Economic growth derives from a very simple formula; it is basically equal to the increase in the labor force, plus the increase in productivity (the amount that each worker can produce in a given time period). As noted above, the aging of the Boomers will likely dampen productivity growth. That’s too bad, because as the Boomers retire, growth in the labor force will also slow. In fact, if a sort of demographic perfect storm arises, the workforce may shrink.
For the past two decades, the United States has been in a remarkable sweet spot as far as labor is concerned. The number of annual births was well below the mid-century peak, and the number of elderly was limited by the low birthrates from decades long gone—those of the Great Depression and World War II. As a result, the share of the nation’s population in its working years was exceptionally high. The workforce was swollen further—massively so—by the movement of women into paid work, and the accelerating influx of immigrants. But the percentage of women in the workforce seems to be leveling off, and future immigration rates, given the growing political backlash against immigrants, are anyone’s guess.
Now come the Boomers, 80 million strong, merrily planning their retirements. Watching their generation move from childhood through adulthood and into old age on demographic charts is like watching a pig move through a python. Thanks to the Boomers’ retirement, by 2020, even if immigration continues at roughly its current pace, the workforce looks likely to be only a little bigger than it is today. If immigration rates were to decline precipitously, all else being equal, the labor force would be roughly 1 million people smaller than it is now.
Though we talk about the retirement of the Boomers as an impending event, it has already started. Participation in the workforce generally peaks between the ages of 40 and 44, declines slowly throughout the next decade, and then falls off a cliff. Millions of Baby Boomers have already left the workforce, and as more of them become eligible to collect Social Security, the process will accelerate.
Slower productivity growth and (in the best case) slower workforce growth mean sluggish growth for the economy. That, in turn, will have a host of consequences, ranging from the geopolitical (slower growth could hasten the relative economic decline of the U.S. versus China, India, and other powers) to the social (as the economic historian Benjamin M. Friedman argued in his book, The Moral Consequences of Growth, earlier periods of economic stagnation, stretching back to the 19th century, have typically sharpened racism, intolerance, and other unsavory tendencies). But the most visible consequence will probably be on the stock market.
At one point or another, you’ve probably heard the speculation that once the Boomers start selling their stocks and mutual funds to support their retirement, the flood of sales will cause the market to crash. That’s plain wrong: the Boomers were born over a period of 18 years, and they will retire over a similar span; moreover, most of them will not start cashing in their stocks immediately. Most people, evidence shows, wait to break into their 401(k)s until they have to. David Wise, the head of the National Bureau of Economic Research’s aging program, has, along with his colleagues, run multiple models looking at what will happen as the Boomers sell out, and he believes the effect will likely be modest.
But the outlook for equity markets is cloudy nonetheless. The problem is more basic: stock prices reflect both a company’s current earnings and its expected growth in earnings. A high price-to-earnings ratio means investors expect fast growth in future earnings. If you think economic growth is going to slow, the stock market looks overvalued today. Historically, stocks in aggregate have tended to trade at P/E ratios between 12 and 20. Right now, the P/Es of the three major indexes are on the high end of that range, implying the expectation of faster-than-usual economic growth. That sort of growth will be awfully difficult to achieve as the Boomers retire—and the problem could persist for decades. It is possible that, as the Yale economist Irving Fisher infamously said in 1929, “Stock prices have reached what looks like a permanently high plateau.”
Many analysts have joined the debate over whether the Baby Boomers have saved enough for retirement. Optimists tend to look at the amount Boomers have saved relative to their incomes, compared with how much their parents had saved at the same age. But Boomers are living longer, so they will need more money than their parents did. And even with the new prescription-drug benefit, they can expect to spend more on health care.
Perhaps most important, the Baby Boomers have fewer children. My grandmother has one daughter living nearby to help with shopping, another (my mother) overseeing her finances, and a third who is only a plane-flight away in case of emergency; when my grandfather was dying, my mother drove up to Newark for weeks at a time. My parents’ familial support network will be thinner: divorced and living in different cities, they will have to share the same two daughters. Given the vicissitudes of the modern economy, neither child may be living nearby when help is required. This is demographically typical, which means that not only will the Boomers be paying for help that family used to provide, they will also have fewer people to call on for financial assistance.
Despite all that, the Boomers themselves are remarkably optimistic about their prospects. A 2004 survey by the AARP showed that a solid majority are confident of their ability to prepare financially for retirement, which may be why 69 percent of them say that they are fairly or very optimistic about the future. More than 70 percent of them think that they will work at least part-time, but only a quarter expect to do so because they need the money; more are expecting to fulfill dreams of entrepreneurship or just to use work to break up the routine of grandkids, travel, and bingo.
These sunny views are reflected and amplified by the AARP, whose Web site paints a rosy picture of early retirement. And by some media outlets, including the newly launched Retirement Living TV channel (motto: “Inspiring your freedom years”), which features programs such as Retired & Wired, Living Live! with Florence Henderson, and Another Chance for Romance, which is billed as “the first dating show focusing solely on Baby Boomers.” (You must give the Boomers credit: their uncanny ability to focus solely on themselves, approvingly, appears undiminished by age.)
And there is cause for optimism, particularly for people planning their early retirement years, rather than confronting their later ones. I met a lot of these people in Newark. They were all terrifically cheerful, and why not? The kids were raised, they had a bit of money saved up, and the next few years looked good. Life expectancies for 65-year-olds have increased dramatically over the past 50 years, from about 14 years more in 1950 to just over 18 years more in 2001. These days, active life expectancy is increasing even faster. Twenty years ago, many patients entered the county nursing home near Newark in their late 60s. Now patients entering before their late 70s or early 80s are viewed as rare tragedies, brought low by some chronic disease like diabetes or kidney failure.
But the confidence of the Boomers in their finances is hard to justify, and seems to rely on some mystical alchemy of strong stock gains, housing value increases, and government largesse. The first, as we’ve seen, may disappoint. The second seems outright fantastic. As the economist Robert J. Shiller, author of Irrational Exuberance, has pointed out, once you account for inflation and home improvements, house values in the United States were typically pretty flat throughout the 20th century: the boom in housing that began in the mid-1990s is a huge historical anomaly. The Case-Shiller index, which tracks housing prices nationally, shows that despite a slight fall since 2006, prices are still more than double what they were in 1997, and have increased much faster than the growth in rents—a sign of unsustainable price growth. (And yet, Shiller’s surveys show that Americans still expect 5 percent or more in annual appreciation from their homes.) As for government largesse, Social Security typically provides just a little more than 40 percent of the average retiree’s income, yet the program’s finances are already strained.
Shiller more or less agrees with the 70 percent of Boomers who say they plan to keep working: he says they’ll have to. And while some, mostly affluent Boomers will surely find the work-as-personal-fulfillment that they expect—mayorships or artistry or part-time teaching; nonprofit work or light consulting as a coda to a successful business career; reinvention at 65—for a larger number, the destination is more likely to be someplace like Wal-Mart. Nationwide, that company employs hundreds of thousands of older workers, many of them retired from other jobs. The AARP’s list of elder-friendly companies leans heavily on temp agencies and retail establishments like Home Depot, Staples, and Walgreens.