Outside the Box

70 Is the New 65

February 17, 2016

As some of us know far too well, forecasting the future with any precision is extremely difficult. There’s at least one exception to the rule, though. Population trends show themselves decades and even centuries in advance. If we know how many people were born in a given year, we can extrapolate what the population will look like far in the future.

On the other hand, demographic forecasting still requires assumptions. At what age will people start having children, and how many will they have? How will new medical advances affect life spans? When will people start working, stop working, and enter retirement? Small changes in any of those assumptions can quickly affect population numbers.

Today’s Outside the Box wrestles with that last question. In the United States we allowed the federal government to set 65 as the retirement age by making Social Security available to most workers at that point in their lives. The retirement age is going up to 67 for the younger members of the Baby Boom generation, but even that may be too “young” to retire in the future.

We Baby Boomers were never big on conformity. Voluntarily or not, a large number of us fully intend to stay in the workforce to age 70 and beyond. If 70 is the new 65, we will see significant changes in the ways people spend their money and the kinds of investments they want.

Matthew Tracey and Joachim Fels of PIMCO outline some of the possibilities in this report. I found it very interesting, and I think you will, too.

Speaking of things changing, the weather in Texas has been nothing like anything in the past. It is mid-February and I’m having to turn the air conditioner on at night. The forecasters tell us it’s going to get into the 80s on Friday. Talking with my long-term Texas friends, none of us can remember weather like this. Cooler than normal summers, milder than normal winters. I guess it’s a good thing it’s not like this every year, because then we’d have a wave of tax refugees showing up from California. Then again, this is Texas. If we wait a bit I’m sure we’ll get our usual ice storms and other nasty stuff. Winter is coming. Maybe.

I am struggling to keep up with the research my 20-some teams are developing for the chapters of The Age of Transformation. Thankfully I have a small team helping me review the research, which is on top of the research I’m doing for the five or so chapters that I’m personally writing. Plus, there’s my regular reading for doing the weekly letters and so forth. It is forcing me to sort through the pile of items in my inbox as to what is must-read, what can wait, and what I just don’t have time for. I really am learning to depend on people to make sure the things that I must read get on my radar screen.

I’m going to go ahead and hit the send button, as I have to prepare for an interview with CNBC Asia on Japan and related topics. You have a great week, and I hope that wherever you are, your weather is as good as ours.

Your marveling at the speed of things changing analyst,

John Mauldin, Editor
Outside the Box

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70 Is the New 65: Demographics Still Support 'Lower Rates for Longer'

By Matthew Tracey and Joachim Fels
PIMCO.com, February, 2016

The so-called demographic cliff remains at least a decade away; meanwhile, global demographics should continue fueling the savings glut.

Is global aging about to end the savings glut? Some observers think so. More and more baby boomers are reaching retirement age, and they will soon not only save less but…

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Keith Wilson

Feb. 19, 1:07 p.m.

This is an excellent article and makes some excellent observations.  It makes total sense that using a more dynamic approach to understanding this concept adds value, and that inequalities in household wealth, incomes, and abilities to self-finance retirement need to be incorporated into the picture.  However, and further to another comment regarding the impact that very low, and potentially negative, interest rates might have on making fixed income an asset class to avoid, it would be good to understand how leverage might fit into this analysis.  Since a sizeable portion of household wealth is probably a function of the massive monetary stimulus programs throughout the world, what happens to that $31 Trillion stash, and the impact on future wealth availability, once this asset bubble is deflated (or popped)?  Since the wealth effect on the way up has done little for overall economic growth and savings potential of the other four quintiles, what happens when it goes in reverse and there is an equally outsized effect on overall household wealth on the way down?

Thanks for all the thought provoking ideas and analyses you provide.  Keep them coming.

jack goldman

Feb. 18, 3:45 p.m.

This is a fraudulent article. America and the world has no savings because there is no money. America has electrons saved as bank deposits with no claim on anything of value. America and the world has been bankrupted by the banks. Main Street has been robbed blind. Electrons are not money. The Dow was 1,000 silver dollars in 1966 and is 1000 silver dollars in 2016. In real US Treasury money there is no increase in the Dow or income taxes. That is why the Fed and government use debt notes, worthless debt notes, as money. There is no money in these accounts. There is only a fake, manufactured electron score, written in a computer. Do not save in anything denominated in dollars. Save in acres or ounces. The dollars are fraudulent and worth nothing. Using a manufactured counterfeit score to measure wealth, and having that wealth stolen, is fraud. I have to protect myself from this massive counterfeit fraud from Wall Street. Good luck to us all.

Carl linden

Feb. 18, 10:48 a.m.

The main conclusion of the paper, that demand for savings will keep interest rates low for much longer than generally thought, seems right to me. Besides the arguments presented, I come at it also from another set of data, the story of capital in Thomas Piketty’s Capital. If you don’t care for Piketty’s recommendations in this book, as many financial commentators don’t, just ignore them. The book is still an excellent data source on capital and wealth. Piketty concludes the real return on capital has historically averaged about 5 percent/year. When I finished the book, I concluded this number would very slowly drop going forward, pulling real interest rates down with it. A big reason for the drop, in my mind, will be more of the “savings glut” Alan Greenspan first spoke about, with too few investment opportunities for excess capital. Piketty, (outside the book) disagrees with my conclusion that the real rate will drop. He believes the need for investment in the developing world will keep the historical return at about 5 percent. The book is worth a read and those interested in the question can judge for themselves what will happen to real rates going forward.

Dan Ross

Feb. 18, 6:37 a.m.

While this is a good article, it seems to gloss over the fact that fixed income investments have traditionally provided a reasonable income stream which today they do not. Nor will they if today’s rates are the new normal. Consequently, investors needing portfolio growth will favor other classes such as stocks for needed returns.