The Greater Recession: Boomers and the 401(k) Cash-In

birth-rates
“Those born between roughly 1946 and 1964, are now 52 to 70 years old. Starting in 2015, more money is coming out of the 401K retirement market than will ever be going in for quite some time.”                                                                               Source for Birth Rate Graph: Wikipedia 

Months ago during the Presidential primary election, during the peak of this nascent website’s readership (so far, perhaps forever), I wrote about what could be appropriately called the “Greater Recession.” It’s detailed focus was on the millennial generation (those born between circa 1980/81 and 1998 or so) and housing and the role that will play in contributing to the next recession. At the end I teased that housing will not be the chief driving force however behind the next recession, rather it will be the fact that baby boomers, retiring en-masse starting a few years ago, will be cashing in their 401K’s and this outflow will outpace the money that is going into retirement markets. What sounds alarmist now and overly complicated will sound stupidly simple when history is written: retirement accounts need money in them. Duh.

In the wake of the silliest U.S. Presidential Election and national conversation on record and for a country whose youngest working generation and middle class is still reeling from the previous Great Recession, it’s completely understandable why no one wants to hear or read about the next one (don’t worry, they won’t). But demographics are still destiny.

They are a chief driving reason Italy cannot grow more than 1 percent annually because Italy cannot replace its own population. Birth rates. If it were not for their relatively more modern and diversified economies, France and Spain would suffer from similar systemic growth problems because most of Europe is suffering from historically low birth rates. The United States has its own birth rate crisis too, but at the other end of the spectrum. The post-World War II baby boom from 1946 to roughly 1964.

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As of mid-2015 withdrawals from 401K plans exceed new contributions, a shift that could shake up the U.S. retirement industry and a trend that will continue well into the next decade and perhaps beyond. Three to four million baby boomers will be retiring every year between now and 2020, and it is expected to accelerate beyond that. The direct result will be on asset management firms and the retirement portion of investment banks being squeezed of large amounts of money because they rely on fees charged to employers and investors as their chief profit engine. Before I move on, let’s go through a quick primer on the history of 401Ks.

401K retirement plans came into wide usage in the 1980s as more companies embraced them as a replacement to their more costly pension fund counterpart. In other words, 401Ks are the privatization of pension plans. Along with the general erosion of big labor and private (as well as some public) sector unions in the U.S., this trend has contributed to declining and stagnant middle and working class incomes. The financial capitalism model that rose in the United States in this decade coincides with globalization ascendent generally, with the post-War political and economic consensus fading into history. Pensions were out. Privatization was in. The prevalence of 401K plans coincide with the major working years of the baby boomer generation, the largest cohort in American history until millennials.

A 401K bubble, unlike the housing bubble, will be far more fundamental than Senator McCain could ever conceive of because it will be demographically and systemically driven. We have seen so many cracks in globalization’s inevitability this past year, whether it is Brexit, the rise of nationalism generally, or the entire 2016 Presidential Election cycle. The final nail in the coffin to its inevitability may very well be another recession, which will no doubt have global implications as well because nearly everything does now. If we’ve learned anything since 2007-09 it’s that globalization and interdependence is failing, and will likely keep failing, rightly or wrongly. We have also learned that nation-states still matter and they matter the most. Rising nationalism that borders on jingoism and xenophobia in some quarters is frightening to anyone who has read history, but at the most basic level–the primacy and importance of national leadership and its ability to control and secure national interests is still incredibly relevant. Much of this development is political and populist in nature, and often very much to the chagrin of the global system, especially those in the financial community.

It has been said, and I think this is still the best case for globalization (although slipping a bit each year), that countries that trade together and are dependent on one another will not fight each other. A free trade and globalized world order is a peaceful world. With each passing year though, this gets harder and harder to believe. When Iraqi civilian casualties are 1/4th the total of the holocaust, you know instinctively that you are not living in a more peaceful world. Rather, you are merely avoiding the most dangerous parts of the world.

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In fairness to those who would call this alarmist thinking, there are three economic developments and one political, that could at the very least, stem the tide. Starting with the most unlikely to succeed.

1. Millennials putting enough money into their own retirements (very unlikely).

Despite the demographic ability to do it, millennials are squeezed out of good paying jobs still and even if they obtain those jobs (a big “if”), significant student loan debt and other costs will limit our ability to save for retirement in the years to come.

 

2. Asset management firms reinvesting a good potion of boomer-held wealth back into the market (more likely).

This may not be enough either though. Aging costs money and boomers are not nearly as wealthy as we all think they are. After all, their entire working lives coincide with America going from an FDR / New Deal / “We take care of our own” – model to a Reagan / “trickle-down economics” / financial capitalism – model.

3. Wall Street downsizing (most likely, already happening). 

 

An interesting facet of the Greater Recession could very well be the great irony: just as the Great Recession could be characterized as Wall Street driving an economic recession that left millennials with few paying jobs, the Greater Recession could be characterized by millennials lacking the assets, paying jobs, and income to prevent an economic recession that will in turn, leave many on Wall Street without their high-paying jobs.

And then there is the political solution.

We all saw how swiftly both parties acted in the wake of the global financial meltdown in 2008. But even in success, we also saw how readily evident it was that the United States has a public policy that is so incredibly friendly to wealthy elites and corporations that more and more publications are taking to calling the United States an oligarchy. Furthermore, political gridlock in the Obama years has made another swift action in response to an economic crisis harder to imagine. It’s far more likely any political response is an incredibly partisan one, carried out by a Republican Party in complete control of the United States government after 2020.

Therefore it’s far more likely that social insurance programs get privatized due to the political winds of the time, bad luck, and poor party-building and planning by the Democratic Party, which will be the chief purpose of the third and final part of the Greater Recession article series. 

 

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