it. The Boskin Commission was the first high-profile step along that path. Look for more.

[jk]

Re: Effects of Demographic Shift and Baby Boomers

Poppycock and balderdash. With inflation etceteras, we at least recognize the issue as inflation. Calling a catastrophically mismanaged entitlement policy a "demographic" problem diverts our attention from the real problem. I'm surprised you are having such a hard time telling the difference.

it's a demographic problem as much as it's an entitlement problem. it's all relative, remember? every variable can be defined in terms of the other variables, and none of our stars are truly fixed.

i think demographic issues are real, irrespective of the entitlement programs. the number of dependents per worker, over the whole economy, is an important ratio, and the shifts will be handled in a number of ways, including inflation, including adjustments to the entitlement formulae, and including boomers working into their later years. other countries' demographic problems are worse, and china in particular has a big time issue in its future as a consequence of its one child policy. i think you do a disservice to dismiss as "vastly overrated," i.e. not worthy of serious examination, an issue that people want to discuss here.

[Finster]

Re: Effects of Demographic Shift and Baby Boomers

it's a demographic problem as much as it's an entitlement problem.

No. It's a pure entitlement problem. The retirement age has been frozen in time while people live longer. Only government works that way. The rest of the economy adapts with changing reality.

i think demographic issues are real, irrespective of the entitlement programs. the number of dependents per worker, over the whole economy, is an important ratio, and the shifts will be handled in a number of ways, including inflation, including adjustments to the entitlement formulae, and including boomers working into their later years. other countries' demographic problems are worse, and china in particular has a big time issue in its future as a consequence of its one child policy.

Despite your claim to the contrary, everything else you just said indicates you are not thinking. You are just parroting the government line that shifts the blame from politicians and the results of years of their using voters' money to buy votes to some mysterious, inanimate force that is just "out there".

Just for example, you seem to assume that the "number of dependents per worker" is just some kind of force of nature. It's not. If it is fixed by government policy, then government policy has to accept blame.

i think you do a disservice to dismiss as "vastly overrated," i.e. not worthy of serious examination, an issue that people want to discuss here.

I could simply have jumped on the same bandwagon as everyone else and in the process surrendered all legitimate claim as some kind of contrarian. That bandwagon will chug along without me just fine, thank you, and to the extent it does so no solution will ever be reached because it fails to identify the problem in the first instance.

In fact it is serious examination here that you seem to want to avoid. Either that or your idea of serious examination is merely to repeat the same political propaganda-come-folk-wisdom that we've been spoon fed for years. Sorry, but mere mutual affirmation of what is already mob wisdom is not even close to serious examination.

Now look back at my first post in this thread, and your reply to it. I dared to challenge the conventional wisdom and your response was to ridicule me. Serious examination? Oh please.

[bart]

Re: Effects of Demographic Shift and Baby Boomers

if only the world were as rational as we! on the other hand, we could say that inflation is a vastly overrated issue, since it too is an issue made in washington. same thing for energy policy, taxes, trade regulation and so on. overrated all of them!

shall we rededicate this board to baseball, football or the weather?

Shall I then comment on all the relative politically correct similarities between baseball, football or the weather?

Shall I then list the number of logical fallacies that your basic statements about Washington evidence too?
/sarcasm/




Energy policy <> taxes <> trade regulation <> policy, and so on... but the main thing you ignore and denigrate or ridicule at your peril is that at root, they all have money in common. And the value of that money is decreasing, and at a rate that is increasing and that is being hidden via many clever artifices.
To undervalue that issue or fail to realize that it is the senior importance is dangerous at the very least.

i think you do a disservice to dismiss as "vastly overrated," i.e. not worthy of serious examination, an issue that people want to discuss here.

Discuss away and examine those issues are seriously as you or any others desire, but failing to recognize or fully acknowledge that the actual root cause of most of them is basically inflation and the hiding of the actual rate of inflation will inevitably lead to at best resolving the wrong problem and continuing to walk a false path.

And yes, of course demographics as a subject is only vaguely related to inflation but the actual effects that will occur due to US boomers ages in a few years, and elderly in other countries currently, are very strongly related to inflation and its heinous effects.

[jk]

Re: Effects of Demographic Shift and Baby Boomers

No. It's a pure entitlement problem. The retirement age has been frozen in time while people live longer. Only government works that way. The rest of the economy adapts with changing reality.

outside certain textbooks, the economy doesn't exist divorced from the political system. political reality is also economic reality. the entitlement you refer to was indeed created when life expectancies were shorter, then it became embedded in people's economic expectations, and expectations are a big deal in most economic analyses. people usually voting their economic interests, and the political system then institutionalizes those interests. the entitlement and the demographic issues are intertwined.

further, as i said above, i don't see why inflation is different, analytically. it, too, is a creation of politically created institutions. and who was more political than greenspan, printing like mad at every crisis, testifying for tax cuts based on his predictions that otherwise the tremendous federal surpluses would retire all the tbonds extant and require that the government start buying private assets, and recommending floating rate mortgages, and saying the housing market has already landed? inflation is a political problem at its base. there are those who say every democracy is doomed once its population discovers that they can vote themselves benefits. maybe that's right. but the inflation problem doesn't exist divorced from politics.

also, discussing social security and medicare only applies to the u.s.'s particular institutions. there are demographic issues in every developed country, and some developing ones - again most notably china. the chinese instituted a one child per couple policy some time ago. that has demographic consequences, and changing their political policy on this matter, even if they wanted to, would not change the demographic problems that are predictable over the next several decades. those demographic problems will be expressed, among other ways, in the chinese economy.

i don't think you should cavalierly dismiss the demographic issues. it may not be something to which you want to devote your attention, but that doesn't mean it's "overrated." perhaps i mistook your tone, but my impression was that your "overrated" remark was dismissive and, i therefore thought, inappropriate.

[bart]

Re: Effects of Demographic Shift and Baby Boomers

outside certain textbooks, the economy doesn't exist divorced from the political system. political reality is also economic reality. the entitlement you refer to was indeed created when life expectancies were shorter, then it became embedded in people's economic expectations, and expectations are a big deal in most economic analyses. people usually voting their economic interests, and the political system then institutionalizes those interests. the entitlement and the demographic issues are intertwined.

All of that is fine, especially from an ivory tower or textbook approach... but to make those statements without also placing them in their proper importance or rank is dangerous yet again, to say the least - political reality <> economic reality, and always will be unequal. Of the two, economic reality will *always* trump in the long run, and the institutionalization of those interests is an effect - not the cause.

further, as i said above, i don't see why inflation is different, analytically. it, too, is a creation of politically created institutions. and who was more political than greenspan, printing like mad at every crisis, testifying for tax cuts based on his predictions that otherwise the tremendous federal surpluses would retire all the tbonds extant and require that the government start buying private assets, and recommending floating rate mortgages, and saying the housing market has already landed? inflation is a political problem at its base. there are those who say every democracy is doomed once its population discovers that they can vote themselves benefits. maybe that's right. but the inflation problem doesn't exist divorced from politics.

Now at least I'm getting a glimmer of where your somewhat absurd notions about inflation comes from. No wonder you keep rejecting or ridiculing or critiquing Finster's or my posts in the area.

Just because inflation is created by a central bank, which was created by various extremely poorly educated (at best) politicians, you assert that it has a political causation. If you study your long term monetary history, you will find that never ever has inflation been resolved or controlled via political means... unless you consider riots or the collapse of a culture or civilization or similar as good politics.

Its both a responsibility and educational issue, as most of the framers recognized and actually implemented in the basic documents, including the Coinage Act of 1792 and throughout the Federalist Papers.
I would say that every democracy is doomed once its population discovers that they can vote themselves benefits, as long as its basic documents allow fiscal irresponsibility and/or do not penalize economic and other idiocy and illiteracy.

But inflation is not a political issue once irresponsibility is built into the system - to even insinuate that just continues the very long term and completely false data that allows inflation and fractional reserve and all the other nasty and heinous little tricks that are the stock in trade of central bankers and other short sighted power freaks to exist. You need to do some major historical digging to put the inflation picture of today into proper and full perspective - you're making rash statements and conclusions based on, among other things, looking at the game much closer to its end than its beginning.

Your failure to pay more attention to Finster's basically sincere efforts to point at the real and basic causes is strong evidence of that favorite Schopenhauer quote of mine:

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident..."
-- Arthur Schopenhauer (1788-1860)