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Hope I die before I get old
—The Who, My Generation
The vagabond who is rapping at your door
Is standing in the clothes that you once wore.
Strike another match, go start anew
And its all over now, baby blue.
—Bob Dylan, It’s All Over Now, Baby Blue
Nothing left to do
When you know that you’ve been taken
Nothing left to do
When you’re begging for a crumb
Nothing left to do
When you’ve got to go on waiting
Waiting for the miracle to come
—Leonard Cohen, Waiting For the Miracle
I was born in 1953, which makes me a post-World War II “Baby Boomer” (those born between 1946 and 1964). First off, I want to issue a blanket apology to younger cohorts (generations X & Y) for the excesses of my generation. No generation in the human history was given so large an opportunity to ravage the Earth through excess consumption, and Boomers did not squander that opportunity. No generation has adversely affected the welfare of future generations as the Boomers have. So much for Woodstock and the Age of Aquarius.
Cam Marston, author of Motivating the ‘What’s In It For Me’ Workforce, talking about the 1983 film The Big Chill: “The young cast, all of whom became major stars, epitomized the Baby Boomers’ new version of the American Dream: “You can have your cake and eat it, too.” Again, I’m sorry.
I’m sure you’ve heard the expression “spend money like there’s no tomorrow.” That’s precisely what the Boomers did. It was an unprecedented debt-fueled spending spree made possible by easy credit. See my Don’t Buy Stuff You Can Not Afford for some details. As Bill Bonner put it at the Daily Reckoning, that household debt now “represents spending that has been taken from the future.”
The first Boomers reach retirement age in 2011. Business Week reports that it has long been expected that aging Boomers would cash out and decrease their spending. But the real Big Chill arrived a few years early.
When 79 million people—nearly a third of Americans—start spending less and saving more, you know it won’t be pretty. According to consulting firm McKinsey, boomers’ conversion to thrift could stifle the economy’s hoped-for rebound and knock U.S. growth down from the 3.2% it has averaged since 1965 to 2.4% over the next 30 years. “We would have gotten here in 5 or 10 years as boomers retire, but [the economic crisis] pushed it up,” says Michael Sinoway, managing director of consulting firm AlixPartners. “Now [companies] are scared things won’t come back”…
Not so long ago, boomers were never going to die. Filled with a self-confidence born of unprecedented prosperity, many thought rising markets would assure their future. If the economy faltered, well, it would rebound more strongly than ever, as it had so many times before. And so boomers spent—and borrowed—as if there were no tomorrow.
[My note: The U.S population is 304,224, 211. The Boomers are 26% of it. So much for fact checking.]
Tomorrow is here. With retirement looming, the Great Recession has put Boomers into emergency thrift mode. Unsurprisingly, McKinsey Quarterly reports that most of them are unprepared for their golden years.
The low savings rate and extensive liabilities of the boomers have left about two-thirds of them unprepared for retirement. We reached this conclusion by assessing the level of post-retirement income and assets that the boomers would need to maintain 80 percent of their peak pre-retirement spending.This analysis—based on net financial assets such as bank deposits, stocks, and bonds, minus credit card balances, car loans, and other non-mortgage debt—indicates that 69 percent of the boomers are not prepared to maintain their lifestyles. The inclusion of home equity, whose value is declining in many regions below the levels prevailing when we undertook our analysis, only reduces the proportion of the unprepared to 62 percent.
The home equity situation is not improving. According to American CoreLogic, more than 15.2 million (32.2%) of all mortgaged properties were in negative equity in June, 2009. (Negative equity means your mortgage debt exceeds the value of your house.) An additional 2.5 million homeowners were nearly underwater. Although the rate of decline in home prices has slowed, it is not at all clear that we have reached the bottom in the housing market. Beyond home equity, Boomers’ net worth has taken a huge hit as asset values fall. Many Boomers will have to work longer than they anticipated.
Economists and demographers say Boomers will need to replace some $2 trillion of wealth lost in retirement funds [e.g. 401k plans] during the recent stock meltdown, plus the billions in home equity that have vanished in the housing crash. Government policy makers will have to figure out how to provide for a huge cohort of people who could live well into their 80s.
McKinsey found that the Boomer spending accounted for an astonishing 78% of GDP growth during the “bubble years” from 1995 to 2007. Much of that spending will disappear. The “generational crash” will be a drag on the economy for years to come.
“The generational crash is when there are too many older homeowners and not enough buyers,” says Dowell Myers, a University of Southern California professor.
“This is like winter coming,” adds Harry S. Dent, an author and consultant who says the U.S. is headed for a slump that will last until 2020. It will take that long for the financial wreckage from this boom-bust cycle to be cleared away, he says, and for the 79.4 million strong “Millennial Generation”—most of whom are still in high school or college—to enter adulthood and start buying homes, cars and gadgets of their own. “It happens once every 80 years,” Mr. Dent says of this sort of demographics-driven economic cycle. “It’s going to be difficult.”
If this sounds like a looming disaster for the economy, it is. But elderly Boomers will require much more medical care than they did when they were lighting embargoed Cuban cigars with $20 bills. That’s the real disaster.
The Medicalization of America
As the destructive financialization of America runs its course, and President Obama’s health care initiative stumbles through the Congress, the “medicalization” of America continues apace (Figures 1 & 2).
Figure 1 — Health care spending as a percent of GDP, from Calculated Risk’s Health Care Spending And PCE. (PCE = personal consumption expenditures, as described in Don’t Buy Stuff You Can Not Afford). In 1983, all health care spending (green line) was slightly more than 10% of GDP. Now it is 16.2% according to the government’s National Health Expenditure data.
Figure 2 — Personal consumption expenditures, with and without health care, as a percent of GDP (also from Calculated Risk as cited in Figure 1). The growing share of health case, especially since the early 1980s, is alarming. As a percent of GDP, which was growing this whole time, the ex-health share has been mostly flat since 1960. In 2007-2008, ex-health PCE was 57% of GDP and health spending added 13%. The graph does not include investment (green line in Figure 1), so the consumption only share is lower than the Figure 1 total (16%). Medicare & Medicaid spending is counted as part of personal consumption expenditures, and makes up 5% of GDP. Hence private health care consumption makes up 8% of GDP.
With most consumption growth fueled by ever-greater debt, the inescapable, tragic conclusion is that many American citizens were borrowing to pay for medical care, which everyone regards as a necessity. Most personal bankruptcies are caused by unpayable medical bills according to the American Journal of Medicine.
Using a conservative definition, 62.1% of all bankruptcies in 2007 were medical; 92% of these medical debtors had medical debts over $5000, or 10% of pretax family income. The rest met criteria for medical bankruptcy because they had lost significant income due to illness or mortgaged a home to pay medical bills. Most medical debtors were well educated, owned homes, and had middle-class occupations. Three quarters had health insurance….
But the worst is yet to come. Calculated Risk tells us the bad news.
But the more important point is what will happen in the future. From a demographic perspective, these are the best of times for health care expenses. The original baby busters (from 1925 to the early 1940s) are now at the peak medical expense years, but their medical care is being heavily supported by the baby boomers (now in their peak earning years).
[My note: Thus the question becomes who will support the Boomers in future years in an economy that will be weak for years to come?]
This is as good as it gets health care-wise, a point which is made forcefully in the Health & Human Services national health expenditure projections.
Growth in national health expenditures (NHE) in the United States is projected to be 6.1 percent in 2008. National health spending is expected to increase from $2.2 trillion in 2007 to $2.4 trillion in 2008. Average annual NHE growth is expected to be 6.2 percent per year for 2008 through 2018.
Over the full projection period (2008-2018), average annual health spending growth is anticipated outpace average annual growth in the overall economy (4.1 percent) by 2.1 percentage points per year. By 2018, national health spending is expected to reach $4.4 trillion and comprise just over one-fifth (20.3 percent) of Gross Domestic Product (GDP).
Driven in large part by the recession, NHE growth is expected to significantly outpace GDP growth in 2008 and 2009. In 2008, NHE growth is expected to be 6.1 percent while GDP growth is anticipated to be 3.5 percent. For 2009, health spending is projected to increase 5.5 percent while GDP is expected to decrease 0.2 percent (the first decrease in GDP since 1949).
[My note: Actual GDP growth was -0.4% in 2008 according to the BEA’s revised numbers.]
And here’s the kicker—
From 1965 to 2007, health spending as a percent of GDP has increased steadily from 5.9 percent to 16.2 percent, roughly an average of 0.25 percentage point per year. History has shown, however, that the health share of GDP has increased most rapidly during periods of recession. For example, the share increased by 0.7 percentage point per year during the recessionary periods of 1990 and 1991, as well as 2001, as growth in health spending did not fall as quickly as overall economic growth.
[My note: According to the BEA, GDP has decreased 2.8% at an annual average rate during the Great Recession (through the 1st quarter of this year). Thus the health care share is growing faster than usual during the downturn relative to the overall economy.]
The reason health spending does not fall as quickly as general spending during a recession should be obvious: health care is usually not discretionary.
Most astonishing of all, Health & Human Services assumes an annual growth rate of 4.1% for the period 2008-2018. This is absurd. Health care spending & investment may be close to 20% of total economic output by 2020, but it won’t be because the economy grew at annual rate of 4%. Indeed, that’s the problem—we’re likely to have a “lost decade” in which non-discretionary health care spending rises far beyond our ability to accommodate it. Just the aging of the population itself practically guarantees this outcome.
Today, for every person age 65 or older, there are five people 20 to 64 years old. That figure is projected to fall to below three by 2030. Even after the retirement of the baby-boom generation, the population will continue to age, demographers project, as life expectancy continues to increase and fertility rates remain low by historical standards.
In this and other columns I have cast doubt on a prosperous future for the United States. Since 1983, the American consumers—rhymes with Boomers—spent tomorrow’s wealth today. GDP growth depended on ever-greater borrowing and was thus systematically inflated. All this time America’s industrial base declined (moved to China) and its (no longer cheap) imported oil dependency grew to ~66% of total consumption. To keep the party going after 1995, the U.S. blew two enormous bubbles, one in the NASDAQ and a much larger one in housing. We used those bubbles to float up to the mountain top, where all that thin air made us giddy. Now we’re sobering up as reality propels us down the other side.
The boom times are over. A secular change has now taken place. The U.S. will look more and more like a Third World country. In health care, compared to Canada or Europe, it already does. Thus our prospects for another economic boom in the next decade are like those of Monty Python’s famous Norwegian Blue parrot—
“This bleeding parrot wouldn’t boom if I put 4 thousand volts through it! It’s bleeding demised… It’s not pining for the fjords, it’s passed on. This parrot is no more. It has ceased to be! It’s expired and gone to meet its maker. This is a late parrot. It’s a stiff! Bereft of Life, it rests in peace! If you hadn’t nailed it to the perch, it would be pushing up the daisies! It’s run down the curtain and joined the choir invisible. This is an ex-parrot!!!”
American Economy 1983-2007: Requiescat in pace
Forget about a “V-shaped” recovery or Ben Bernanke’s “green shoots.” This parrot is no more, it has ceased to be.
I think it is safe to assume that some version of President Obama’s health care bill, should one pass through the Congress, will not rein in soaring costs because it will not address the root causes of health care cost inflation (e.g. incentives to perform unnecessary tests or lack of preventative care.) Let’s summarize the relationships among aging Boomers, health care spending, and various economic factors.
- Boomers will start retiring in 2011 and will continue to retire until 2029. Their disposable incomes and ex-health spending will decrease. Their spending on health care will increase, as will Medicare & Medicaid expenditures (see the last section).
- There will be only slow growth in GDP over the next decade. As a result, health care spending & investment as a percent of GDP will rise more rapidly than “normal” relative to the overall economy. GDP itself will be effectively overstated as Boomers require more health care in their golden years because, perversely, taking more medications, being sick, or dying adds to GDP. But many of these expenditures will be “unproductive” for the economy as a whole in so far as money will be spent to keep the elderly Boomers alive rather than keep the workforce healthy. (I know that sounds hardhearted to say, but this is the mess we’ve created. It’s not called the Dismal Science for nothing.) As health care rises rapidly as a percent of GDP, the rest of the real economy (ex-health) may actually be shrinking (depending on the overall rate of growth). This continuing imbalance makes it more and more difficult for the dwindling working population to support the aging Boomers.
- The ranks of the uninsured will increase. Household debt will be pared down slowly. We will experience an extended jobless recovery. Disposable real income will stagnate (or may even decline) over time. Underemployment—part time workers who desire full time jobs—usually disqualifies workers from access to employer-sponsored health insurance plans. The effective unemployment rate (now 18.35%, MS Word file) will also remain very high (>12%) for many years to come. Household wealth continues to decline, but will eventually bottom out. It will not rise much thereafter in the absence of new bubbles in the economy. Non-discretionary health care needs will force more and more people in the Middle Class into bankruptcy and foreclosure. In the normal course of things, the disposable, uninsured poor will remain poor, uninsured and disposable.
This is all grim news, but that’s not the half of it.
Growing Federal Deficits
The non-partisan Congressional Budget Office (CBO) lowered the boom in it’s June, 2009 Long-Term Budget Outlook.
Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Keeping deficits and debt from reaching levels that would cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two.
For decades, spending on the federal government’s major health care programs, Medicare and Medicaid, has been growing faster than the economy (as has health care spending in the private sector). The Congressional Budget Office projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035…
[My note: See Figure 2 above and the attached note.]
We might sensibly ask what the CBO thinks future GDP might be (Figure 3). Figure 4 shows the Federal debt (and thus projected deficits) under the CBO’s two scenarios.
Figure 3 — This graph of “potential” GDP in real (inflation-adjusted) 2000 dollars is taken from The CBO’s Budget and Economic Outlook: Fiscal Years 2009 To 2019. I have injected some reality into the projection with my low (blue), reference (red) and high (green) growth cases.
Figure 4 — Projected federal debt under the Extended-Baseline and Alternative Fiscal scenarios from the CBO.
The Alternative Fiscal scenario “deviates from the CBO’s baseline projections, beginning in 2010, by incorporating some changes in policy that are widely expected to occur and that policy-makers have regularly made in the past. In other words, it is the expected outcome if politics continues as usual.
Under the alternative fiscal scenario, deficits would decline for a few years after 2009 but then grow quickly again. By 2019, debt would reach 83 percent of GDP [and 100% in 2022, Figure 4]. After that, the spiraling costs of interest payments would swiftly push debt to unsustainable levels. Debt would exceed its historical peak of 113 percent of GDP by 2026 and would reach 200 percent of GDP in 2038.
[My note: 2038 is a long way from now as far as making predictions goes. Even 2026 is a stretch.]
Figure 5 shows where the new debt comes from.
Figure 5 — This is the CBO’s crucial graph. I marked it up to show the date range in which Boomers turn 65 years old. Growth in Federal spending on Medicare & Medicaid (dark blue) far outpaces Social Security spending (very light blue). The dark blue line shows expected revenues. Expenditures above the revenue line represent deficit spending.
The remarkable things about Figure 5 are the things you can’t see. Historically, Federal revenues (tax receipts) have averaged about 18.5% of GDP since 1950, despite some wild swings during the Bubble Era (1995-2007). That is why the revenue line is flat in Figure 5. Revenues will increase or decrease with GDP, other things being equal (e.g. tax policy). However, if GDP does not grow to “potential” as shown in Figure 3, revenue in real dollar terms will be less than anticipated (again, sans tax policy), whereas Medicare & Medicaid spending, which is subject to terrible cost inflation, is currently fixed by law. Thus the health spending deficit could be much larger than the CBO anticipates in its Alternative Fiscal scenario.
The second remarkable thing about Figure 5 is that the graph does not include interest on the debt.
The current recession has little effect on long-term projections of non-interest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. Higher debt results in permanently higher spending to pay interest on that debt (unless the debt is later paid off ). Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.
On August 8th, Tim Geithner asked Congress to raise the debt ceiling to $12,100,000,000,000 (trillions). If this were the year of my birth, 1953, running these kinds of deficits wouldn’t be so irresponsible. We had plenty of oil and decades of strong economic growth in front of us. But a lot of that oil is gone now, and the Boomer debt party is over. I’m not alone in thinking that we are looking at years and years of slow or no growth ahead of us. The aging of the Boomers, and the accompanying health care costs, are just one, albeit important, part of this scenario.
Most analysts who aren’t “gold bugs” think it unlikely that the United States will default on its debt. Such an event would mark the official End of the Empire, and would trigger an Argentina-like collapse—the dollar would be effectively worthless. Alarmingly, there is perceived to be a non-zero chance of default now, and that risk will rise in the future. I’ll leave you with this quote from We’re Borrowing Like Mad, Can The U.S. Pay It Back?
The notion seems absurd: Banana republics default, not the world’s biggest, richest economy, right? The United States has unparalleled wealth, a stable legal tradition, responsible macroeconomic policies and a top-notch, triple-A credit rating. U.S. Treasury bonds are routinely called “risk-free,” and the United States has the unique privilege of borrowing in the currency that other countries like to hold as foreign-exchange reserves.
Yes, default is unlikely. But it is no longer unthinkable. Thanks to the advent of credit derivatives — financial contracts that allow investors to speculate on or protect against default — we can now observe how likely global markets think it is that Uncle Sam will renege on America’s mounting debts. Last week, markets pegged the probability of a U.S. default at 6 percent over the next 10 years, compared with just 1 percent a year ago. For technical reasons, this is not a precise reading of investors’ views. Nonetheless, the trend is real, and it is grounded in some pretty fundamental concerns.
Grounded in some pretty fundamental concerns? I would say so.
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