When Boom Turns to Bust

by | November 1, 2021

This week, we consider a relatively unknown, yet significant, case of unequal intergenerational burden sharing. It is a challenge shared by many countries, though some handle it better than others. Among the worst is the US.

To be clear, we are not referencing the errors and omissions of an aging generation leaving a world that is overheating, beset by wildfires, and battered by violent storms owing to climate change that its actions helped bring about. Nor are we referring to indifference to biodiversity loss, social strife, tottering democracy, or a myriad of other challenges that Baby Boomers are bequeathing to future generations. We are also not highlighting the large and growing piles of government, corporate and household debt, amassed over decades of questionable private sector borrowing decisions and augmented this past decade by swelling federal government deficits.

Those ‘negative’ bequests to our young are, indeed, indictments of stewardship by what some wags refer to as the less-than-greatest generation—the Baby Boomers. Yet, sadly, young people already recognize and begrudge the legacy of environmental, social, and financial excesses they will inherit.

Rather, we highlight a little known but nevertheless potentially massive set of obligations that today’s aging generations are quietly passing on to their younger and even unborn progeny in the form of unfunded retirement and healthcare benefits. Boomers are reaping benefits without paying for them, creating creaky retirement and healthcare infrastructure that future generations will have to repair, most probably at a significant cost.

Twice yearly, the International Monetary Fund (IMF) publishes its Fiscal Monitor. Its most recent edition came out on October 7. Buried deep within its appendices is a remarkable yet rarely referenced table, which outlines the net present value over the next three decades of future spending obligations that developed, emerging and lesser developed countries have made regarding the provision of pension and healthcare benefits.

Like all long-term forecasts, the IMF numbers must be taken with a large dose of salt. Three-decade ahead estimates are based on various factors and projections that may not hold up over time, including demographic trends on ageing, morbidity, costs of medicines, hospitalizations, and other treatments, as well as on the tax revenues and asset returns that fund their costs. Those estimates, however, are based on current law and norms, including those that underpin implicit and explicit promises made to beneficiaries, as well as the prevailing taxes that fund (or don’t fund) them. The IMF figures are only estimates, but they are grounded in realities and probabilities.

And even if the numbers are only approximations, they are still numbing. The net present value of US healthcare spending change over the next thirty years is estimated at over 150% of US GDP. To put that in perspective, the present value of projected new spending on healthcare is more than the entire outstanding US federal debt. Over the next three decades, the net present value of future spending on US public pensions is also expected to rise by nearly one third of US GDP. In short, US expenditures on caring for those who are aging or sick could amount to nearly twice today’s annual national income

To repeat, the numbers are huge. And even if they are overstated by a half, they represent a series of promises that will be difficult to keep or, if maintained, will saddle future workers with enormous tax burdens. 

Parents are not supposed to spend their children’s money on their retirement and health. But that’s what the numbers suggest will happen. It is tantamount to intergenerational grand larceny.

In terms of healthcare, a key reason for the stupendous increase in US spending as forecasted by the IMF stems from the grotesque inefficiency of US medical and pharmaceutical provision. US healthcare spending per capita is nearly twice as high as that of its peer group of advanced economies, but with few indications that the money is well-spent. US life expectancy is lower and infant mortality higher than in other G7 countries. Early detection and effective treatment of cancer, hypertension and other serious maladies are no better in the US, and in some cases worse, than in Canada, Western Europe, or Japan.

The expected rise in such spending is not, as some might think, purely a matter of aging populations. If that were the case, then countries with far worse demographics than the US might be expected to spend even greater fractions of their future income on healthcare. That’s not the case. Italy or Japan, for example, are countries with much older populations, yet the IMF projects their spending increase on public health will only grow a fifth to perhaps a third as fast as that of the US. Indeed, no large or small high-income country is forecast to have more than half the growth rate of healthcare spending anticipated for the US in the years to 2050.

The picture is a bit more mixed when it comes to pensions. Italy will see faster pension benefit growth than the US over the next 30 years, but Japan, the UK, Canada, and France will have significantly smaller future obligations. 

Therein lies the key conclusion—demographics are not destiny when it comes to the provision of effective income and health support for the aging. The inexorable rise of the share of the aged in the overall population will, of course, push up age-related spending, but those increases can be offset by more economically and financially efficient pension and healthcare systems. If Japan and Italy, with their much older populations, can keep their pension and healthcare spending numbers in check, without sacrificing humane care for senior citizens, surely the same is true for other countries.

The US has much to learn from others. Single payer healthcare systems, broadly, do not compromise health outcomes, yet deliver more cost-effective solutions. Pension reforms, including increasing retirement ages as life expectancy rises, can help maintain generous and dignified support for retirees. 

Such reforms are, of course, politically challenging. But great generations do not shy away from great challenges. It is not too late for the Baby Boomers to consider their legacy. But it is an exercise that is long overdue.

About the Author

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy.

Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland.

From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT.

At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others.

Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

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