The Baby Boomer Bust

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The Baby Boomer Bust?

Posted by Unconventional Economist in Australian Economy on Feb 13th, 2011 | 13 comments
The 21st century will be the century of old age, where declining birth rates meet longer life expectancies.
This ageing of the population will affect many areas of the international economy, from consumption and
growth to asset valuations.
The impacts from ageing will likely be most acute in Western Nations, although some developing
countries, most notably China, will also be negatively affected.
Australia is not immune from these demographic headwinds. As shown by the below chart, for the past
25 years, Australia’s total dependency ratio – the ratio of the non-working population, both children and
the elderly, to the working age population – has been in a demographic ‘sweet spot’. That is, there has
been a high proportion of working age people supporting only a small pool of dependents. This ‘sweet
spot’ has come about from two main factors:
1. The Baby Boomer generation – defined by the Australian Bureau of Statistics (ABS) as those born
between 1946 and 1965 and comprising around 25% of Australia’s population - has been at
working age; and
2. Declining birth rates from the mid-1970s.
However, 2011 marks the year when the oldest members of the Baby Boomer generation - those born in
1946 – turns 65 and reaches official retirement age. Accordingly, Australia’s dependency ratio is
projected to worsen progressively each year from now on as the Baby Boomers gradually enter
retirement.
Australia’s demographics are similar to those of other Western nations, which have also
experienced similar demographic ‘sweet spots’ as well as rising dependency ratios going forward (see
below chart).
http://macrobusiness.com.au/2011/02/the-baby-boomer-bust/ Page 1 of 13
The Baby Boomer Bust? | macrobusiness.com.au 14/02/11 7:00 AM
To put the number of retirees in Australia into perspective, consider the number of Australians turning
65 each week between 2000 and 2030:
As you can see, the number of retirees has been on the rise since 2000. And this trend is expected to
continue for another 15 years or so.
Accordingly, the proportion of Australia’s population aged 65 or above is projected to rise from around
14% currently to 24% in 2050. Similarly, Australia’s median age is expected to increase from around 38
years of age currently to 43 years in 2050 (see below chart).
An increase in the dependency ratio will, other things equal, lower Australia’s growth potential
via reduced expenditure, lower asset valuations, and higher rates of taxation. These impacts are
summarised below.
Consumption expenditure:
First, consider the below chart showing how much household income falls once retirement is reached.
As you can see, household income peaks between the ages of 45 and 54, before dropping sharply. A
household in retirement earns just over a third of what a 45 to 54 year old household earns.
A similar situation applies with respect to expenditure. Household spending peaks between the ages of
45 and 54, before falling sharply. A household in retirement spends less than half of what a 45 to 54
year-old household does (see below chart).
Asset values:
An earlier article, Baby Boomers, Retirement and Asset Prices, provides a comprehensive examination
of the negative effects that ageing will likely have on Australian asset prices (particularly housing). Here
are the key takeaways from that article:
Despite representing only 25% of Australia’s population, the Baby Boomers collectively hold 45%
of owner-occupied dwellings and 51% of other dwellings (i.e. investment properties and holiday
homes). However, since the older Boomer cohort (55-64 year-olds) are relatively small
(accounting for 11% of the population), they hold a smaller (20%) share of Australia’s housing
assets. By contrast, the younger Boomers (45-54 year-olds) hold 26% of the housing assets,
reflecting their larger (14%) share of the population (see below chart).
Around 30% of Baby Boomers hold second homes and around 13% have loans over these
properties (click to view table).
When it comes to financial assets, the Baby Boomers hold 54% of the total (see below chart).
Most Baby Boomers are heavily exposed to property and hold relatively little in the way of
financial assets – certainly not enough to fund a comfortable retirement. It is, therefore, highly
likely that many will look to sell their investment properties/holiday homes and/or downsize in
order to free-up the equity in their housing assets to finance retirement. The incentive to sell-out of
their properties will likely intensify once the Boomers realise that there is little prospect of
continued high capital appreciation.
A recent Bank for International Settlements (BIS) Working Paper found that the ageing of the
Baby Boomers is projected to reduce Australia’s real house price growth by around 30% in real
terms over the next 40 years compared to neutral demographics (see below chart). The BIS also
expects ageing to have a similar impact on the value of financial assets.
Again, readers seeking to gain a better understanding of the Baby Boomer retirement’s impact on asset
prices are encouraged to read my earlier detailed examination.
Government revenue and taxation:
The 2010 Intergenerational Report (IGR) had the following to say about the impact of ageing on
Government finances:
Population ageing will create pressure for increased spending, particularly in the
demographically sensitive areas of age related programs and health. Health costs will also
escalate as a result of technological enhancements and rising demand for better quality
health services. Population ageing, by reducing the proportion of working age people in the
population and hence potential economic growth rates, will also reduce Australia’s capacity
to fund these spending pressures.
Unless action is taken to increase the growth potential of the economy and ensure spending
is sustainable, spending will exceed revenue and result in a fiscal gap of 2¾ per cent of GDP
by 2049–50.
However, the IGR possibly underestimated the fiscal impact of ageing, since it ignored the impact of
declining property valuations on state government budgets. As shown by the below HIA chart,
Australia’s state governments have become increasingly reliant on property taxes. And any decline in
valuations brought about from the retirement of the Baby Boomers would clearly have a detrimental
impact on state finances.
Clearly, any loss of revenue arising from the ageing of the population will need to be met with 1)
reduced government outlays; 2) an increased tax burden on younger generations; or 3) a combination of
both.
Demographic headwinds are the new normal:
For the past 30 years, the Australian economy has been powered by the Baby Boomers, whose entry into
the workforce en masse in the 1980s saw Australia’s dependency ratio fall to all time lows. This
demographic ‘sweet spot’, whereby Australia’s dependency ratio was at its lowest ever level, lasted for
25 years from 1985 to 2010. During this period, Australia’s economy benefited enormously from the
Boomer’s productive capacity, consumption spending, and taxation receipts, which peaked after the
1990s as they reached peak earning/spending age (45 to 55 years of age).
Asset values, too, were pushed-up by the Baby Boomers as they accumulated vast amounts of housing
and financial assets with the aim of funding their retirements.
From 2011 onwards, however, Australia’s economy will face significant demographic headwinds as the
Baby Boomers gradually: enter retirement; cut back on spending; draw-down on assets; cease paying tax;
and receive increasing levels of health care and social security, funded by increasing taxes on the
younger generations.
These factors will likely significantly lower Australia’s growth potential and asset valuations going
forward.
Cheers Leith
unconventionaleconomist@hotmail.com
www.twitter.com/Leithvo
13 Responses to “ “The Baby Boomer Bust?”
1. Rowan says:
February 13, 2011 at 11:11 pm
It would be interesting if you researched the proportion of medical expenses spent on the last
months of peoples lives.
I can foresee a country crippled by an ageing population (who once would on average live only a
few years after, now living 15-20 years into retirement) cutting the experimental & expensive
health care that costs hundreds of thousands to keep somebody going another few months with
terminal conditions.
Reply
787 Dudliner says:

February 14, 2011 at 3:48 am
Are you proposing we let your/my father die?
My dad was terminal at 78 with pneumonia and was saved and I enjoy a chat now and some
guidance at 88.
When we start letting our young and old die because we need to save money so we can do
an aeromedical airborne rescue on the central coast due to another Sat night ‘brawl/glassing’,
it is time.
The time I pull my Canadian and Euro passport out and give up on this my home country.
Protect the 100% inflated property bubble at all costs Smithers (for you mathematically
challenged, $250K to $500K is 100% gain, 500 to 250 is a 50% fall)
Reply
Phil says:
I’ve heard in loose conversation within the medical fraternity that over 80% of the Medicare
levy is spent on people in their last 6 months of living – what a waste of money in my view,
yes – a harsh comment, but none the less a debate just waiting to happen.
Phil
Reply
2. Keith MacLennan says:

Dunno about the cost of aging but what about the horrendous cost of growing children until they
reach the point they become worth anything to the economy.
I think they cripple our economy for at least their first 20 years of their life.
Reply
3d1k says:
Kids cripple the economy???? Are you kidding. I can think of many factors that adversely
impact the economy…and kids are not one of them.
Kids are a joy, lighten the spirit and worthy every penny, real and imagined.
Grow up.
Reply
3d1k says:
Upon reflection, I realise you must be joking!
Kids cripple the economy: pharmaceutical contraception; physical contraceptives;

gynecologists; obstetricians; anesthetists; midwives; nurses; clinic staff; pediatricians; baby
goods manufacturers; formula manufacturers; baby apparel; three year old kindy teachers;
kindergarten and preschool teachers; primary teachers; educational material publishers; child
psychologists; playground designers; tv merchandisers; high school teachers; junior fashion
suppliers; fast food companies; vast sectors of the public service; animators; mobile phone
companies; high school teachers; tutors; kumon; music schools; dance classes; martial arts
classes; amusement parks; department stores at Christmas and Easter; how to parent
publishers; pet stores; Disney movies; Harry Potter; and so on and on and on.
Kids – a real drag on the economy.
Reply
787 Dudliner says:

I spend $15K-25K ayear on my kids education et al so they don’t end up like you. So far so
good.
Reply
787 Dudliner says:

BTW Keith, as a non centrelink recipient isn’t the 15-25 at Uni college level and
school level actually INJECTING discretionary income into a sector of the economy?
Reply
3. Gordon says:
Those in favour of a ‘big Australia’ frequently spruik high levels of immigration as the panacea for
our ageing problem. The last time I checked the median age of immigrants was 34 years and of
Australians 36.9 years, so high immigration would seem unlikely to have the required result.
Perhaps there is a demographer out there who would care to comment?
Reply
4. Nicolas says:
Leith,
You might find this interesting,
“Demographic Change and Asset Prices, in Demography and Financial Markets, Reserve Bank of
Australia”, By Robin J. Brooks (2006) http://www.rba.gov.au/publications/confs/2006/brooks.pdf
Note: Dose not look at house prices.
“Empirical evidence does not point to a strong historical link between demographics and financial
markets”
“While the existing literature has found that the relative importance of middle-aged cohorts tends
to be associated with relatively high
real stock and bond prices, this paper shows that this relationship does not hold for countries with
strong equity market participation among households, such as Australia, Canada, New Zealand, the
UK and the US. In these countries, higher real financial asset prices tend to be associated with a
large share of the population in the old tail of the age distribution, consistent with survey evidence
from the US that shows that households build up financial wealth well into old age and then do
little to run it down in retirement. Taken at face value, this suggests that real financial asset prices
in these countries will actually rise as the population continues to age”
“Nonetheless, this finding underscores that historical evidence provides
little support for the hypothesis that asset prices and returns will fall abruptly when the baby
boomers retire”
Reply
Phil says:
I’m rolling on the floor laughing at that;
“Taken at face value, this suggests that real financial asset prices in these countries will
actually rise as the population continues to age”
Just as scarcity stimulates people into action to buy, and as Newton’s second law of Physics
states (equal and opposite force) – be assured that the bust will come and houses will be sold
of wholesale in the rush to the exits (businesses as well – the majority of small business
owners think their business has their super tied up in the sale – that makes me laugh even
more, it won’t happen, the majority will walk away with nothing as demand for their goods
and services dries up … it is happening now).
The momentum created from the ageing baby boomer’s behaviour (as the reality sets in) will
see all assets re-rated in the next few years (and I think it will accelerate when people feel
their wealth sifting through their hands), hence my view that most of the re-rating will occur
before 2015. They will sell their second homes on masse and this will accelerate – they will
spend less as they realise the situation they are in – creating unemployment which in turn
will decrease GDP – for at least 10 to 12 years when the Y Gen start their peak spending
(1975 plus 47/48).
All assets except cash will be smashed in the process – clear as day to me. The stockmarket
rewards company share prices based on their forecasted earnings and importantly their
growth in earnings – the PEG ratio … history tells us that when periods of contraction turn
up, PE ratios (performance earnings)plummet to an average of 5. Today they are 14 (I think)
– yes a fall of 65% in the stock market coming.
Governments will be voted in and out by the Baby Boomers for the next 15 years – there is
enough of them to do this and in the process they will get whatever they want to ensure a
comfortable and long retirement (the luckiest group of people to date in my view – had it
bloody easy) … this will create unprecedented unrest as the younger generation revolt!
Mmm, that sounds familiar.
I’m a Liberal voter, however for the next 10 to 15 years I don’t think they have a clue on
how to handle this period of politics. Labor will hold power for a long time as the
Government will have to compensate for the imbalances.
By the way, I am a Baby Boomer.
Phil
Reply
5. 787 Dudliner says:

Keith is a boomer? A 10% haircut to the portfolio OK?
If property values fall by 5%pa a quick round of year 12 logarithms says its 13.5 years to halving
in value raw.
Allowing for 3% inflation 8 years to 50% GONE (5% annual haircut).
Reply
6. Phil says:
Leith
… as I have posted before, the period of growth is as a result of people born 1933 to 1962 – this is
the group of people to watch. From 1933, birth rates increased at 45-55 degrees for 30 years
unabated in most of the western world (USA and AUS in particular).
Demand for goods and services peaked some 45 years later (for people born in the 30ʹ′s) to 47/48
years later for those born closer to 1962, who left having families a little later. Then the pill was
introduced and we had the “free love” period – which of course stopped the baby boomer in its
tracks.
So overall GDP increased and created the boom of the last 30 years, 1980 to 2010 as this group of
people went through peak spending.
The 1946-1964 period is but a small part of the real “boomer” group.
People born in 1933 are now 77 years of age, well into retirement, the majority dependent on the
Government pension, the numbers in this situation increasing by the day and creating a major drag
on the public purse. This will go on for 30 years before it gets better (to be fair, we might still be a
year or two away from the direct costs spiraling up – probably 80 years of age is when people
become “totally hooked” (or peak dependency) on the Government for Medical care, noting their
will be a 30 year period of increasing costs for the younger generations to provide through their tax
as the rest of this group make their way to 80! Regrattably with advancements in keeping people
alive physically, most will hang on for another 4 or 5 years (that’s a different discussion, noting
that advances with mental diseases has made little progress …).
A massive period of adjustment is just around the corner – cash looks good to me!
Phil
Reply
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Demographic headwinds are the new normal:

13 Responses to “ “The Baby Boomer Bust?”

787 Dudliner says:

Are you proposing we let your/my father die?

2. Keith MacLennan says:

Upon reflection, I realise you must be joking!

Kids cripple the economy: pharmaceutical contraception; physical contraceptives;

Kids – a real drag on the economy.

787 Dudliner says:

787 Dudliner says:

You might find this interesting,

Note: Dose not look at house prices.

I’m rolling on the floor laughing at that;

By the way, I am a Baby Boomer.

5. 787 Dudliner says:

Keith is a boomer? A 10% haircut to the portfolio OK?

Allowing for 3% inflation 8 years to 50% GONE (5% annual haircut).

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