The Baby Boom and the Future of the Economy

A reader recently asked me a question about the baby boom generation: "What's going to happen to the economy when all the baby boomers retire and get old?"

It's a great question that would need an entire book to properly answer! Fortunately many books have been written on the relationship between the baby boom and the economy. Two good ones from the Canadian perspective are Boom, Bust & Echo by Foot and Stoffman and 2020: Rules for the New Age by Garth Turner.

Turner explains that the big changes will be due to the fact that the ratio between the number of working people to the number of retired people will change dramatically over the next few decades:

When most boomers were in their teens, there were six Canadians like them, under the age of 20, for every person over 65. TOday there are about three young people for every senior. By 2020, the ratio will be even more frightening. THis will have profound consequences on our entire society. (80)

Demographic changes will have a major impact on the ratio of retirees to workers; the ratio of the number of people ages 65 and over to the number ages 20 to 64 is expected to grow from about 20% in 1997 to 41% in 2050. (83)

These demographic changes will have both macroeconomic as well as microeconomic impacts. With so few people of working age, we should that wages will rise as employers fight to retain the small pool of labor available. This also implies that unemployment should be fairly low. However taxes will also have to be quite high to pay for all the services that seniors require such as government pensions and Medicare.

Older citizens tend to invest differently than younger ones, as older investors tend to buy less risky assets like bonds and sell riskier ones such as stocks. Do not be surprised to find that the price of bonds rises (causing their yields to fall) and the price of stocks to fall.

There will be millions of smaller changes as well. The demand for soccer fields should fall as there are relatively fewer people will the demand for golf courses should rise. The demand for large suburban homes should fall as seniors move into one story condos and later to old-age homes. If you're investing in real estate, it will be important to consider the change in demographics when you're considering what to buy.

There are all kinds of changes that will occur as the baby boomers get older. I'd like to hear your predictions: please contact me via the feedback form and tell me what you think.