Those born between 1946 and 1961 had their birth certificate stamped ‘Baby Boomer’. The inscription on their death certificate will read ‘Retiree Buster’.
Boomers (of which I am one) have had a relatively charmed life – carefree youth; low cost tertiary education; fuel was cheap; abundant employment opportunities – the future was rosy. The world was the boomers’ oyster.
We were too busy acquiring ‘things’ to realise our collective ‘wants and desires’ were reshaping the global economy. Conspicuous consumption (funded by never-ending credit) became an art form. Luxury brands -retail, motor vehicles, restaurants, housing – blossomed.
Our standard of living is a world away from the one our frugal parents grew up in. Moderation was not in our vocabulary. Therein lay the seeds of the trouble that awaits the indulgent boomers. ‘Austerity and boomers’ are as compatible as ‘salt and ice cream’.
The first wave of boomers has started to retire. The transition from taxpayer to tax receiver has begun, and will gather momentum over the next twenty years.
The predicted longevity of the boomer generations is bad news for tomorrow’s workforce.
The three major issues arising from this demographic shift are:
- How do (seriously indebted) western governments fund mounting health and welfare costs without overburdening Gen X,Y & Z?
- How does the global economy survive without boomer credit fuelled consumption?
- How do boomers avoid outliving their capital?
In 1910, the Commonwealth Government entered into a social contract with the citizens of Australia. The age pension was payable to females over 60 and males over 65. Lower life expectancies meant honouring this contract was a modest impost on the taxpayers of the day.
The pyramid structure of society allowed the base to easily support the apex.
Pyramid (Ponzi) structures only survive if the base keeps expanding. Social security is the ultimate Ponzi scheme. Unless the ruling class makes the tough decisions necessary to re-weight this scheme, boomers are going to be the victims of its collapse
The solution to the problem is relatively straightforward – pay more taxes or pay fewer entitlements. A workforce needs to be incentivised. Higher taxes (like those proposed by French President Hollande) cripple incentive. The ‘best and brightest’ take flight to a more tax friendly country. Only so much ‘blood’ can be extracted from the workers.
The sensible resolution is to ‘cut your coat according to your cloth’. Entitlements need to be pared to a level that can be funded from a fair tax regime. This means the social contract entered into a century ago is obsolete.
Making this call is a political death warrant – baby boomer voters would make sure of that.
The answer to issue 1 is that Governments cannot whip future taxpayers to death to fund promises made over a century ago. If something can’t continue, then it won’t. In the absence of a brave politician, it is safe to say the welfare system will implode sometime within the next decade or two.
The Great Credit Contraction is the answer to issue 2. The global economy, so heavily weighted to consumption, cannot continue without consumers willingly living beyond their means. Governments desperate for boom time tax revenues have instructed central bankers to ‘stimulate’ demand. Zero-bound interest rates, unlimited QE, Everest sized public debt piles and never-ending budget deficits are all designed to ‘grow’ an economy.
Economic ‘growth’ as measured by GDP is a falsehood. Deduct government (federal, state and local) deficit spending (future taxpayer liability) and GDP would be massively in the red. The underlying economy is shrinking. The complete disregard for economic fundamentals is one thing. However, the burden being placed on the wallets of future taxpayers is obscene. It is a desperate attempt to hold together the remaining vestiges of the boomers’ spending spree.
The central bankers actions have lead to the greatest level of malinvestment in history.
The current market euphoria is the last hurrah of the boom time era. This artificially inflated asset bubble is destined for the same fate as all preceding bubbles.
The answer to issue 3 depends on whether boomers recognize in time how vulnerable their paper profits are to the claws of the worst bear market since The Great Depression.
Our role, indeed responsibility, is to manage risk and reward over the long term. At present the share market is being driven by central banker momentum – this is a high risk and very low reward strategy.
A retirement strategy based on:
- The age pension and health care entitlements continuing unchanged
- The global economy resuming ‘credit bubble’ growth rates
and
- Markets delivering above average returns to fund a comfortable standard of living
is a high stakes game of Russian Roulette with your future.
The few boomers who survive the coming Secular Bear mauling will not only survive, they will prosper. Your Gen Y & Z children will thank you profusely for your foresight.
‘Retiree Buster ‘ or ‘Retiree Boomer’ – choose your title before the Secular BearMarket selects it for you.
Vern Gowdie
Contributing Editor, Money Weekend
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