Our Growing Inactive Population: Demographics and the Economy 18 comments
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The future state of the US economy depends to some degree on the demographics of the United States. Demographics are not everything in the world of economics and investing, but they can be an important determinant of growth. For example, the maturing of baby boomers in the 1980s and 1990s combined with the technology revolution, the Reagan tax cuts, and the declines in commodity prices and interest rates, produced a powerful cocktail which propelled stocks 14-fold in the 18 years between 1982 and 2000.
A useful measure of demographic change and its impact on the economy is the number of economically active people relative to the number of inactive people. If, for example, 75% of the population works and produces while the other 25% studies or enjoys retirement, the economy will fare better than if only 50% produces while the other 50% studies and cruises. The active population creates the wealth and, directly or indirectly, supports the inactive or less active population.
Declining Ratio
Regarding the broader economy, it is useful to calculate a ratio of the economically active to the economically inactive. In our country, we could say that people aged 25 to 67 constitute the economically active population while people aged less than 25 or more than 67 are children, students, or retirees, are therefore inactive, and are dependents of the active population. These are broad assumptions but they are probably true enough to make our exercise reliable. (Using 18 years as a cutoff instead of 25 years does not materially alter the outcome of the analysis).
When the ratio of the active to the inactive is rising, the economy would grow and we would enjoy increasing amounts of discretionary income. Conversely, when the ratio is falling, there would be fewer workers and more dependents, and the economy would grow at a slower pace, or even shrink, and we would have lower levels of discretionary income.
A look at the adjoining chart is informative in this regard. The ratio of active to inactive had been growing for years until the middle part of the current decade, but it has started declining, gently for now but more steeply starting in 2012 and for the following 18 years. If you accept the premise of this analysis, this inflection is not good news for the economy in the next two decades. Other factors may intervene to mitigate this ratio, but the economy will be fighting a headwind which did not exist when the ratio was growing in the previous fifteen years.
Retiring baby boomers as a group are far wealthier today than their counterparts of previous generations. Their consumption can impact the economy positively long after their retirement begins. But the market value of their assets could also come under pressure due to this demographic picture. All other things being equal, a declining active to inactive ratio will impact adversely the asset values and net worth of all Americans.
The chart includes many assumptions. For example, the number of dependents who are under 25 years includes estimates of future births. In the base case scenario, we used a birth rate of 14 births per 100 women aged 20 to 35, a rate that is consistent with recent years. If the economy deteriorates, this birth rate could fall back towards its all-time low of 11 where it was in the late 1970s.
Some Solutions
Politicians will be tempted to raise taxes on the active population to fund social security but this would be raising taxes on a segment of the population which will already be enjoying lower economic growth and falling discretionary income.
One clear, but politically difficult, solution is to raise the retirement age to 70 years. Social security was introduced at a time when life expectancy was significantly lower than it is today. Adding the 67-to-70 year-olds to the active group (and removing them from the inactive group) would delay the decline of the active/inactive ratio by six or seven years and would limit the overall burden placed on the active segment of the population by the inactive segment.
Foreign markets may help us mitigate the impact of these demographics. New workers in India, China and other developing nations cannot be expected to support our aging population. But foreign investors in American assets would help support asset values at a time when there could be more sellers than buyers in the United States itself. Avoiding a decline in asset values will help maintain consumption among retirees at levels which would be supportive of the economy.
In theory, immigration can be part of a solution. Large numbers of people are waiting in line to come and live and work in the United States. But the mood of the country is currently to limit rather than expand immigration, at least until a solution is found for illegal immigration.
A temporary combination of a lower birth rate, higher worker productivity, and a higher retirement age should be sufficient to get us through this difficult period. But relying on the status quo will lead to economic stagnation or worse.
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This article has 18 comments:
Nice article.
Just one problem: There is no baby boomer retirement savings. or wealth.
It is all a media created myth to keep the public throwing their money at an industry that does not "manage" assets. They "gather" assets.
An extensive study of baby boomers was done and released approx 3 months ago. Here is what they found:
50% of baby boomers will rely soley on social Security for retirement.
30% of baby boomers have $100K or less for retirement.
10% of baby boomers have $200K or less for retirement.
The last 10% have $200K or more towards retirement.
For years, the smart ones among us have known that the top 10% of this country controls 90% of its net worth. That applies to baby boomers as well.
And if you think that baby boomers selling their residences is going to make up the difference, think again. Baby boomers mortgaged their lives away just like non baby boomers, so essentially many have little equity in their homes anyway.
I made a statement to a friend last year that I know is going to come true.
Is it a sad statement:
"Over the coming 25 years, you are going to see levels of senior citizen poverty, that is going to make the depression look like a picnic."
Sad, but true. The media has failed at its attempt to fool people about all this "baby boomer wealth". Just watch as it unfolds.
Invest accordingly.
Bush economics trampled the middle class. Obama's new administration will need to create a plan that invests in America's future and creates real jobs at home. How are the younger generation going to support the Boomers if we don't have any opportunities to obtain real jobs? Free trade sucks.
Hey, Filet Mignon!!
Change your name to: Envious of 'Filet Mignon'
Again!!!
Another disenfranchised middle-class Dumbocrat, who started to show
cognitive thought until politics got in the way.
Yes, many (a high %) baby-boomers have no real equity; but they spent
it away! They buy depreciating assets (cars, TV's, ipods, etc.) on credit and save nothing. Now, again it is somebody else's fault!
Those middle class (uneducated - nonskilled labor) have transferred jobs
overseas; when an entreprenuer can get the same quality from someone willing to accept 10% of the pay, he/she will take it. Remember, it is their (equity - investment) that created that job in the first place (not a gov't stimulus).
Therefore, free trade sucks for the uneducated!
You are not all uneducated though, you are right that the pol's have
screwed us. However, we have known this for a long time.
I suggest you stay in the work line at your employer and not the line for
a gov't (bailout, stimulus, food stamps, etc.) the latter is the transfer of
wealth that does not work!!!!!!!!!!!!!!
On Dec 03 08:56 AM Filet Mignon wrote:
> Archman, how pessimistic, but true! Baby Boomers have all their wealth
> tied up in their homes. Good luck to them trying to cash out any
> equity. All of the remaining wealth created the past 30 years has
> been transferred to the rich. The middle class has the debt to prove
> it. And the rich have transferred all of the good jobs overseas to
> get richer! And it's all our fault for letting our elected representatives
> pass laws to make this happen. It destroyed our standard of living.
>
>
> Bush economics trampled the middle class. Obama's new administration
> will need to create a plan that invests in America's future and creates
> real jobs at home. How are the younger generation going to support
> the Boomers if we don't have any opportunities to obtain real jobs?
> Free trade sucks.
Any adult with a brain knew this was wrong for our kids from the very beginning, but it was shocking to see how many citizens and our gov't bought into this "revised" educational agenda which was introduced to America by teachers who would have been seen as treacherous communists just a few years earlier. Of course, the kids loved it! It meant they could be antisocial, stupid, ignorant, fat, lazy, dirty and sloppy and it was seen as OK by other kids and even all of society! No shame at all. Look what has happened from that purposeful agenda. We now have among the worst educated kids in the world, a catastrophic drop from the best in the 50's. We now have pervasive child obesity right down to kindergarten, massive unwed and child pregnancies due to essentially free and open sex, violent criminals stalking the streets after minimal sentences for horrendous crimes, drugs, criminal chic tattoos and body piercings everywhere, and socially damaging, abberant juvenile behavior with no consequences now accepted as "age appropriate" in newspeak sociobabble. We have also created "alternative" schools for the worst antisocial, drug addicted, and serious mental problem kids where they are taught nothing and are pushed through to pollute the system still illiterate and ignorant and essentially worthless and harmful to themselves and society.
With all these purposeful negative influences from this pervasive and now-accepted near insanity we have placed into the minds of our kids and society, we have all the building blocks solidly in place for a failed social system sooner than you may think. So, good luck with that in today's America! Many of you well deserve what is coming.
On Dec 03 08:30 AM archman82011 wrote:
> <<Retiring baby boomers as a group are far wealthier today than their
> counterparts of previous generations.>>
>
> Nice article.
> Just one problem: There is no baby boomer retirement savings. or
> wealth.
>
> It is all a media created myth to keep the public throwing their
> money at an industry that does not "manage" assets. They "gather"
> assets.
>
> An extensive study of baby boomers was done and released approx 3
> months ago. Here is what they found:
>
> 50% of baby boomers will rely soley on social Security for retirement.
>
> 30% of baby boomers have $100K or less for retirement.
> 10% of baby boomers have $200K or less for retirement.
> The last 10% have $200K or more towards retirement.
>
> For years, the smart ones among us have known that the top 10% of
> this country controls 90% of its net worth. That applies to baby
> boomers as well.
>
> And if you think that baby boomers selling their residences is going
> to make up the difference, think again. Baby boomers mortgaged their
> lives away just like non baby boomers, so essentially many have little
> equity in their homes anyway.
>
> I made a statement to a friend last year that I know is going to
> come true.
> Is it a sad statement:
>
> "Over the coming 25 years, you are going to see levels of senior
> citizen poverty, that is going to make the depression look like a
> picnic."
>
> Sad, but true. The media has failed at its attempt to fool people
> about all this "baby boomer wealth". Just watch as it unfolds.<br/>
>
> Invest accordingly.
On Dec 03 10:53 AM bobbobwhite wrote:
> Since the mid-'60's, left wing liberals have been allowed by federal
> law to alter how and what our children are taught in school. These
> kids were also taught that there is no shame or social consequence
> for nonconformist or abberant behavior that would have caused them
> and their families severe social and personal problems only a generation
> earlier. This was seen as "modern" and self-empowering.
>
> Any adult with a brain knew this was wrong for our kids from the
> very beginning, but it was shocking to see how many citizens and
> our gov't bought into this "revised" educational agenda which was
> introduced to America by teachers who would have been seen as treacherous
> communists just a few years earlier. Of course, the kids loved it!
> It meant they could be antisocial, stupid, ignorant, fat, lazy, dirty
> and sloppy and it was seen as OK by other kids and even all of society!
> No shame at all. Look what has happened from that purposeful agenda.
> We now have among the worst educated kids in the world, a catastrophic
> drop from the best in the 50's. We now have pervasive child obesity
> right down to kindergarten, massive unwed and child pregnancies due
> to essentially free and open sex, violent criminals stalking the
> streets after minimal sentences for horrendous crimes, drugs, criminal
> chic tattoos and body piercings everywhere, and socially damaging,
> abberant juvenile behavior with no consequences now accepted as "age
> appropriate" in newspeak sociobabble. We have also created "alternative"...
> schools for the worst antisocial, drug addicted, and serious mental
> problem kids where they are taught nothing and are pushed through
> to pollute the system still illiterate and ignorant and essentially
> worthless and harmful to themselves and society.
>
> With all these purposeful negative influences from this pervasive
> and now-accepted near insanity we have placed into the minds of our
> kids and society, we have all the building blocks solidly in place
> for a failed social system sooner than you may think. So, good luck
> with that in today's America! Many of you well deserve what is coming.
With the loss of retirement funds of late, many older Americans will stay on the job longer to increase savings and make their savings last longer. Some wil stay in upper management slots.
This will result in fewer of the younger workers being promoted into those upper management slots until several years later. Careers will stagnate for the younger crowd because the older crowd won't retire "on schedule".
B. all these, 'things were better in the past' monologues are a load of crap - about as true as saying 'I had to walk 10 miles to school through a foot of snow when I was a kid'
C. my kids go to public school in a middle class community and I don't see any of that, the teachers are dedicated and the kids are respectful and work hard.
On Dec 03 10:53 AM bobbobwhite wrote:
> Since the mid-'60's, left wing liberals have been allowed by federal
> law to alter how and what our children are taught in school. These
> kids were also taught that there is no shame or social consequence
> for nonconformist or abberant behavior that would have caused them
> and their families severe social and personal problems only a generation
> earlier. This was seen as "modern" and self-empowering.
>
> Any adult with a brain knew this was wrong for our kids from the
> very beginning, but it was shocking to see how many citizens and
> our gov't bought into this "revised" educational agenda which was
> introduced to America by teachers who would have been seen as treacherous
> communists just a few years earlier. Of course, the kids loved it!
> It meant they could be antisocial, stupid, ignorant, fat, lazy, dirty
> and sloppy and it was seen as OK by other kids and even all of society!
> No shame at all. Look what has happened from that purposeful agenda.
> We now have among the worst educated kids in the world, a catastrophic
> drop from the best in the 50's. We now have pervasive child obesity
> right down to kindergarten, massive unwed and child pregnancies due
> to essentially free and open sex, violent criminals stalking the
> streets after minimal sentences for horrendous crimes, drugs, criminal
> chic tattoos and body piercings everywhere, and socially damaging,
> abberant juvenile behavior with no consequences now accepted as "age
> appropriate" in newspeak sociobabble. We have also created "alternative"...
> schools for the worst antisocial, drug addicted, and serious mental
> problem kids where they are taught nothing and are pushed through
> to pollute the system still illiterate and ignorant and essentially
> worthless and harmful to themselves and society.
>
> With all these purposeful negative influences from this pervasive
> and now-accepted near insanity we have placed into the minds of our
> kids and society, we have all the building blocks solidly in place
> for a failed social system sooner than you may think. So, good luck
> with that in today's America! Many of you well deserve what is coming.
For example, educated, well-trained people could be induced to work into their seventies, at least part time, by good salaries and good work conditions and remain productive much longer than they do now.
Also, it isn't a bad thing for young people to be, more or less, unproductive as long as the result is highly productive citizens capable of participating in the American democracy and economy.
We are not training young people well-enough from elementary school through college. In fact, a very large percentage of the American adult population aren't even able to read and write and do simple calculations.
A further good use of unproductive, retired people would be to bring a certain percentage of them into the educational system while allowing them to continue to draw all retirement benefits but give them a smaller salary than ordinary teachers to keep attracting good young teachers.
It would also be easy to have better tax system to encourage families to have more children. Families would also be encouraged to have more children if we provided free education for all students who can pass rigorous exams similar to those of various European countries.
(Free education for everyone at all levels is not economically feasible, of course, and unmotivated, untalented and disruptive students need to be dealt with very carefully and intelligently. Thus problem is one of the great unsolved problems of America and of most other industrialized societies as well.)
On Dec 03 08:56 AM Filet Mignon wrote:
> Bush economics trampled the middle class. Obama's new administration
> will need to create a plan that invests in America's future and creates
> real jobs at home. How are the younger generation going to support
> the Boomers if we don't have any opportunities to obtain real jobs?
> Free trade sucks.
1) Lowered morals --> abortion and artificial birth control --> lower producing population, and less productive population at that.
2) Entitlement government --> lack of personal responsibility and initiative.
It's too late to prevent some of the effects, but we can do something about both going forward. Let's start with ending entitlement government. That means complete tax overhaul and a Balanced Budget Amendment.
fairtax.org
1) You reap what you sow.
2) There's nothing new under the sun.
3) Welcome productive immigrants (that includes most Mexicans).
4) More unsafe sex.
Live cheap, save, and try to get a side business going. You're unlikely to age discriminate against yourself.
On Dec 03 11:34 AM iThinkBig wrote:
> I do not disagree but I will say this: There is nothing new under
> the sun. The people of the Roaring Twenties were not much different.
> By 1946 they were called the Greatest Generation. I had to think
> a lot about leaving the country in 2007 to avoid the pain. Nope,
> not doing it. If America was such a horrid place to be why is it
> that people globally still wish to exodus there own nations to come
> here? However, there truly is a leadership vaccum as that 1960's
> crowd has taken over Washington with there baked right out (literally)
> idealogies. I see emerging leadership my own age of 35-40 stepping
> up, although we're locked out for a short time to make a larger impact
> in the short term. I see gentlemen that are 75+ in the business community
> giving a huge final push to help America. It's not all bleak and
> I am getting a bit tired of the globe trashing America. Without us
> you would all be speaking German or Russian. Have a nice day. <br/>
The fact of the matter is America is the "ultimate gated community" in terms of people trying to get in. It is in fact American Dollars that are being funneled out of the country either through oil transfers to the middle east or through the walmart effect of industry. Trillions are sitting in the sidelines in Asia (China & India) or the Middle East and even in Russia (the recent oil boom and gas shipments to EU).
The problem is not "too much" immigration, its not enough of the right immigration. Fill the empty homes, refund the banks and financial institutions, and get the economy back on track through high income, high talented, risk taking, willing contributors to American values (and the economy). Give the 1,000,000 Squared plan a chance to work.