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February 21, 2008
Wealth, Savings and Debt
Russell Roberts
One comment on this post about the state of America mentioned our rising debt, negative savings and so on. Savings is mismeasured in the US--it doesn't include investment in human capital and ignores asset appreciation. As I said in the post, yes, debt is rising. But debt isn't what matters. It's net worth. Here are the data on real net worth. It's at an all-time high.
And yes, I know this is the total and doesn't hold for every individual. The same data for different quintiles of the income isn't quite so cheery. But they're still cheery. The chart is taken from a post by Michael Mandel at Business Week. Read the whole thing.
Posted by Russell Roberts in Standard of Living | Permalink
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Comments
I'm beginning to understand this philosophy and it makes sense when I put it to myself in these terms. A few years ago, if I were in debt by a few thousand dollars I would be freaking out because I wasn't worth so much, meaning I couldn't get a job just anywhere, I had to work at Walmart for peanuts. As I enhanced my skills and specialized in a field I began to increase my worth and the debt really didn't matter so much. Now that I have honed in on my skills and my worth is much higher, my debt can be much higher.
If this is the correct analogy, I guess the remaining question is, where is the line and who/how is it drawn. When is too much debt too much debt?
Posted by: Brian-NJ | Feb 21, 2008 8:23:53 PM
The decline is housing prices will likely decrease the net worth from its high once more... but its still important to realize that it should be measured peak to peak or trough to trough.
It's also worth noting that people are quick to adjust good things (wages, GDP) for inflation but never adjust bad things (debt, prices of commodities). Pessimistic bias I guess?
Posted by: Syphax | Feb 21, 2008 8:31:31 PM
Unfortunately I think that data doesn't correct for population growth or. inflation. Finally if the wealth increases from the top 1% are taken out there ain't much left over....oh and everyones house is going down in value 20-30%.
Fed: Stagnant Net Worth for Typical US Family
Posted by: muirgeo | Feb 21, 2008 8:47:38 PM
Fed: Stagnant Net Worth for Typical US Family
http://bigpicture.typepad.com/comments/2006/02/fed_stagnant_ne.html
Posted by: muirgeo | Feb 21, 2008 8:52:08 PM
Muirgeo,
Measuring from 2001-2004 is unfair, It is measuring from the peak of the business cycle to a little past the low point of the recession. Just as I wouldn't expect people's net worth to be higher 2 years from now than it was in 2006, you shouldn't expect that it would be higher in 2004 than it was before the stock market crash of 2000/2001.
Measuring for population growth? It is a household measure, meaning population growth has no effect. Actually, since households have declined in size, the chart posted actually understates the increase in wealth, but only by a little. The graph is also adjusted for inflation, which almost certainly has overstated inflation over the course of 15 years.
Posted by: Syphax | Feb 21, 2008 9:05:20 PM
Syphax,
You're right about the inflation. And you're right about the 2001-2004 data. But the data I posted are a measure of total net worth across all households. So it would be reasonable to correct for population growth. My guess is that when you do that, you will find a similar trend.
Posted by: Russ Roberts | Feb 21, 2008 9:16:51 PM
syphax writes: "Finally if the wealth increases from the top 1% are taken out there ain't much left over....oh a..."
we know this how? the new number left over is?
Posted by: jpm | Feb 21, 2008 10:24:37 PM
My mistake, I guess 45 trillion dollars per household is a tad bit unrealistic.
A rough adjustment for population(250 million in 1990, 300 million in 2006) shows that the population in 1990 was 83% of what it is now. If this chart was deflated by population the 2005 number would be about 37.5 trillion instead of 45, still a huge increase from 25 trillion.
Posted by: Syphax | Feb 21, 2008 10:25:27 PM
Professor Roberts,
When you say that U.S. savings does not include asset appreciation, would that include:
- the home that my mother owns, purchased for $10,000 in 1956, but which could be sold for 15 times that much today?
- the small retail store I opened in Tennessee in 1993 that has an accounting book value of $40,000 but which could be sold for 6 times that much?
Would the $45 trillion in real net worth include either my mom's $150,000 house or my $240,000 retail store? Or the unrealized value of millions of other homes and small private businesses in the U.S.?
Posted by: John Dewey | Feb 22, 2008 7:01:45 AM
I'd like to see this chart on a longer time scale. The current decade is the "last chance decade", i.e. it's the last chance for many baby boomers seeking rents to retire by age 65. People gain authority as they age. If we mark the beginning of the "boom" at 1945, the leading edge reaches 65 in 2010. See the chart at the bottom of this page.
Of course, "baby boom" is really a misnomer. The "boom" was a period of normal birth rate between two busts. The first bust was associated with depression and world war. The second was associated with birth control and abortion.
The baby boom is historically significant for several reasons. First, the first bust was unusually global for a variety of reasons. Depression and war spreading rapidly across the globe are relatively recent phenomena, and the destruction wrought by recent wars is unprecedented. The end of the boom in the U.S. is 1965, marked by the Griswold decision that legalized birth control across the U.S.
Second, the second bust is essentially permanent. No comparable boom will follow this bust.
Third, in addition to the permanent, technology driven change in birth rate, the twentieth century is also associated with a similar change in death rate, i.e. the death rate at every age has fallen, from infancy forward. Life expectancy at every age therefore has increased. The "boom" is also an artifact of this change.
Fourth, the power of states effectively to create rents has increased. This power is a matter of effectively predicting future value and establishing entitlement to it. Who creates the value is irrelevant. In the purest form of rent seeking, the most central authorities simply raise taxes on whoever creates value and sells entitlement to the tax revenue (or keeps it), but this practice certainly does not exhaust opportunities to create rents. Of course, monetary authorities can create as much money as necessary for the purchase of the rents. What matters is who ends up entitled to them.
So why worry? First, we don't know who is entitled to what rent or how much they're entitled to. Unfunded liabilities of states obscure this figure, and other expectations also contribute to it. Authorities of all kinds everywhere continually cook up rents. We can't just look at Congressional committees. These committees are only the most open examples, the ones we can see, the tip of the iceberg.
If I own a business and I want to retire, I want to sell the business for the highest possible price, so I want the lowest possible interest rates as I sell, then I want the state to sell me entitlement to tax revenue including interest guaranteed to exceed the inflation rate. This strategy might not work as well as being a senior executive in the Federal government, but it's also an example of rent seeking.
Once I've accomplished this transaction, I don't really care the rents are collected. States may torture people into submission for all I care. I'll feign outrage of course. I might post at this web site while earning my pension for example. I'm not particularly evil in this regard, only particularly honest.
In Roberts' chart, I see a rapid rise in the 90s followed by a flattening in the current decade. It's not simply a fall followed by a rise. It's a flattening, possibly a peak preceding a decline. I say so for theoretical reasons as well as the obvious shape of the curve. If the rise indicates many people saving for retirement (accumulating entitlement to rents), why wouldn't the rise slow as many people retire?
The theory is debatable of course, but demography is destiny, and the future certainly is not like the past demographically or technologically.
Here's a question: does "household net worth" include entitlement to pension benefits? If I'm a senior executive in the Federal government entitled to retire at 55 with a full pension, I effectively own a very valuable asset, with a cash equivalent in the millions. Does this entitlement affect "household net worth" as illustrated?
Posted by: Martin Brock | Feb 22, 2008 7:45:03 AM
Martin,
"Of course, "baby boom" is really a misnomer. The "boom" was a period of normal birth rate between two busts."
Agreed. I graphed this out myself a couple of years ago.
"...the second bust is essentially permanent. No comparable boom will follow this bust."
Disagreed. The second bust is only continuing among white liberals. The population of the US has roughly doubled in my life time and I wouldn't be the least bit surprised if it doesn't double again before I'm dead. There will come a point in the not to distant future when massive immigration is no longer resisted because there will no longer be a significant percentage of the population that wants to resist it. And, if I may attempt to follow your concept, many will seize the opportunity to sell their entitlements to the newcomers in order to go out in style.
"So why worry?"
What? Me worry? But seriously, the things that make people successful haven't changed and will not change. A quote from Colin Powell; "There are no secrets to success. It is the result of preparation, hard work, and learning from failure."
Posted by: Randy | Feb 22, 2008 8:46:52 AM
Brian-NJ
People aren't robots so there isn't a single answer for everybody. It depends on many factors including personality. Some people are very risk adverse and others aren't.
For you it depends on how risk tolerant you are, how confident you are of your future income and what ever other factors you might deem important.
If the country moves left the value of saving goes down imo as the risk of having much of it taxed away goes up.
Posted by: Marcus | Feb 22, 2008 8:49:28 AM
Brian-NJ
People aren't robots so there isn't a single answer for everybody. It depends on many factors including personality. Some people are very risk adverse and others aren't.
For you it depends on how risk tolerant you are, how confident you are of your future income and what ever other factors you might deem important.
If the country moves left the value of saving goes down imo as the risk of having much of it taxed away goes up.
Posted by: Marcus | Feb 22, 2008 8:49:32 AM
John Dewey (and others)
I'd like to see the data go back further but not sure it's been collected for very long.
Yes, as I understand it, it includes the value of your appreciated house and business. In the time period that's being measured, the data are corrected for overall inflation--the rise in average prices of all the things we buy.
I'm sure the chart is "wrong." They don't literally count every asset and they don't count it accurately for every household. But my point is simply that the trend is suggestive of good things and that just looking at rising debt is wrong.
On the top 1% issue or what I would call the median vs. the mean issue, real median net worth is up dramatically since 1992 as well and I will try and post that chart soon.
Posted by: Russ Roberts | Feb 22, 2008 9:05:38 AM
Disagreed. The second bust is only continuing among white liberals.
Not true. It's more pronounced among yellow liberals, not to mention yellow Communists, and it's spreading world wide. See Ben Wattenberg's book "Fewer".
The population of the US has roughly doubled in my life time and I wouldn't be the least bit surprised if it doesn't double again before I'm dead.
Recent U.S. population growth is heavily affected by immigration. I don't expect another doubling of U.S. population in my lifetime unless it's driven by immigration, which is completely reasonable of course. Many demographers now expect world population to peak around mid-century. With luck, I'll live to see it. The Japanese population has already peaked.
There will come a point in the not to distant future when massive immigration is no longer resisted because there will no longer be a significant percentage of the population that wants to resist it.
I don't resist it now.
And, if I may attempt to follow your concept, many will seize the opportunity to sell their entitlements to the newcomers in order to go out in style.
Right.
What? Me worry? But seriously, the things that make people successful haven't changed and will not change. A quote from Colin Powell; "There are no secrets to success. It is the result of preparation, hard work, and learning from failure."
Colin Powell is a retired Federal employee receiving a pension from taxpayers, and the last example of his learning from failure that I recall is the speech he gave to the Security Council before the Iraqi occupation, the one with all the aerial photos of WMD production sites that we later captured and found to be nothing of the sort.
Powell undoubtedly is a clever man. The question is: how are clever people getting ahead these days?
Posted by: Martin Brock | Feb 22, 2008 9:30:14 AM
Martin,
True, Colin Powell made his way in government service. But its no easy trick to make it to the very top ranks of any field, let alone the US military. And anyway, what he says is true. I don't know about you, but I sure don't tell my kids that the key to success is voting for the right people.
Posted by: Randy | Feb 22, 2008 9:38:09 AM
I would venture a guess that the chart does not count for unrealized assets. Maybe my choice of words is wrong, but what I mean is that it is common, at least in the corporate world, to issue stock options and restricted shares that vest over time. While it is not an immediate measure of savings, it does represent what one may consider a method of savings.
In my (anecdotal of course) experience, my current unvested options are hovering around a maturity value of $13,000. I also have non-forfeit, restricted shares of company stock that vest annually at a rate of 25% of the original grant representing another $26,000 of stock available to me over 8 years. Granted, if I choose to leave my job or lose my job over that period, much of this evaporates. However given the present position I am in and the state of our business, my overall debt is a small fraction of the amounts I can realize within a shorter period of time such as 1 year. While my debt to liquid assets ratio may be somewhat grim, My long-term prognosis is looking pretty good. And after my review yesterday with my superior, it's looking even better. Too bad I'm looking to go to law school :/
I guess my point is that if we are talking about assets over time on which you do not draw on immediately, we maybe missing parts of the data where compensation changes have taken place.
Posted by: colson | Feb 22, 2008 9:40:31 AM
"Unfortunately I think that data doesn't correct for population growth or. inflation. Finally if the wealth increases from the top 1% are taken out there ain't much left over....oh and everyones house is going down in value 20-30%.
Fed: Stagnant Net Worth for Typical US Family
Posted by: muirgeo | Feb 21, 2008 8:47:38 PM"
Socialist thinking exposed again.
Why can't the socialist pick the needle up from its one groove and move it or just stop the recording playback altogether?
I have a friend, Honda's top salesman worldwide, whose income has gone up over 25% for well over three consecutive years. My video business has increased my wealth growth at greater than 10% a year for the last three years.
What does my friends growth rate have to do with mine? Nothing. If he sold nothing at all for the last three years my wealth growth rate would still have been greater than 10%.
Because he has more does not mean that I have less, and this holds true for every single household. My friend takes nothing from me in his success.
I suspect that if the top 1% of wealth owners did nothing or had their one year wealth growth confiscated, the rate of growth and income for those below would be affected not at all or so little as to be insignificant.
And last but not least: Why can't the socialist understand that they simply can not speak for every one, they can only speak for themselves. muirduck's home may have saw a decrease in value.
No muirduck, not every one saw their home value decrease by 20% to 30%. My home and those of my neighbors saw increases of up to 10% in value over the last year.
Your problem, muirduck, is you're trying to apply "leftcoast confusion" to Texas reality/logic.
Posted by: vidyohs | Feb 22, 2008 9:44:19 AM
Does the chart adjust for age? A young person is more likely to have more debt and less net worth. As they get older things like college loans are paid off, and many have higher net worth through retirement plans etc...
Posted by: Mcwop | Feb 22, 2008 9:44:59 AM
P.S. I figure that peak population is a function of population density and availability of natural resources, not just demographic trends. Japan may be near its peak population densitiy, but the US is not even close. The north central and north western tier of states haven't really even started growing yet.
Posted by: Randy | Feb 22, 2008 9:48:11 AM
Vidyohs,
"...trying to apply "leftcoast confusion" to Texas reality/logic."
Good one :)
Posted by: Randy | Feb 22, 2008 9:51:11 AM
But its no easy trick to make it to the very top ranks of any field, let alone the US military.
Right. It wasn't easy for Mussolini or Stalin either. It's not easy for the Pope, and everyone beneath him in his hierarchy takes a vow of poverty. So does he, while living in one of the most immaculate castles on Earth.
And anyway, what he says is true.
Truisms are true.
I don't know about you, but I sure don't tell my kids that the key to success is voting for the right people.
But you'll tell them to join the state and keep saluting? You can also tell them not to bother voting at all. What does voting have to do with it?
Posted by: Martin Brock | Feb 22, 2008 10:22:11 AM
Martin says:
"It's not easy for the Pope, and everyone beneath him in his hierarchy takes a vow of poverty. So does he, while living in one of the most immaculate castles on Earth."
Congratulations. You are almost matching Muirgeo with your level of ad hominem/ straw-men arguments. Please continue to post really long responses that have little to do with the topic, have pretzel logic, and are sprinkled with sarcastic condescension. That is what we need more of 'round here.
Posted by: Python | Feb 22, 2008 10:30:52 AM
P.S. I figure that peak population is a function of population density and availability of natural resources, not just demographic trends.
Read "Fewer". The trend is global. Natural resources are available everywhere now. The U.S. has one of the fattest populations on Earth and a much lower population density than the U.K. or China, but our birth rate still hovers around the replacement rate. Immigration now accounts for must of our population growth.
Japan may be near its peak population densitiy, but the US is not even close. The north central and north western tier of states haven't really even started growing yet.
True.
Posted by: Martin Brock | Feb 22, 2008 10:34:10 AM
That is what we need more of 'round here.
Your response is vacuous and simply ignores many substantive points.
Posted by: Martin Brock | Feb 22, 2008 10:35:40 AM
Martin,
"What does voting have to do with it?"
Voting, as in political activity, is just an example of something I don't tell my kids when I'm giving them advice on how to be successful. Its also something that lots of people, especially those of the progressive persuasion, do seem to believe is the path to a better future. What I do tell my kids is pretty much along the lines of the quotation from Colin Powell.
Posted by: Randy | Feb 22, 2008 11:01:01 AM
"not every one saw their home value decrease by 20% to 30%. My home and those of my neighbors saw increases of up to 10% in value over the last year."
I think my home just north of DFW Airport appreciated 5% to 6% in 2007.
Aren't the homes on the coasts that decreased in value by 30% the very same ones that increased in value 50% - 70% over the previous five years? I'm sure some made the mistake of buying on the bubble, but for most homeowners there was no realized loss, right?
Posted by: John Dewey | Feb 22, 2008 11:09:58 AM
>> I'm sure some made the mistake of buying on the bubble, but for most homeowners there was no realized loss, right? <<
Right, and in some areas (the exceptions to be sure) prices continue to go up.
But this just raises a question that has been on my mind for Professor Roberts and others...Much of this wealth is laying idle and not being used, in the present, to impact people's perception of their life. Isn't it really the purchasing power of what is left in someone's wallet that is going to make the biggest impact on their perception of the conditions of their life?
Posted by: mark seery | Feb 22, 2008 11:15:00 AM
I just can't get past this whole "debt doesn't matter" thing.
How is a net worth calculation that doesn't account for debt even useful?
Simply taking out a huge loan does nothing to increase real wealth. And that is exactly what has happened in recent years.
Posted by: Rob | Feb 22, 2008 11:22:40 AM
mark seery: "Much of this wealth is laying idle and not being used, in the present, to impact people's perception of their life."
Are you referring to only the housing values? My wealth in my small retail store and my wealth in equities of global corporations is not laying idle. Those parts of my wealth are creating jobs and are either providing services or producing goods. My perception of my life is vastly different now that I've accumulated a significant nest egg for my looming retirement years. The elimination of financial stress has certainly done more for my current and long term happiness than any material good.
Posted by: John Dewey | Feb 22, 2008 11:27:47 AM
What I do tell my kids is pretty much along the lines of the quotation from Colin Powell.
Voting is a political activity, but being chairman of the joint chiefs is not?
That's a question.
Posted by: Martin Brock | Feb 22, 2008 11:49:14 AM
So, Martin, what do you tell your kids? Forget that Colin Powell said it and just focus on what he said. Is there any change in the environment that would make what he said not good advice?
Posted by: Randy | Feb 22, 2008 11:58:11 AM
Aren't the homes on the coasts that decreased in value by 30% the very same ones that increased in value 50% - 70% over the previous five years?
My home did neither. The question is: how much of the price increase is sustainable? Another question is: how much did you borrow against the increase? If you "withdrew" the last 30% rise in your equity by borrowing against it before the decline, a 30% gain earlier (from a lower base) still leaves you in negative equity. If you reinvested the 30% gain you borrowed in another inflated asset, you're in still worse shape. We don't yet know how much malinvestment will unwind.
Posted by: Martin Brock | Feb 22, 2008 12:00:17 PM
So, Martin, what do you tell your kids? Forget that Colin Powell said it and just focus on what he said. Is there any change in the environment that would make what he said not good advice?
What Powell said is a platitude that my kids figured out before they were twelve. I don't tell my kids how they'll make their living, because I don't know. If they want to follow in my footsteps, I'll help them as much as I can, but none of them show much interest in my work now. They'd probably rather have the cushy government research job I had years ago, or they'd rather have Colin Powell's job or at least get on the road to it. That's the problem, you know.
My government research job (in astrophysics) really was cushy and really was interesting, but it didn't produce anything you've ever consumed or anything that increased production of anything you've ever consumed or much of any use to you at all, because we had no reason to care what you consume. We just did what interested us and consumed what you produce by writ of our entitlement. We were science and engineering welfare queens. Honestly, I sometimes wish I still were. I can't justify this wish now, and I didn't try to justify it then. I just went with it.
Posted by: Martin Brock | Feb 22, 2008 12:12:15 PM
Martin,
We live in a world in which the political class creates welfare queens - c'est la vie. Even so, the advice doesn't change.
Posted by: Randy | Feb 22, 2008 12:29:03 PM
Simply taking out a huge loan does nothing to increase real wealth. And that is exactly what has happened in recent years.
Posted by: Rob
I'd agree but that doesn't seem to be the interpretation here. But I could swear everyday when I read the paper I see more write downs, foreclosures, city and state budgets falling and federal debt of massive proportions.
From the Brsbane Times;
"Edward Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford. However, when Mr Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the then Fed chairman."
Bottom line this outcome is substandard, was predictable and we can and will do better then this.
Posted by: muirgeo | Feb 22, 2008 12:29:45 PM
"Another question is: how much did you
borrow against the increase? If
you "withdrew" the last 30% rise in
your equity by borrowing against it
before the decline, a 30% gain earlier
(from a lower base) still leaves you
in negative equity."
Martin,
This is exactly my point. Real homeownership (equity) is currently at an all time low (sorry, don't have the statistics on hand) because the vast majority of Americans pulled equity out of their homes and spent it on "stuff". Added to that, many people who never pulled a dime out of their home have negative equity because of zero downpayments and declining home values. But according to Dr. Russell, people are only wealthier because of their ability to assume massive amounts of debt.
Posted by: Rob | Feb 22, 2008 12:35:24 PM
But according to Dr. Russell, people are only wealthier because of their ability to assume massive amounts of debt.
To be fair to the doctor, his measurement claims to show net household wealth, so it subtracts debt from equity. I'm not surprised that net household wealth rose in the nineties. I expect the rise to peak around now, and it does seem to be peaking. Why wouldn't an unprecedented number of retirees not have this effect? People approaching retirement seek rents. Retirees sell them.
I'm more skeptical of the median. The more interesting effects depend on the distribution.
Posted by: Martin Brock | Feb 22, 2008 1:35:00 PM
Why would an unprecedented number of retirees not have this effect?
Posted by: Martin Brock | Feb 22, 2008 2:25:24 PM
John Dewey,
>> Are you referring to only the housing values? My wealth in my small retail store and my wealth in equities of global corporations is not laying idle. <<
I was, and good point - in your case.
>> The elimination of financial stress has certainly done more for my current and long term happiness than any material good. <<
And in some abstract way that was my point. Sounds like you have dilligently attended to your well being for some time, and as a result have through your own work achieved a peace of mind - congrats to you on that.
My bottom line is that this entire conversation about wealth is all to do with who does or does not have the right to claim what about that "poor" struggling middle class that politicians are always talking about that. In that context, I was just trying to raise the question of what is it that gives the average voter a sense of whether they are better or worse off in between election cycles.
Posted by: mark seery | Feb 22, 2008 3:36:35 PM
martin brock: "I expect the rise to peak around now, and it does seem to be peaking. Why an unprecedented number of retirees not have this effect?"
I hope I understand what you mean. As Boomers reach peak-income, pre-retirement years, they should save more and build wealth. Then during retirement they will liquidate assets. That would be consistent with Milton Friedman's permanent income hypothesis, wouldn't it?
Annual U.S. births didn't reach 4 million until 1954 and remained above that number through 1964. The bulge of Boomers are now aged 43 to 54. Unless the U.S. implements universal health care, these Boomers should remain employed until age 65. That's because medical insurance for early retirees is being eliminated by more employers every year.
The bulge of Boomers have 11 to 22 more years in the workplace. We should see at least a dozen and perhaps even more years of wealth accumulation. Further, retiree assets will be only gradually liquidated. So I don't expect to see a big sell off of U.S. equities for at least a couple of decades. I don't think U.S. household wealth is close to peaking.
Posted by: John Dewey | Feb 22, 2008 3:40:51 PM
mark seery: "what is it that gives the average voter a sense of whether they are better or worse off in between election cycles."
For me, it's the value of my portfolio. But I'm hardly the average voter.
For my close relatives approaching retirement without a penny of savings, I suspect it's what the media is reporting about the future of social security.
For a few relatives it's probably just the price of beer and crawfish.
Posted by: John Dewey | Feb 22, 2008 3:57:02 PM
I hope I understand what you mean. As Boomers reach peak-income, pre-retirement years, they should save more and build wealth. Then during retirement they will liquidate assets. That would be consistent with Milton Friedman's permanent income hypothesis, wouldn't it?
I haven't seen Friedman state it, but I do expect people to save more as they age, and I expect most people to stop saving and dis-save when they're old.
Annual U.S. births didn't reach 4 million until 1954 and remained above that number through 1964.
Demographers typically start the "boom" around 1945. Look at the population chart at the bottom of this page:
http://www.knology.net/~marbrock/psupp.htm
You can see that in 1995 the leading edge of the bulge is around 50 years old. 1945 is an arbitrary choice to some extent, but ten years later is much too late. 2010 as the first "baby retirement year" makes a lot of sense for many reasons. For example, the payroll tax surplus peaks around this year. The last projection I saw was 2008.
I started thinking in these terms in the eighties when Phil Gramm said that the number of new Social Security beneficiaries starts to rise rapidly in 2010. My analysis is completely standard.
http://en.wikipedia.org/wiki/Post-World_War_II_baby_boom
Wikipedia gives 1946 to 1964. I use '45 to '65, because '65 was the year of Connecticut v. Griswold (the Supreme Court decision legalizing contraception across the U.S.), and '45 is a nice, round number giving a 20 year long "boom". The trend toward widespread contraception was already under way, but marking the end with Griswold makes symbolic sense, if nothing else.
The bulge of Boomers are now aged 43 to 54.
More like 43 to 63. You can see it in the age distribution. It stands out like a sore thumb. Population was relatively low immediately after the war, but the birth rate shot up almost immediately, and birth rate isn't the only factor to consider. Lower mortality is also a factor.
Unless the U.S. implements universal health care, these Boomers should remain employed until age 65. That's because medical insurance for early retirees is being eliminated by more employers every year.
For the first ones, that's two years from now. The payroll tax surplus peaks first. That's happening now. This event is significant, because it begins the pressure on Congress to find other general revenue to replace the surplus. The next significant event for Social Security is around 2018 when the surplus disappears entirely, i.e. the benefits exceed payroll tax revenue. Then the "trust fund" kicks in, i.e. Congress starts paying Social Security benefits from the income tax (I assume). Then around 2045, the "trust fund" is exhausted. In that year, Congress either continues funding benefits with the same income taxes it used the year before, or everyone in Congress loses his job. That's the plan. It was the plan all along. You hear this 2045 date all the time, but it's the least significant. Whatever transition will occur has already occurred by then.
The bulge of Boomers have 11 to 22 more years in the workplace. We should see at least a dozen and perhaps even more years of wealth accumulation.
Some have 20 more years, and some have already retired early, but that's not the point. As the boomers start retiring, they don't just stop buying assets. They start selling them. An increasing number of people stop buying and start selling. All boomers are buying now, so their demand has already peaked.
The number of buyers rose rapidly in recent decades. Now, that number stops rising rapidly, and the number sellers starts rising rapidly. This transition occurs now, not after half of the boomers have retired. That they've been incredibly successful rent seekers is another factor. The pressure of their rents suppresses demand of the people behind them.
In the eighties, when the Reagan market boom was in full swing, everyone agreed that it was happening. I heard this demographic analysis of the boom all the time. Now, the silence is deafening.
Further, retiree assets will be only gradually liquidated.
They were gradually acquired too, but balance of supply and demand favored sellers then. Lots of things happen as boomers age. For example, they downsize their houses, because their kids move out and they want to cash in the equity. It doesn't all happen suddenly in some magic year, but we have reliable markers like the payroll tax surplus that signal these events.
So I don't expect to see a big sell off of U.S. equities for at least a couple of decades. I don't think U.S. household wealth is close to peaking.
The payroll tax surplus is peaking. This surplus is the difference between taxes paid into a "saving for retirement" model and benefits taken out. The surplus peak has been analyzed to death. There's not much doubt about it. Google it. According to the reports I've seen, the surplus peaks this year. And who's talking about it?
Posted by: Martin Brock | Feb 22, 2008 4:57:57 PM
Here's Will Wilkinson of the Cato Institute on the peak in the payroll tax surplus.
http://www.willwilkinson.net/flybottle/2005/05/13/the-2009-shortfall/
Posted by: Martin Brock | Feb 22, 2008 5:26:24 PM
Martin Brock: "This transition occurs now, not after half of the boomers have retired."
I'm sorry, but I completely disagree. The number of "Boomers" who will retire in the next five years is very small compared to the number of Boomers who will be increasing their incomes and increasing their savings over that period.
As I said before, the large bulge of Boomers are currently aged 44 to 54. The early Boomers do, as you point out, dwarf the pre-Boomer adults who were born from 1930 to 1945. But that group is only 2 percent larger than the group which followed the Baby Boomers:
Average Annual U.S. Births
1945-1953.....3.73 million
1954-1964.....4.18 million
1965-1971.....3.66 million
1972-1978.....3.26 million
1979-1988.....3.60 million
1989-1995.....3.95 million
Boomer Stats provides the meaningful birth data.
Although a few adults begin saving for retirement earlier, most wait until their mid 30's and 40's. Savings amounts and rates increase as workers increase earnings in their 50's, at the same time most stop supporting children.
As the early Boomers retire over the next ten years, their gradual liquidation of assets will be easily matched by the higher accumulation rates of two aging groups:
- the much larger late Boomer population; and
- the equally large (compared to early Boomers) population that immediately followed the Boomers.
It is not until 11 to 22 years from now - as I said before - that liquidation of financial assets could become a noticeable phenomenon. That's when the real Boomer bulge starts retiring in large numbers.
Posted by: John Dewey | Feb 22, 2008 6:21:38 PM
Martin Brock: "The payroll tax surplus is peaking."
Payroll taxes and government retirement spending are completely different topics than what we were discussing. It's not related to the liquidation of financial assets by Boomers. I was replying to your suggestion that net household wealth is peaking right now. I'd really rather not discuss a second issue this afternoon.
Posted by: John Dewey | Feb 22, 2008 6:32:05 PM
I made a small calculation error in a couple of the averages I provided above.
Average Annual U.S. Births
1945-1953.....3.73 million
1954-1964.....4.18 million
1965-1971.....3.61 million
1972-1978.....3.22 million
1979-1988.....3.64 million
1989-1995.....3.98 million
So the 1965-1971 population is 3 percent lower than the early Boomer population of 1945-1953, which is still hardly significant.
Posted by: John Dewey | Feb 22, 2008 6:42:05 PM
As I said before, the large bulge of Boomers are currently aged 44 to 54. The early Boomers do, as you point out, dwarf the pre-Boomer adults who were born from 1930 to 1945. But that group is only 2 percent larger than the group which followed the Baby Boomers:Average Annual U.S. Births
I'm not sure what these numbers are supposed to show, but you're ignoring half the story. The number of births per year flattens out, because the birth rate falls. If the birth rate hadn't fallen, the number of births per year would have risen. But that's only half the story. The other half is mortality and life expectancy. Mortality at every age also fell in the twentieth century. The people born in the early in the century didn't live as long as the people born later. Put another way, more people at every age survived each year. More infants survived their first year. More one year olds survived to become two years old and so on.
http://www.ac.wwu.edu/~stephan/Animation/pyramid.html
Hold your cursor over the 65-69 age group and watch what happens in 2010.
And look here:
http://www.census.gov/population/www/projections/natsum-T3.html
Estimated U.S. population between 65 and 69
2000.....9,436
2001.....9,411
2002.....9,487
2003.....9,685
2004.....9,928
2005...10,086
2006...10,350
2007...10,721
2008...11,328
2009...11,758
2010...12,159
2011...12,411
2012...13,503
2013...14,040
2014...14,705
2015...15,410
2016...16,208
2017...16,287
2018...16,650
2019...17,106
2020...17,598
The rapid increase is starting now.
Although a few adults begin saving for retirement earlier, most wait until their mid 30's and 40's. Savings amounts and rates increase as workers increase earnings in their 50's, at the same time most stop supporting children.
That's right. Boomers are between 43 and 63. They're all in the peak saving years already. Their demand for assets has peaked. Now, they start selling. They don't wait until they die. They start selling when they start retiring.
As the early Boomers retire over the next ten years, their gradual liquidation of assets will be easily matched by the higher accumulation rates of two aging groups:
The way the accumulation of early boomers easily matched the gradual liquidty of assets by their predecessors?
It didn't match. That's what's changing. You want me to believe that nothing changes in this period, but I look at these population figures, and I see a number increase much more rapidly over a decade than it increases in the previous decade. The ratio of buyers to sellers rises.
- the much larger late Boomer population; and- the equally large (compared to early Boomers) population that immediately followed the Boomers.
Right. Buyers and sellers are much more nearly balanced compared with the past. That's what's changing. Of course, every asset sold by a boomer will find a buyer. Markets always clear, but the market is changing.
It is not until 11 to 22 years from now - as I said before - that liquidation of financial assets could become a noticeable phenomenon. That's when the real Boomer bulge starts retiring in large numbers.
11 years from now, many boomers will already have joined the increasing number of people who stop buying and simultaneously start selling. 22 years from now, all of the boomers are sellers. They still find buyers, but the line at the checkout is shorter. You're telling me that the change only happens then?
Posted by: Martin Brock | Feb 22, 2008 7:50:08 PM
It's not related to the liquidation of financial assets by Boomers.
Like I said, the peak in the payroll tax surplus is a marker for a rapid increase in the number of people who stop accumulating and start liquidating, and I'm assuming here that no one retires before 65, which isn't true at all.
Posted by: Martin Brock | Feb 22, 2008 7:53:57 PM
The population figures are in thousands, of course.
Posted by: Martin Brock | Feb 22, 2008 8:00:31 PM
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