Malthus visits Wall Street
We all know that the leading edge of the roughly 76 million baby boomers born between 1946 and 1964 are entering their retirement years. A decade ago some 12 percent of the population was 65 and older. By 2025, that share will swell to 19 percent -- a figure higher than the current demographic profile of Florida.
The litany of fears about an aging population is long. Spendthrift boomers saved far too little for far too long. The retirement savings that were accumulated in 401(k)s, IRAs and the like have been decimated by two recessions and two bear markets in less than a decade. The federal debt and deficit will only worsen with spending on Social Security, Medicare and Medicaid rising alongside an older population.
Well, add this to the list of worries: bad investment returns. Simply put, there are too many aging baby boomers. When they retire and draw down their savings and private pensions, the massive asset sale will depress stock and bond values, leaving boomers with less money in old age -- and anemic returns on investment for everyone else.
The latest story on Malthus visiting Wall Street was in a Wall Street Journal interview with Robert Arnott, the founder and chairman of Research Affiliates LLC in Newport Beach. Arnott is one of the smartest long-term thinkers around on the capital markets.
Here's the problem as he sees it:
The ratio of retirees to active workers in the U.S. will balloon. As retirees sell stocks and then bonds to support themselves, there will be fewer younger investors to buy those securities, keeping a lid on prices. Meanwhile, strong demand from boomers and a limited supply of workers will boost the prices of goods and services the boomers need.
Last August, the Federal Reserve Bank of San Francisco published Boomer Retirement: Headwinds for U.S. Equity Markets? Economists Zheng Liu and Mark M. Spiegel answered their question with a yes. The shift from buying stocks to selling them in retirement "could be a factor holding down equity valuations over the next two decades."
Still, I wonder if investors should really fear the march of time. The specter of a baby boomer-driven implosion seems implausible to me largely because of the move toward market economies around the world. The spread of private property rights and openness to the world economy is encouraging vast amounts of capital to flow across borders. By the time boomers are selling in earnest, markets will be even more global than they are now. There are a lot of foreigners to buy U.S. assets in the 21st century. Arnott does note the importance of foreign buyers:
WSJ: Your prognosis for U.S. investors sounds in some ways too simple. And definitely too scary. In retirement, can't I sell my securities to workers in other countries? And won't other countries supply goods and services to boomers, taking some pressure off prices?
Mr. Arnott: Absolutely. But it is dangerous to overrely on that. What I'm painting isn't a doom-and-gloom scenario. What I'm painting is a scenario that is challenging, that's difficult. Compared with the '80s and '90s, it is awful. But the '80s and '90s were an extraordinary period. You still have a lot of people expecting 8% or 10% a year from stocks or even from balanced portfolios. That's naive.
He's right about not expecting to make 8 percent to 10 percent on your money. It's an important caution.
Nevertheless, despite all the problems of recent years, strong U.S. productivity and world-class technological innovation give the U.S. every chance of maintaining a highly competitive global economy. And less-developed nations joining the free-market world give the global economy an unprecedented degree of diversity, which means a less risky world economy overall. I'm probably more optimistic about inflation, too. I think bonds will retain value as fierce domestic and international competition help keep inflation at bay. The real bond-market vigilantes -- central bankers -- all share an anti-inflation zeal. Bonds hold their value when inflation is constrained.
No, I don't think a dismal future of low returns is what boomers need to fear. This perspective suggests the real fear is that policymakers will change the rules of the game by embracing protectionist policies. I don't see it as a real long-term risk, however. We've been through the worst downturn since the 1930s and it's striking how nations around the world essentially steered clear of beggar-thy-neighbor policies. Instead, the ties that bind are even stronger than before the crisis. Too much money and wealth is at stake for a fundamental retreat. And that means baby boomer assets will shrink in importance within a larger global capital market.