I came across an interesting interview in the Wall Street Journal the other day which highlights another detrimental economic effect from the mass of baby boomers retiring in the next few years.  Robert D Arnott, “a portfolio manager, asset-management executive and inveterate researcher”, claims that baby boomers who have planned ahead for their retirement and have saved and invested wisely will have a slight problem – the returns from these investments that they are relying upon will not be as high as expected. 

“The problem in a nutshell: 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.”

Thus, the price of what they want to buy will increase, while the return from their investments will decrease.  The reason for this problem is, of course, demography (everything comes down to demography…on this blog).  As Arnott points out:

“This very year, for the first time in U.S. history, the population of senior citizens rises faster than the working-age population. Less than 10 years ago, when the baby boomers’ kids were coming into the labor force and the very skimpy roster of Depression babies was retiring, we had 10 new additions to the working-age cadre for each one new senior citizen. It goes to 10-to-1 in the opposite direction in 10 years. There will be 10 new senior citizens for each new working-age citizen. If that’s not a political, economic and capital-markets game changer, I don’t know what is.”

It’s worth keeping that fact in mind – in ten years’ time for each new working-age citizen in the US there will be 10 new senior citizens.  This demographic bulge used to be a bonus for the US (the “demographic dividend”).  Thinking in terms of stocks, the surge in mature workers, those between 40 and 60 years of age, is the “sweet spot demographically for stock and bond returns”.  In the US, this happened in the 1980s and 90s.  These were “an extraordinary period” and compared to those decades, the current bond and stock scenario is, according to Arnott, “awful”.  While Japan’s stock bubble crested at the end of 1989, the United States’ stock bubble crested almost exactly 10 years later.  Unfortunately, that news has not filtered down to everyone:

“You still have a lot of people expecting 8% or 10% a year from stocks or even from balanced portfolios. That’s naive.”

Whereas historically US stocks have returned around 5.5% or 6% a year (before inflation), Arnott views stocks as having:

“…a forward-looking return of 5%, give or take, over the next 10 to 20 years. If bonds are priced to give us, let’s say, 2% to 4%, that means your balanced portfolio is likely to deliver 4%. Net of inflation and net of taxes, that’s awfully close to zero real after-tax return.”

So what is Arnott’s advice for baby boomers?

“It’s really simple: Save more aggressively; invest in economies that aren’t afflicted by the 3-D hurricane of deficit, debt and demography; and diversify into markets that can serve us well in a reflationary world…I think most boomers, if they invest sensibly, can retire roughly when they originally planned to or a year or two later. If they invest conventionally, it is three or four years later. And If they don’t invest at all and rely on entitlements to take care of them in their old age, then yes, they work until they’re 80.”

In the future as we grow older, we more of us be expecting (and perhaps wanting?) to work until we’re 80? Will we need to work until we’re 80 in the future? Only another 63 years I suppose…  


Marcus Roberts was two years out of law school when he decided that practising law was no longer for him. He therefore went back to university and did his LLM while tutoring. He now teaches contract and...