Boomers as Retail Clerks Shows Why Greenspan Saw Low Growth Era


A greeter at a Wal-Mart Supercenter in Bowling Green, Ohio.

During his final policy-making meeting as chairman of the Federal Reserve Board, Alan Greenspan glimpsed a force potent enough to trump the law of supply and demand in the world’s largest economy. Greenspan had said for months that increases in government borrowing would drive up interest rates on bonds maturing in 10 years and beyond. Instead, rates declined. And Greenspan said he thought he knew why: The world’s growing, graying masses were rewriting the rules for both markets and economies.

Special Report: The Future of Retirement

Before that January 2006 Fed meeting, British pension managers -- stewards of one portion of the globe’s vast pool of retiree money -- had bought enough long-term U.K. government securities to drive their yields below those of shorter-term debt. Similar U.S. investments would eventually feel the same “overwhelming force,” Greenspan told his colleagues.

“What the demographics are telling us is that the issue is large enough to essentially dominate the longer end of the markets,” Greenspan said, according to the transcript. “These pressures may overwhelm the economics.”

Financial markets provided what the outgoing Fed chief called “the first evidence” that the consequences of societal aging would extend beyond funding costly public retirement and health programs. Yet the discussion around the Fed’s 27-foot mahogany table that day only hinted at the broadest and most alarming implications.

Unleashing Aftershocks

As economists and regulators are beginning to recognize, global aging threatens to unleash a wave of aftershocks: chronically weak economic growth, a more volatile international economy and the risk of a new financial crisis triggered by innovative investments dubbed “death derivatives.”

Relentless aging, especially in advanced economies, promises nothing less than a recalibration of the engine that powered growth for more than half a century. Expanding populations -- the American baby boom, its European echo and subsequent boomlets in developing nations such as Brazil -- long fueled global prosperity with both workers and consumers.

Now, as the working-age share of the planet’s 7.2 billion people crests and slowly declines, generating accustomed economic growth will require many people to shelve dreams of idle bliss and labor into their eighth decade. Gray-haired retail clerks, burger flippers and home-care companions hint at a future awaiting millions.

Daunting Profile

“We’re coming out of an era of the most benign demography for GDP growth in the history of mankind, and we’re coming into a demographic profile that’s more daunting,” said Rob Arnott, chief executive officer of Research Affiliates, a Newport Beach, California-based investment-strategy firm. “If you have vast numbers who no longer produce and a diminished workforce, you’re going to have an assured formula for interclass and intergenerational conflict.”

Some of those conflicts challenge ethical and cultural norms. Is there an age, or mental acuity level, at which sexual activity should stop? When does a family’s concern over an elderly loved one’s suffering take precedence over society’s commitment to safeguarding life?

Those personal dilemmas arise against an unfamiliar backdrop of economic challenge and lowered expectations.

Slowing Output

Through 2030, amid falling birthrates and longer lifespans, U.S. output per person will rise only about two-thirds as fast as in the past half-century, according to a 2012 National Academy of Sciences study.

European workers must double their productivity, reaching levels akin to the 1990s Internet boom in the U.S., just to see economic growth reach 2 percent, according to the European Central Bank.

Key developing nations, too, may struggle. China’s working-age population over the next two decades will shrink, a legacy of the one-child policy it adopted in 1979. In coming years, that will be enough to strip more than 2 percentage points from annual growth, which over the past four years has averaged 9 percent, according to Citigroup Global Markets.

Central bankers’ traditional tools may prove ineffective in economies dominated by older populations, leading to greater volatility, according to one International Monetary Fund assessment. Persistently low interest rates could invite frequent brushes with deflation or reckless private-sector borrowing.

‘Longevity Risk’

And that’s if populations age as expected. If people live just three years longer than current forecasts -- a typical margin of error -- the $15 trillion to $25 trillion in global pension fund obligations will increase by $1.4 trillion to $3 trillion, according to an August report of the Bank for International Settlements’ Joint Forum, a global body of insurance, banking and securities regulators.

To help pension funds cope with this “longevity risk,” a market in swaps, hedges and bonds is emerging. If not carefully policed, these new investments could spread risks akin to those of the complex mortgage securities at the heart of the 2008 financial crisis.

“Losses arising due to longevity risk may affect the stability of the financial system,” the Joint Forum said in its report.

Economic Headwind

In many ways, population aging is an emblem of prosperity and progress, the quintessential good problem to have. Declines in infant mortality and progress in treating diseases such as cancer and HIV/AIDS translate into longer lifespans. More women are free to enter the labor force, thanks in part to modern contraceptives letting couples limit their number of children.

Such advances mean older societies. In 1940, a newborn American male could expect to live a bit more than 61 years. His grandson born last year should live more than 76 years; on his 65th birthday, he will anticipate an 18-year retirement, roughly 50 percent longer than his grandfather’s.

Some economists are sanguine about prospects for adjusting to such a world. In its 2012 study, the National Academy of Sciences panel concluded that, assuming early changes to Social Security, Medicare and Medicaid, higher saving and longer working lives, the U.S. didn’t face “an insurmountable challenge.”

Yet none of the needed changes will be popular or cost-free. Most involve trading leisure for work and consumption for savings. Already, almost 19 percent of Americans age 65 and older are in the workforce -- the highest rate since 1965 and almost twice the 1985 low.


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