Population demographics in the United States have changed dramatically. Last year, the Population Reference Bureau found the U.S. population is growing at the slowest rate since the Great Depression, and that the U.S. fertility rate “is estimated to have fallen to 1.9.” This drop below the replacement rate of 2.1 is attributed to the recession, and is expected to inch up slightly. But it is a far cry from the expansive birth rates of five decades ago.
Because the demographics have changed, it means many of the financial assumptions will have to change as well—for everyone. Need confirmation of the necessity of a new financial perspective? Look at the European Union. Aging, stagnant populations cannot support their country’s social programs, pay their national debts, or expand their economies. And there is a growing awareness that “stimulus spending”—a concept designed for expanding populations—may no longer be a solution.
Bringing the impact closer to home, fewer American workers today have institutional “automatic” programs for financial security. Two of the three legs of the Greatest Generation retirement stool—Social Security and pensions—are wobbly or vanishing for the Baby Boomers and successive generations.
Going forward, government-administered social welfare programs will struggle because there won’t be enough people working to support the recipients. The Social Security Administration reports that today 19% of Americans currently receive a monthly benefit check; that’s almost one in five. As the first wave of Baby Boomers approach their mid-60s, the percentage is going higher—with proportionately fewer workers left to pay the bill.
At the same time, employers and governments are unloading their pension and other “legacy” benefit programs as fast as they can. In June, General Motors announced it was transferring a portion of its pension plan to a private insurer, giving 42,000 retirees the option of receiving a lump-sum distribution or a monthly annuity check from the insurance company. GM management indicated the decision was due to a desire to see its “pension obligation reduced significantly.” A front-page headline from the June 23, 2012 Wall Street Journal announced “More than 40 states have moved to trim pension costs since the financial crisis.”
For the present, the most effective responses to these demographic-influenced changes are at an individual level. By their sheer size, governments and large corporations are often slow to adjust to changing paradigms, but individuals don’t face the same restrictions. While the details will vary with individual circumstances, there are general ways in which changing demographics may reshape your financial perspectives.
If you want an inheritance or a retirement fund in your financial future, you will have to plan for it. You can’t expect to work 30 or 40 years, then stroll down to Human Resources at age 65 and say “So, what are my retirement options?” And the likelihood of leaving or receiving an “accidental inheritance” is slim to non-existent.
Beyond taking greater responsibility, the new demographics may fundamentally alter many important long-term financial decisions. The biggest change: that most Americans will work longer. The financial feasibility of owning a home (and where you choose to live) may need to be re-evaluated. Borrowing should be re-thought as well, for a house or other items. Changing demographics will influence your choice of retirement accumulation formats. Business models for capitalizing, starting and maintaining a profitable business will be different. And addressing the medical expenses and living arrangements of aging family members will require greater financial attention.
The economic impacts of changing demographics are slow-moving but inevitable. For aware individuals, these trends can present great opportunity. In contrast, those who persist on operating from old assumptions based on the demographics of the past are exposing their financial futures to greater risk
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at 212-261-1858.
By Elozor Preil