In four months the debate over America's Fiscal cliff will come to a crescendo, and if Goldman is correct (and in this case it likely is), it will probably be resolved in some sort of compromise, but not before the market swoons in a replica of the August 2011 pre- and post-debt ceiling fiasco: after all politicians only act when they (and their more influential, read richer, voters and lobbyists) see one or two 0's in their 401(k)s get chopped off. But while the Fiscal cliff is unlikely to be a key point of contention far past December, another cliff is only starting to be appreciated, let alone priced in: America's Demographic cliff, which in a decade or two will put Japan's ongoing demographic crunch to shame, and with barely 2 US workers for every retired person in 2035, we can see why both presidential candidates are doing their darnedest to skirt around the key issue that is at stake not only now, be every day hence.
Sadly, the market which due to central-planner meddling, has long lost its discounting capabilities, and is now merely a reactive mechanism, will ignore this biggest threat to the US financial system until it is far too late. After all it is the unsustainability of America's $100+ trillion in underfunded welfare liabilities that is the biggest danger to preserving the American way of life, and will be the sticking point in the presidential election in 80 days. However, don't expect either candidate to have a resolution to the demographic catastrophe into which America is headed for one simple reason. There is none.
The problem in a nutshell: the first wave of Baby Boomers, born between the years of 1946 and 1964, officially reached retirement age in 2011. There are a whole lot of Baby Boomers - just under 76 million, to be exact - that will depend on new money flowing into the system to help keep the entitlements coming. According to the latest Social Security and Medicare Board of Trustees 2012 Annual Reports Social Security now pays out more than it takes in, and is expected to do so for the next 75 years.
And while the market, and its "discounting" may now be largely irrelevant, those who care to be educated about the facts behind America's Demographic Cliff, here is ConvergEx and "Talkin' 'bout your generation"
According to the Census Bureau’s Current Population Survey, about 40.2 million people – 13% of the entire US population – are 65 years or older and eligible to receive government entitlements such as Medicare and Social Security. At current levels, spending on these entitlements make up about 8.7% of GDP – about $1.3 trillion. While this may sound sustainable over the short term, in coming years the amount of entitlement outlays necessary to keep up with retiring Baby Boomers is going to send spending through the roof. By 2030, for example, a full 19.3% of the population will be claiming SSI and Medicare benefits, based on the Census Bureau’s population projections (the CB uses an adjustment factor for the age cohorts based on mortality rates, foreign-born immigration, and life expectancy). For simplicity’s sake, here’s a decade-by-decade look at where the aging population – and expenditures – will be in the years to come, courtesy of the Census Bureau and the Congressional Budget Office (CBO):
- In 1900, 4.1% of the US population was 65+. By 1950, this number had almost doubled to 8.1%. As the chart following the text shows, the Baby Boomers (now ages 48-66) represent the most significant population wave in US history. According to the CBO, the population aged 65 and over will increase by 87% over the next 25 years as Baby Boomers enter retirement, compared to an increase of only 12% in those aged 20-64.
- This year, 13% of the US population is 65+ and entitlement spending accounts for 8.7% of GDP. And that number only includes SSI and Medicare, not Medicaid and future Obamacare subsidies which add to these outlays.
- In 10 years (2022): 16.1% of the population will be 65+, entitlement spending estimated at 9.6% ($1.5 trillion, based on 2011 US GDP)
- 2037 (25 years on): 20 % of the US population will be 65+, entitlement spending estimated at 12.2% of GDP ($2.0 trillion)
- Not surprisingly, there will be far more women than men in the 65+ population. Women currently live about five years longer than their male peers, on average. Accordingly, the Census Bureau estimates that in 2030, there will be about 8 million more women than men that are 65 and older by 2030: 27.8 million versus 35.7 million.
It’s a pretty tough picture, to say the least; as the population ages, we’re looking at more and more money dedicated to retirement benefits with a smaller workforce to fund the spending. We’re not the only ones, either: Japan is in worse shape than the US, with 23.1% of the population already over 65. In 2050, government statistics forecast that number to be 39.6%. Europe’s in the same boat: 17.4% of the population in EU countries was 65+ in 2010, and it’s expected to be about 30% by 2060. The developed world, essentially, is facing a demographic “Fiscal cliff” with no clear-cut strategies for how to fund the liabilities inherent in an entirely predictably aging population.
Are there any social positives that might mitigate this plethora of indisputable financial concerns? The math is the math, as quants are fond of saying, so I don’t expect that there are overwhelming offsets to the problem of an aging population. But there are some notable “Positives” which don’t get the attention they deserve because they offer such a lightweight counterbalance to the challenges I outlined above. Still, here are a few thoughts:
- Stronger voter turnout/greater engagement in the political process. The 65+ age group has beaten out every other age cohort in voter turnout in every Presidential and Congressional election since 1980. In the latest presidential election, 68.1% of those aged 65+ went to the polls, versus and average of 51.2% for the rest of the voting-age population. The reason for this differential is straightforward: it easier for retired persons to vote given fewer time restrictions, allowing the higher turnout rate. But given an average turnout of 58.2% overall in 2008 for Obama’s election, compared to an average of 70-80% in other developed countries (Japan, Germany, Canada, Spain), the growing 65+ population will certainly help the U.S. come closer to its developed country peers on this metric.
The stronger turnout of these voters, and their sheer numbers, are also likely to have an important impact on US political races in the years to come. They’re going to be the biggest voting bloc in American history, if patterns hold: 68% of them is almost 52 million, larger than the entire Black/African American voter population, for example. And like other older generations, according to a study by the Pew Research Center done in late 2011, Boomers have become slightly more conservative as they’ve aged, and slightly more of them (45% vs. 51%) intend to vote for Governor Romney in the upcoming election. However, given that one of their main concerns is the maintenance of entitlement spending, it seems unlikely that Boomers will continue to support a party that recommends reducing the deficit by cutting entitlements. All candidates, then, and especially the GOP, will need to take a hard look at the wants and needs of the Boomers. The 2012 Presidential election – and many others afterwards - will quite literally depend on their votes.
- Lower crime rates. The younger population is by far the more crime-prone age cohort, according to the Department of Justice and the FBI Uniform Crime report. The DOJ publishes an annual report on arrests by age, the first occurring in 1980 and the latest in 2009. Over these years, the number of total arrests has increased by 30.9% for the entire population; for the 65+ population, it’s gone up 0.3%. Moreover, the Baby Boomer generation (in 2009, ages 45-53) accounted for only about 7% of all crimes. What were their most “Popular” crimes? Drunkeness and DUI. Violent crimes are almost exclusively the MO of the 18-29 cohort, who account for almost half (44%) of all arrests. It’s not too far of a stretch, then, to think that as our population ages, we can expect less and less violent crime across the country – though you may want to be careful on the roads.
- Lower resource consumption. The older population tends to cut down on resource consumption after retirement, particularly in the case of gasoline. Once they no longer need to commute to work and move into smaller, more affordable houses, the amount of fuel needed for transportation and heating/cooling should drop, perhaps significantly.
Take motor gasoline usage as a benchmark. Just under 60 million Baby Boomers consider themselves a part of the labor force, according to BLS data. 85% of all Americans drive to work, according to a late 2010 Gallup poll, with an average commute of 30 miles round-trip – about 45 minutes – and an average of 20mpg (courtesy of the Bureau of Transportation Statistics). Using these estimates, we can calculate that the average Baby Boomer commuter uses about 33 gallons of gas each month; assuming that 85% of them drive every day, that’s about 1.7 billion gallons of gas being used per month. As they retire, there are actually fewer new entrants into the workforce to replace them, meaning fewer drivers and less fuel consumption.
- Growing domestic service economy. An older population becomes more and more dependent on services as they age, particularly in the realms of healthcare and transportation. More and more people will be needed to fill the void in these service areas as the Boomers retire. Luckily for the US workforce, these are jobs that can’t be outsourced: healthcare especially depends on on-site care and personal service.
In fact, as the population has begun to age, the US has already seen some steady growth in service-related positions. The BLS’s Occupational Employment data logs the number of occupations across the US in major industry sectors as well as almost 800 detailed occupations. According to the survey, the US has seen a -3.3% drop in job growth overall. Healthcare and “Personal Care”, however, have grown 13% and 11% each since that year. Occupations such as physician’s assistants, pharmacy technicians, and home health aides are in high demand, and will most likely continue to be so as the population ages and begins to rely more heavily on these services.
- Declining unemployment and increased labor force participation for this segment of the workforce. One of the most unique aspects of today’s aging population is their continued presence in the workforce. According to the BLS, 23.4% of Americans age 65+ were in the labor force as of June 2012, making up a full 4.5% of the total civilian labor force. They also had a below-average unemployment rate of 6.9%. If this trend continues, we’re likely to see more productivity from the upper end of the age spectrum in years to come as Boomers delay retirement in favor of working.
On the flip side, as more of the aging population retires and leaves the workforce, more job opportunities will open up for those who are currently unemployed. The youngest members of the workforce, ages 18-24, will be the biggest beneficiaries of this shift, as they typically seek the same kind of jobs that the older population currently occupies. When these positions are vacated by the older group, then, and refilled by the younger groups, we may see a decline in youth unemployment rates.
The older workforce also opens an interesting opportunity for some employers. The younger half of the Baby Boomer generation is tech-savvy, experienced, and definitely needs the money. This set of skills won’t go unnoticed in the labor market.
Unfortunately, these societal “benefits” are only a thin silver lining on a very, very dark cloud. Social Security and Medicare spending are projected to grow exponentially as healthcare costs explode and the biggest population wave in the history of the US starts to enter retirement. The Congressional Budget Office expects spending to increase by 150% over the next 25 years, which is hardly sustainable with barely 2 workers for every retired person in 2035... there’s a storm a comin’