Baby Boomers Are A Drag

The Baby Boomers who were born in 1946 in the USA started retiring at age 65 in 2011. The last Baby Boomers born in 1964 will retire in 2029. They will make up about 20.6% of the US population by 2029.

Average Social Security income of Baby Boomers is $17,500 a year. Median savings for the 70% who have saved for retirement is about $250,000, which would generate an income of just over $10,000 a year. But 30% have no savings at all. If they are averaged in, then the average income from savings for Baby Boomers in the USA will be about $7,500 a year. Put this together with the Social Security payments, and you get to a yearly income for these people of about $25,000 a year.

Now the average income on retirement for Baby Boomers is about $50,000 a year. If they only have $25,000 a year on average in retirement, this means that the average retiree will be forced to live on 50% of their previous income in retirement.

About 25% of Baby Boomers will receive a company pension. But these pensions are mostly broke, as is Social Security. As the pressure on Social Security and these pensions mounts as more and more people retire, expect government to start to means-test applicants for Social Security, with any company pension being deducted from a Social Security entitlement dollar for dollar until it is gone. In short, even including company pensions, I think the assumption that Baby Boomers will have to live on about 50% of their previous income is accurate.

An average of 12.7% of the US population was retired between 1990 and 2011, when the Baby Boomer started hitting age 65. In 2030, when they are all past age 65, the percentage of the population that will be retired will be about 20.6%, for an increase of about 8% overall in 20 years.

Recall that these people will, on average, only have about half the income they previously had when retired. The USA is a services and consumer driven economy, so the overall contribution to economic consumption of these people will be cut in half by 2029.

Because they are the largest demographic cohort in society, the USA will have a larger percentage of retired people by 2029 than at any time in its history, meaning that the drag on consumption that will accompany these retirees will also be larger than ever before.

If we take 1990 – 2010 as a base, then the proportion of retirees in society who will be living on an average of only 50% of their previous income will be rising by about 0.4% of the total population a year, every year from 2010 to 2029.  

By 2029, Baby Boomers will be collectively spending about 4% worth of GDP less each and every year than what retirees have been spent had society continued with a normal demographic spread where retired people only made up 12.7% of society as from 1990 to 2010, not 20.6% by 2030.   

I suspect that the drag on consumption from this unprecedented mass of retirees has not been factored in by most economists when they look at future economic growth. Just to stay even, the economy would have to grow by 0.2% more each year as more and more people retire and start to spend at only 50% of their previous rate. 

The economy will also have to maintain this growth every single year to stay even, as the 0.2% drag is not a one-time thing, but lasts until these people pass away and the percentage of people who are retired in society gets back to normal. 

To stay even since 2010, we would have had to have had, first about 0.2% a year in growth in 2011 when the Baby Boomers started retiring, and now about 2% a year in growth which is the drag on consumption that has accumulated since then, with this continuing to rise by 0.2% every year until 2029.

This Baby Boomer consumption drag is the reason why, in spite of more fiscal and monetary stimulus than at any time since WW2, economic growth has been mostly tepid worldwide since the Great Recession, only taking off in the last few years. Throughout this time, as stimulus has pushed the economy forward, these retirees have been spending less and less and have been pulling it right back again.

Expect that, no matter what governments and central banks do, economic growth may be tepid for at least another decade, at least until all Baby Boomers are finally retired and demographics start to get back to something like normal.