Posts Tagged ‘baby boomer’

“The elderly are more likely to vote than the young.” That was what CityAM said this morning, in response to Ed Balls’ idea of increasing the retirement age.

Actually, Mr Balls was talking about ring fencing. The government is trying to make cuts, but certain areas are protected, will never be breached – never as in cross my heart hope to die, never.

So the NHS is safe. Education is safe, and state pensions are safe.

But maybe ring fences are a bit too solid, and never is too long a time frame. Part of the problem with the NHS is that the pendulum has swung too far to the other way since the bad old days of the 1970s. Back then doctors and nurses were grossly underpaid. Today many GPs are more like traffic police. They direct patient traffic to different specialists, but how much of what they do could be handled by well trained, experienced nurses?

As for nurses, maybe the entry level is too high. A better career progression path, with senior nurses taking on many of the tasks that used to be carried out by doctors is a good idea, but at the bottom end, maybe we need more SEN type nurses. So perhaps the NHS should be not so much be ring fenced, as have a new ring of confidence via a complete re-think on how it operates.

The NHS also needs a re-think in terms of the imminent retirement of the baby boomer generation, otherwise we have a nasty problem coming.

Talking of baby boomers retiring, did you hear the one about savings? It was told by Scottish Widows, and the story goes like this: one in five Brits are not saving at all; 40 per cent are not saving enough.

Is it right? Well, sort of.

It is true that the UK sits on a fault on the demographic tectonic plates, and the impending earthquake could be far more significant than anything fracking might bring. As things currently stand, the UK is heading towards a disaster of enormous proportions as the baby boomers retire, and find there isn’t enough money in the pot.

But what the UK really needs is a more dynamic economy, with more entrepreneurism. Greater savings may help if the money saved is used to fund investment and in promoting entrepreneurism. If, on the other hand, greater savings mean money sloshing around and lying idle, promoting consumer credit and mortgages, and pushing up house prices, then the catastrophe that is the imminent retirement of the baby boomers will be far more catastrophic.

As for ring fencing state pensions, Ed Balls actually said that the idea of cutting money spent on stage pensions in some way was being considered, but probably the result will be a rise in retirement age, rather than less pension income for those who are retired.

And on the topic of the UK fiscal deficit and government borrowing, it seems there is a choice: carry on borrowing and risk creating a massive debt burden for the younger generation, or impose austerity and risk deepening the downturn, imposing a massive burden on the younger generation trying to build a career.

Mr Balls is as populist as any of the politicians, and no more likely to advance unpopular policies that are in the common good, than anyone else, but at least Ed Balls’ new plan tries to deal with one of the problems.

The baby boomer generation makes up a large chunk of the electorate, however, which means they want higher house prices, higher pensions, a lower retirement age, and none of this talk about fiscal stimulus, for that will lead to more debt, which is immoral because that will leave a debt for future generations to pay.

For more see, Baby boomers: The tyranny of the Baby Boomers 

© Investment & Business News 2013

Uk Population

Here’s a chart for the UK population as of now with a line for the official projections 10 years hence.

As a tool for prediction this chart can be quite powerful; pictures speak a lot louder than words.  The way to use the chart is to imagine the blue and red lines being pulled across the page as we all move inexorably towards God’s waiting room on the right.

We’ll be pulled past 2 marks on the way. The left block shows where young people (16 – 24) might find themselves becoming employed and paying taxes – remember that 20% don’t though so the ‘new workers’ line is copied and shifted lower.

The next mark, for the retiring age for men, shows an ever increasing rate of retirees, after a very steep previous 10 years there will be another 7 million arriving during our 10 year look into the future. You might notice an almost mirror image of the lowered ‘new workers’ line but the unemployed are living off the state too, so there is another 1 million to be added to the line on the right if we want to balance workers vs. state supported.

Unfortunately, because the leading edge of retirees points up and the leading edge of new workers points down, things just get worse. While this demonstrates the ex-growth nature of the economy it is reassuring to compare the huge block of substantially employed people and the much smaller wedge shaped block of the already retired.

So it looks a lot less gloomy right now but as our 10 year view unfolds it builds to uncomfortable levels all the way up to and past the baby boomer’s peak in 15 years.

Note how the red projection line slumps after the retirement age. I’d like to think that this is not an early death syndrome but rather an indication that retired people like to head off to countries with blue skies and sunshine. As we have seen, the retiree level is really lower than the new workers level and that’s a significant first; it just gets progressively worse after this as the retirees line builds even steeper and the workers line pulls across a dip. Incidentally there are dips because WW1 and WW2 were one breeding cycle apart (27 years) and the resulting post war pulses have yet to die down.

If you are about 50 now you are at the population peak age. Births subsequently declined for 13 consecutive years, and that was another first, signalling the end of centuries of perpetual population growth. Because accounting practices, pension arrangements, government finance, and much more, all worked because growth conveniently forgave all sorts of silly thinking, there were, and still are, bound to be some serious consequences.  The way the world works has changed forever.

The workings of pension schemes are of particular interest. With perpetual growth there was always a bigger pool of funds to pay out the liabilities so nobody needed to be particularly efficient. That is no longer the case and you can be sure there will be a raft of pension scheme failures.

With such a huge pension liability arriving over the next 15 years the pension funds have to prepare by switching out of equities and into bonds and then progressively the bonds are then sold as net payouts increase. Logically we might expect weak equities and strong bonds eventually followed by weak bonds.  When the bond sell-off stage arrives one wonders how the Government finances will work – who will they sell bonds to then?

An ex growth world has some implications for equities. Shareholders have got used to accepting lower yields in exchange for corporate growth. As soon as the growth stops then a proper yield will be required. As an example a company yielding 2% and going ex-growth might have to yield 4% to remain attractive. So that means the share price would have to halve!  How likely is this scenario?

Well take a supermarket for example. As a footfall company, whose profits are directly linked to the traffic through the door, the impact of an ex-growth population will be severe. Actually the population is not quite ex-growth, it is just slowing down, but even so companies in this category are subject to massive falls as soon as their growth is seen to end. Just to be safe, sell all your growth stocks?

You can see why there was a property boom over recent decades as the only way the available housing stock grew was via owners dying or new houses being built. Looking back it seems so obvious that fewer old people (from a previously smaller population) supplying demand from a much bigger block of house seekers would result in big price rises.

The chart is giving a strong indication of a repeat performance. Note how there is a bulge moving into the first time buyers age groups and then compare that to the lower height of the chart where old people might shuffle off. Demand will clearly outstrip supply for a while and looking forward 10 years this is increased by immigration as can be seen by the way the bulge actually grows as it moves across. The low end of the housing market looks like a good bet and you can expect a rally in the house builders too.

All this is good for the economy with an added twist. The baby boomers already have a house and yet they are about to inherit their parents houses which can easily be sold on at today’s fairly substantial prices; an added boost to the economy for several years to come.

This last point reinforces the idea that retiring couples with windfall cash will head for the sun. That’s bullish for overseas holiday homes so get in while they are depressed.

Any negatives? Well the way the dotted red line sits above the blue line has implications for NHS services over the next 10 years. It doesn’t look much but in percentage terms there is a significant increase with a detrimental age bias to account for too. An already stretched service has a crisis looming.

The big bulge in the new adults group will all be driving cars for the first time; good for the motor industry but bad for traffic jams.

Conclusions:  No great dramas for the next 10 years but this is the lull before the storm. After 15 years the peak of the baby boomers will be at retirement age and from then on it is hard to see how the books stack up unless the, already brimming, country is filled with more foreigners.

The houses to buyers ratio is likely to top out, leading to a sustained bear market in house prices. The stock market will slump horribly as it goes absolutely ex-growth and the pension funds go into net draw down.  The Government will find it hard to fund the state pension burden and increased demands on public services. Borrowing to bridge the gap will be hard as traditional lenders, in the net draw-down scenario, have no need to buy bonds. Interest rates may well climb as a result and then the National debt financing costs spiral up. Pay more, borrow more, pay higher; sounds familiar.

A UK Government default before 2028?  Not so hard to imagine is it?

Data – The Office for National Statistics

Opinion – Patrick O’Connormist

Nudge nudge, wink wink, know what I mean?  Your pension, squire, is it a goer?

And so it is that the UK government has introduced regulations meaning that employees will automatically be enrolled into pension schemes, and for them not to take part, they have to consciously opt out.

The reform is not being introduced overnight. To begin with, the new scheme will only apply to companies employing 120,000 workers or more. But bit by bit, the scheme will be widened, so that by 2015 small businesses will have to take part.

According to the FT, it is estimated that 11 million Britons – or 40 per cent of the working population –­ are not saving enough to maintain living standards when they retire. (Can you believe that? This implies 60 per cent of the working population are saving enough. That is surely not true!)

There are snags with the scheme. For one thing the level of savings that employees will automatically start making will be tiny. Someone earning £20,000 a year will save just £2.37 a week.

Of course, the more you put in the more you get out, and workers setting aside £2.37 a week might think that one day a great windfall will be theirs, but in reality all they can really look forward to is either a retirement made of poverty, or working until they are very old indeed.

And while many argue that we all need to save more, it could be said: what’s the point? What’s the point when the rate of interest is so tiny, and stock market returns over the last 12 years have been so awful. After all the FTSE 100 still languishes some 1,000 points below its all-time high set on January 30 1999.

The truth is that the only way the UK will be able to meet the need of its baby boomer generations as they enter into their late 60s, is by extending their retirement age. Some may find that quite  unappealing, but put the choice in these terms. The good news is that we are living longer, and are much healthier in our sixties and seventies than we used to be. Do you want to either:  (a) work until you are in your seventies, or (b) see a return to what it used to be like, when the life expectancy was much lower?

But what is interesting about the pension reform is that it is based on the ideas of nudge economics.

There’s a book called Nudge, written by Richard Thaler and Cass Sunstein – and a very good book it is too.

Economic theory assumes we are rational. Maybe we are all inclined to think of ourselves as rational. Be honest now, when you go about your daily life, do you do the things you do because you are a sensible rational human being, or do you think you are little more than a collection of cells living in a world for which you were clearly not designed? Most of us probably think the former, but the truth is more likely to be the latter.

The book Nudge shows that sometimes we don’t do the things that are in our own interest. So until it was made compulsory to wear seat belts when we were driving, a lot of us didn’t.  Or take the ATM.  So you put your card in the that hole in the wall, ask for your money. Suppose the money comes out first, then the card. What then? Research shows a lot of people forgot about their card, and wandered off, leaving it behind. Then the banks, aware of the ideas of nudge, reversed the process, now the card comes out first, then the money. It is not often we forget about the cash, and just collect the card then go.

In short, we are nudged into not leaving our cash point card behind; we are nudged into putting a seat belt on when driving, and now we are nudged into saving for our pension.

Expect a lot more nudging to follow over the next few years.

©2012 Investment and Business News.

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