Much of the world, including Australian, experienced an unusual phenomenon after the Second World War, known as the baby boom period. The generation that came from that, called rather unsurprisingly and unimaginatively, the Baby Boomers, were not like previous generations, and they also caused an anomaly and unusual occurrence in global demographics.
Because of the sheer number of them, this created a bulge in population demographics of pretty much every developed country post war, which has had far and wide reaching effects. This generation saw unprecedented prosperity and growth and, unlike their war time parents, never had to experience lack.
What this did was create an expectation that this was the norm, that there would always be good times and everyone could have everything now. This time also coincided with an exponential growth of technology and advances in medicine prolonging life. This has created a problem for the generations that come after them.
The time of the baby boomers was one of great economic growth and prosperity. This allowed governments to create a great number of welfare programs and companies became prosperous because there was a huge demand for goods from baby boomers as they grew up, passed through their university education, got jobs, got married and had children. Companies and economies grew at unprecedented rates, which sometimes got to double figures, and it was possible for governments to create a cradle to grave welfare system because as the tax base was growing, so government revenues could continue to increase. It also increased asset prices, particularly real estate and stocks.
But this is a double edged sword, because with the exception of a very few select countries, the generations that followed the baby boomers have been smaller. Unfortunately, it became the norm for governments keep promising more and more at each election in order to get elected, but this is only possible if there are sufficient new workers from the succeeding generation to foot the bill.
In almost every country, both developed and developing, this has not been the case and has created disastrous consequences. In order to fully understand these consequences, we need to go back 100 or so years and look at the history of how our welfare state came about.
The pension system is not new, and has been in existence for quite a few hundred years, but this was usually only available to soldiers or those who defended their country or monarch. However, as the feudal system began to vanish, pressure was on to create a more universal pension system. This was firstly achieved by Otto von Bismarck, the German Chancellor between 1881 – 1891, generally credited with creating the welfare state.
After he had succeeded in uniting Germany, in order to win over the conservatives, he proposed certain measures including a universal pension, unemployment insurance, accident insurance and medical care. It is the pension that I’ll discuss in this blog post. When von Bismarck proposed a pension, he arbitrarily chose between 65 and 70 as the age that workers could retire and claim a pension from the state. However, at the time the life expectancy of workers was about 45 years of age, so there was an expectation that there would not be many claims on the pension as few people were expected to live long enough to do so.
When other countries decided to implement pension systems, eg. Australia and UK in the early 1900’s, the US in the 1930’s, 65 for men and 60 for women was selected as the age that pensions could be claimed. However once again, life expectancies at the time were in the 50’s or early 60’s. At best people could expect a few years of pension before passing on.
Then during the post war years, the advances in medicine absolutely exploded and people began living longer. The life expectancy has steadily increased until, for example here in Australia, men can expect to live to about 79 years, and women to about 84 years. This means that it is entirely possible that people can live for some 20 years after retirement. This was not what the old age pension was designed for.
Governments have been slowly increasing or trying to increase the pension age, as in order to meet all their welfare commitments, they are relying on the next few generations to pay for all this. But as previously mentioned, in most developed countries, the following generations have been respectively smaller. What this means is that during the start of the baby boom, for every one person receiving government funded welfare, there were four people working and paying taxes in order to provide this. This means there will be fewer taxpayers supporting more welfare recipients. Unfortunately, newer generations have been conditioned to a cradle to grave welfare system provided by governments but from a shrinking tax base.
So now, in a new millennium, we will need to be smarter with our finances and start thinking of how we can help ourselves, rather than expecting our governments to help us. We need to look at ways of saving our money, reducing and eliminating our debts, investing and planning and saving for our retirement.
It would be a very brave government indeed who will actually be proactive and substantially reduce or completely eliminate various welfare systems, especially the pension and I personally do not think the pension can ever be abolished. However, given our potentially long life spans, you need to ask yourself what kind of existence would you have on a wholly government supplied pension?
And then there are also high asset prices which have been boosted by the prosperity brought on by the number of baby boomers in the market. This, along with the easier availability of debt, increased house and share prices. But what will happen when the retiring baby boomers want to convert their assets to cash by selling their houses, shares and businesses? If subsequent generations are smaller than the boomers, will there be sufficient people to buy all the houses, shares and businesses that become available in the market? Insufficient buyers of assets have the effect of pushing down asset prices, losing the “wealth effect” brought on by baby boomer’s purchases of rising assets.
Another factor brought on by the baby boom generation is the rates of economic growth. During the boom prosperity years of the last 40 or so years, many global economies grew at over 7%, some reaching double figures. However during the naughties and teen years of the new millennium, economic growth has slowed considerably and sometimes stalled completely. Is this really a sign that the economies are in trouble, or are we in fact, reverting back to the mean of more normal economic growth rates?
Japan is a good example of what faces many developed and developing countries such as Australia, New Zealand, the U.S., Canada, the U.K, Europe and significantly, China. Japan had their baby boom equivalent period about 20 years before the rest of the world. They are now entering their third lost “decade”. Their house and share prices peaked in the 1990’s and have remained at about half their value to this day, in spite of stimulus measures by various governments to try and boost asset prices and manipulate their currencies.
Ultimately, no amount of meddling and changing rules will avoid the inevitable forever, it’s just demographics at work.
Here’s one take on what the change in demographics means for us:
ABS Predicts Rise in Single Person Households
Much thanks! This is an wonderful site.