EconoMatters, Rethinking America

Being Old in 2040 Will Be No Fun

Current trends in demographics and national budgets will leave the elderly of the future in dire straits.

Credit: John - www.flickr.com

Takeaways


  • Current trends in demographics and national budgets will leave the elderly of the future in dire straits.
  • The prospects for those entering old age in the years ahead are looking anything but benign.
  • Germany, with its high productivity and well-ordered fiscal policy, may be able to avoid the age trap.
  • The old folk of 2040, those born between say 1955 and 1975, will face a really tough retirement period.

There are times when it’s good to be young – the 1960s, with its prosperity and hedonism, was one such period. Being old has fewer joys, but you can argue that the 1990s were a halcyon period for the old. Pension funds were swollen by stock appreciation and the senior citizen generation was relatively small.

However, with the current trends in demographics and national budgets, the younger generation of Baby Boomers and the older Gen-X’ers (only few of the older Baby Boomers will still be around) can rest assured of one thing: Being old in 2040 will be very unpleasant indeed. And this isn’t just a problem in the United States. It is more or less true for the world as a whole.

Good times, bad times

Different generations enjoy halcyon and hellish periods at different times. There have been bad times to be young. Turning 18 in 1861 in the United States or 1914 in Europe was no fun at all.

In contrast, the 1990s were the best period in the whole of human history for old people. The generation reaching old age in the 1990s was mostly born in the so-called inter-war period.

Having mostly suffered miserable childhoods in the Great Depression and World War II, they felt doubly blessed with secure pension and social security systems that were easily able to bear the burden of their retirement.

The prospects for those entering old age in the years ahead don’t look at all so benign. We can already see how the politics of it will play out.

In most countries, the period since the 2008 financial crash has seen very low interest rates with unprecedented budget deficits. Both are very dangerous indeed for the long-term prospects of the aging.

Low interest rates prevent them from earning a return on their money above the inflation rate except by investing in stocks, real estate and speculative bonds. In the short term, the stocks and real estate go up in price while interest rates remain low.

Thereby, aging savers are lulled into a false sense of security by the steady rise in value of their portfolios. With similar policies being followed worldwide, the false sense of security for the aging is a worldwide phenomenon.

Public sector problems

Meanwhile in the public sector, deficits have not been brought down and so the stock of public debt is rising steadily as a percentage of GDP. Low interest rates and the last years of favorable demographics before the baby boomers retire have lulled both politicians and the electorate into undue fiscal optimism. Deficits are remaining at a level far above what is actuarially sustainable in the long run.

It must be remembered that in most countries, the old vote and the young don’t. Hence, politicians will be tempted to apply short term band-aids to their budget problems and the actuarial deficits in their social security systems, punting the problems down the road for a decade or so.

In 2030, when the early baby boomers are mostly still with us, politicians will still be pushing problems off into the future as far as possible, in order to avoid the wrath of geriatric voters. Taxes will have risen, savings will have been decimated, but with the application of copious short-term remedies, the problem will still not be in its acute stage.

By 2040 however, with the first half of the baby boomer cohort departed, a nemesis will have arrived. In the United States, the social security trust fund will have run out, leading to sharp cuts in payouts to retirees.

What is worse, the voters of that day will have seen Medicare and other old-age costs apparently rising inexorably over several decades, both absorbing hefty tax increases and making U.S. debt soar to dangerous levels at which its repayment is doubtful.

Vengeance of the young

Round about 2040, a debt crisis will occur – at which point the obvious solution will be to cut back drastically the benefits available to old people. After all, it will be argued then, they are no longer producing incomes that can be taxed in order to repay debt, and they are the ones who collectively bear much of the guilt for the parlous U.S. fiscal position. The same applies to many other Western countries.

The Millennials and their successors will blame the old for their predicament and relative poverty, and they will have a substantial amount of reason on their side. Their revenge will be severe.

The old folk of 2040, those born between say 1955 and 1975, will face a really tough retirement period.

The details of the problem and its timing differ in most rich countries, but the problem itself doesn’t. In Japan, by 2040 the demographic problems of its aging society will be dissipating as longer working lives and robot geriatric care allow that admirable country to surmount its difficulties.

However, it is likely that Japan won’t get to 2040 without a debt crisis, so the true nadir of Japanese geriatric welfare may come about 2025.

France and Italy will be more or less bankrupt well before 2040 and their living standards will correspondingly have declined sharply, but the problem won’t be confined to old folk.

Germany, with its high productivity and well-ordered fiscal policy, may be able to avoid the problem, while Britain looks to be following a trajectory very much like that of the United States.

Finally, China will have a demographic problem similar to those in the West. Its old folk of 2040 are unlikely to share fully in that country’s increasing prosperity – but those born in 1955-65 will still have living standards much better than in their childhoods.

Editor’s Note: Adapted from an earlier version published on the True Blue Will Never Stain blog

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About Martin Hutchinson

Martin Hutchinson is the co-author of Alchemists of Loss: How modern finance and government intervention crashed the financial system (Wiley, 2010) and a Contributing Editor at The Globalist. [New York, United States]

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