saving private blue

"The surge in birthrate fol­lowing World War II and the increase in life expectancy will create a large aging population, increasingly out of the workforce but continuing to con­sume. And here’s a fact that should get you thinking: when Social Security set the retirement age at sixty-five, the average life expectancy for a male was sixty-one. It makes us realize how little Social Security was designed to pay out. The subsequent surge in life expectancy has changed the math of re­tirement entirely.
The decline in birthrates since the 1970s, coupled with later and later entry into the workforce, reduces the number of workers to each retiree. During the 2020s this trend will intensify. It is not so much that workers will be supporting retirees, although that will be a factor. The problem will be that retirees, drawing on equity in homes and retirement funds, will still be consuming at high rates. Therefore, workers will be needed to fill their demand. With a declining workforce, and steady demand for goods and ser­vices, inflation will soar because the cost of labor will go through the roof. It will also accelerate the rate at which retirees exhaust their wealth.
Retirees will divide into two groups. Those lucky or smart enough to have equity reserves in houses and 401(k)s will be forced to sell those assets. A second group of retirees will have few or no assets. Social Security, under the best of circumstances, leaves people in abject poverty. The pressure to maintain reasonable standards of living and health care for the baby boomers will be intense, and it will come from a group that will continue to retain disproportionate political power because of their numbers. Retirees vote disproportionately to other groups, and the baby boomer vote will be particularly huge. They will vote themselves benefits.
Governments around the world […] will be forced to either increase taxes or borrow heavily. If the former, they will be taxing the very group that would be benefiting from the increased wages necessitated by the labor shortage. If there is increased borrowing, the government will be entering a shrinking capital market at the same time that boomers are withdrawing capital from that market, further driving up interest rates and, in a replay of the 1970s, increasing in­flation due to a surging supply of money. Unemployment is the only thing that won’t echo the 1970s. Whoever can work will have a job — at high wages — but those wages will be badly squeezed by taxes or inflation.
Boomers will start retiring in about 2013. If we assume an average re­tirement age of seventy (and health and financial need will push it there), the years after will see the start of a surging retired population. A significant drop-off won’t occur until well after 2025, and the economic repercussions will continue to echo well after that. Those born in 1980 will be coping with this problem from their mid-thirties to their mid-forties. For an im­portant part of their working life, they will be living in an increasingly dys­functional economy. From a broad historical point of view this is just a passing problem. For those born between 1970 and 1990 this not only will be painful but will define their generation. It may not be on the order of an­ other Great Depression, but those who remember the stagflation of the 1970s will have a point of reference."