Retirement In The Coming Age of Discontent

On a day to day basis markets create a lot of noise. China shuts the market down. The Dow bounces back. The oil price heads towards $30. The Aussie dollar falls below US$0.70 cents. The All Ords makes up lost ground.

For those who trade the market on an hourly or daily basis this squawking has relevance.

Personally it’s of only passing interest to me. My brief and highly unsuccessful attempt at trading (many years ago) cured me of any desire to continually try and outguess the market.

These days I am far more interested in the bigger trends. The ones that shape the longer term direction of markets.

For example; 40 years ago, if you’d identified children born between 1946 and 1962 that would soon be adults with consumption needs, you could have ridden a massive asset appreciation wave.

In today’s Markets and Money I’d like to share with you an article I wrote in the December 2015 issue of The Gowdie Letter. The article was titled ‘The Coming Age of Discontent’.

In my opinion we’re on the cusp of a major trend that’s going to impact asset values in the decades to come.

Whether you agree or disagree with the conclusions, it’ll make you think a little deeper about the road ahead.

Assuming what’s happened in recent history will continue could prove to be a serious miscalculation. A miscalculation that could literally make or break your retirement plans.

The article follows.

The coming age of discontent

Workers and retirees are heading into an unhappy future.

Deflation. Debt. Demographics. Deficits. Depression.

I’ll go back over some old ground quickly.

  • The Depression era generation (my parents) were generally frugal.
  • Boomers were much less frugal than their parents. We borrowed (a lot) to have a better lifestyle.
  • That ongoing debt accumulation process produced artificial economic growth statistics, showing the economy was growing faster than it really was.
  • Governments promised a truckload of entitlements on the back of the artificial (and unsustainable) economic activity.
  • The spiralling cost of living, housing and funding for retirement (all as a result of the debt infusion into the economy) forced families to have fewer ‘mouths to feed’.
  • The lower birth rates translate into a lower number of future workforce participants.
  • The future workforce participants are burdened with higher levels of borrowing for housing; higher levels of funding for childcare; higher taxes to pay for entitlements promised during the economic golden age; and longer working lives to pay for all the above plus their own retirement.

I think that pretty much sums it up.

We have a serious demographic showdown coming our way within the next decade.

In one corner we have the Boomers. They have expectations of still living a lifestyle just slightly above their means (financed from investment income, capital drawdowns, reverse mortgages, age pensions and access to low cost healthcare).

And in the other corner are Gen X, Gen Y and the Millennials. They’re none too happy with the debt and entitlement legacy left by the Boomers. A legacy which is leaving them with being taxed higher for longer.

The economic tailwind created by the boomers from 1980 onwards is now building into a gale force headwind.

Economic activity is largely a result of a productive workforce.

The following chart shows how GDP growth is impacted by demographics.

Young people detract a little from GDP growth, whereas old people detract a lot.

The economic sweet spot is when you have a large cohort of 20 to 44 year olds in the economy. For those past 44, remember what it was like back then? Setting up your home; buying cars; educating, clothing and feeding children. This all translates into a higher level of economic activity.

Source: Nomura Research

The following chart (from the Australian Treasury) projects our population distribution through to 2047.

The fastest growing segment is the over 65s (the grey section — possibly a subconscious reference to hair colour).

Source: Australian Treasury Department

Economic growth is going to slow down.

This is not unique to Australia. Europe, the US, UK and Canada are all facing the same demographic headwind. Japan is already in the teeth of the demographic gale.

To avoid following the Japanese economic ‘death by a thousand lashes’ model, changes need to be made.

  • Increased immigration to bolster the 15 to 64 age bracket. This ‘solution’ has problems. Yes it gives a one-off fix, but what happens when those people reach 65? Do we then have another influx of people to support the supporters? How much population can our country’s resources (or any country for that matter) provide for? This is a fix, not a solution.
  • Increase tax rates. Lots of talk about just how Government is going to do this — GST hike, super grab, levy increases, changing tax laws on overseas corporations. You can only get so much blood out of people. If the tax system becomes too onerous, people find ways to either circumvent the taxes and/or opt out. The other fly in the ointment for governments looking to raise income taxes is automation and robotics. How will they tax a more efficient and lower cost operating structure?
  • Decrease entitlements. But once given, they are very hard to take back…especially when it’s Government promises. Politically this is tough, but it needs to be seriously looked at. Will it be counting the family home in the assets test? Gradually increasing the eligibility age for the pension to 70 or more?
  • Increase the retirement age to 70 and beyond — whether this is done officially or unofficially (because people will not have enough saved to fund a 30+ year retirement) the retirement age is going up and up over the coming decades.

The following chart is based on research from US based Research Affiliates. While this relates to the US, it has applications for us in Australia.

Based on maintaining stable retirement savings — not depleting retirement capital by retiring too early and by living for too long — Research Affiliates calculates that between 2018 and 2030 the retirement age will need to rise to over 70.

Pressure is going to mount in the coming years as both sides of the demographic divide clash out of self-interest.

If something cannot continue, then it won’t. The outcome will be a combination of the options outlined above.

Let’s join a few dots here.

Low economic growth feeds into low investment returns.

Low investment returns means a lot of retirees are going to find their capital base is not sufficient to generate a standalone retirement income.

Portfolios will be gradually sold down to cover the income shortfall.

Will the following generations pay the price the boomers are asking for the assets they are selling down? Or will they wait for the boomers to blink?

I’ll leave you with this snapshot from Nomura Research on the demographic structure that works better for shares:

Appreciating the headwinds that are in our future, means we have to allocate our capital wisely.

Buying shares based on the banal premise of ‘shares always go up in the long term’ is really dumb investing. The road ahead is going to be very different to the one that allowed the investment industry to come up with this self-serving mantra.


Vern Gowdie

Editor, Markets and Money

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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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