Threats to Growth: Boomers' Retirement, Millennials' Student Debt

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 24, 2015 3:10:00 PM

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Employment_4A major demographic transition is under way in the U.S., with the baby boom generation aging into retirement as the millennials (or echo boomers) start to enter their prime earning and spending years. This is a well-known story, but lately I’ve been thinking about a worrying new take on it.

Over time, the demographic effect should be more or less a wash. Both generations are large, and, although the timing is creating an economic drag right now, in the next couple of years, the millennials should be moving into the workforce as fast or faster than the boomers exit. So far, so good.

Here’s the problem: spending

On both sides, consumer spending may fall short of where it’s been historically. Why? Both groups are entering the next stages of their lives in a significantly inferior financial position than preceding generations.

Let’s start with the boomers. The largest generation ever to enter retirement, the boomers will be largely dependent on social security plus any savings they have—which, overall, are quite low. That alone would suggest a significant decline in spending. Now factor in current low interest rates, which generate low levels of income from that already low level of savings, and it's clear that boomers who stop working will see their income—and spending—potentially drop significantly. This is typical for workers who transition to retirement, but for the boomers, the damage will be even deeper.

Now to the millennials, who are entering the next phase of their lives with extensive student debt and, until recently, poor job prospects. Although things are improving on the jobs front, student debt will make spending—particularly homebuying, which is a base for a great deal of further consumption—more difficult. A more restrictive mortgage lending environment will also constrain homebuying. Millennials’ consumption stands to be crippled by all of these factors.

What this means, of course, is that the two largest demographic cohorts in the country will both be spending far less than their equivalents have been for much of history. It’s quite possible that we’re already seeing these effects in the low consumer spending that has been generating so much angst.

A bigger worry than we think?

This is a potential headwind to economic growth that, as far as I know, hasn't been discussed much. It’s entirely possible that rising interest rates could boost the purchasing power of savers and retirees, which would mitigate the damage somewhat. But at some point, that same rise would also make it harder for homebuyers to get financing. This is a problem without an easy solution.

Overall, it seems that low retirement savings and high student debt may be even bigger and longer-term problems than we now imagine.

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