Baby Boomer Riches

Baby Boomer Riches - an article by Dr Gareth Morgan, 4 June 2003

One of the consequences of the 1990’s stockmarket boom/bust has been the impact on the income aspirations of the baby-boomers – that generation born between 1946 and 1964 and looking at retiring between now and 2030. At some stages of the 1990’s boom it looked like retirement for them at age 55 would be a viable proposition, the cash value of their pensions and other assets they’d
accumulated apparently more than enough for sunset years in comfort.

What a difference a couple of years in investment markets makes. Much, although not all, of that nest egg liquefied with the stockmarket meltdown. For many that means either staying at earning work longer, lowering retirement income aspirations, or trying to rebuild some of what’s been lost. The phenomenon hits not just those providing for themselves but will impact those dependent solely on NZ Super. The ability to maintain that scheme, despite the Cullen Fund’s endeavour to part pre-fund, is bound to be limited always by the tax base at the time we need to tap it, as well by how Cullen kitty has survived the ravages of investment markets in the interim. If the Government Servants’ Super Scheme is any indication then there will be an element of lottery in the latter.

In New Zealand we have, over recent years, become far more dependent on State provision of retirement income. Universal entitlement without means testing has firmly placed this as the centrepiece of most people’s retirement income. The one correction introduced since the Muldoon electoral bribe seduced the electorate in 1975, has been to move the qualifying age out to 65. That this age might now have to be stepped out to 70, given the projected load New Zealand Superannuation will make on the annual tax, should terrify many of the Boomer generation.

Continental Europe, another bastion of State-provision of pensions, is currently embroiled in public unrest over attempts to lift the retirement age. This should serve as a timely warning to Kiwis that our reliance on these politically-expedient, State-funded schemes is fraught with risk. The European Central Bank has recently told member governments that there is no way the current pay-as-you-go
scheme (same as ours, today's taxpayers fund the pension of yesterday’s workers) will survive without major trimming. With low population growth some of those countries are looking down the barrel at 10 taxpayers funding 7 pensioners.

One solution of course is immigration, raising the numbers of younger, tax-paying workers to fund our dotage. That recipe how ever has limited scope, given that the numbers of new Kiwis needed to raise the worker/retiree ratio would likely prove politically unacceptable.

So is private provision the answer? Not necessarily. The various schemes around have all taken major hits recently. For the defined benefit schemes popular in the US for example, the sponsoring corporates are facing years of having to siphon profits from shareholders to ex-employees who they have retirement contracts with. For those with defined contribution private pensions – as are the majority of those private schemes still in New Zealand – the pension that can be looked forward to, just collapsed.

Which brings us to housing. Many Kiwis see this as the repository of their retirement reserves. Given the pace of house price rises over recent years, the attraction many feel for this asset class right now is almost without precedent. Rising house prices apparently, are fully justified by low interest rates, rising real incomes, growing populations and a fixed supply of land. But like all asset prices,
today’s level should reflect the discounted value of future net rental income. Certainly market prices diverge above and below this value but its always cyclical. For an asset price to diverge for long from its underlying value would mean that two parts of the same market (in this case tenants and renters) have permanently diverging views on value.
So the various avenues whereby prospective retirees accumulate claims on existing wealth, which they anticipate cashing in when they need to, are all susceptible to the diminishing power of numbers. The more wish to do it at the same time, the less each will get.
We talk about that effect hurting property owners when the time comes, and there have been books written about the same effect plaguing sharemarkets when the savings locked up there try to exit too (whether they be direct owners, or indirect through private Super schemes or Cullen Funds). The pre-fund option is no silver bullet.

There is then left just a single answer. An economy’s ability to fund transfers from its earner-workers to the elderly is driven by the income-earning capacity of the economy at the time. If we imported a million boat people, paid them stuff-all, and ripped the surplus off their backs via tax say, then we may be able to defy the gravity of the looming Boomer numbers.

In reality though the only path is for economies to be conducive to ongoing productivity gains and not having taxation and regulatory regimes that encourage misallocation and waste of scarce investment resources. An important part of this process is keeping from power politicians who enable government to become profligate, respond only to the immediacy of ballot box popularity, and ignore the
economic arguments against their populist interventions. On this score New Zealand has gone backwards markedly over recent years.

URL: http://articles.garethmorgan.com/column.php?id=484
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