Will the US Economy Decelerate Rapidly as Boomers Retire?



Bloomberg reports that a "Revolutionary" Federal Reserve study is "shaking economists’ forecasts by suggesting the U.S. economy will have to decelerate much more over the next decade than most now expect."

The study won’t be out until July (we referenced it last week here) and was drafted by Stephanie Aaronson, Bruce
Fallick, Andrew Figura, Jonathan Pingle and William Wascher

What makes the study so controversial is that the "retirement of the Baby Boom generation will force far-reaching adjustments in the way the economy works. Forecasts for everything from growth and employment to corporate profits and interest rates will have to be recast."

From the Bloomberg column:

The study projects a slower pace of workforce growth than most economists now forecast, suggesting the economy can’t keep growing at the present-day pace without generating pressure for higher wages and inflation. To prevent that, the Fed will have to enforce a lower speed limit on the economy by pushing up interest rates.

The study suggests that growth over the next 10 years will average less than 3 percent, instead of the 3.3 percent of the last decade, economists said. A 0.3 percentage point difference in growth in the $12 trillion U.S. economy translates into $360 billion over 10 years, equal to the size of Switzerland’s economy. Payroll gains, which averaged 200,000 a month in the 1990s, may be half that.

“This is a very big story,” said Laurence Meyer, vice chairman of Macroeconomic Advisers LLC and a former Fed governor. “It makes the challenge for the Fed a little greater.”

The study also conservatively projects a "3 percentage-point decline over the next 10 years in the labor force participation rate." (We’ve been discussing the drop in the  the percentage of people working or looking for work for some time now).

As the participation rate drops, so to will the Growth Rate slow. Labor force growth will slow, as will hours worked.

What makes this so significant is the that the Fed Study estimates are "well below current government and private forecasts." This will impact everything from Federal Deficits to Social Security.




‘Revolutionary’ Fed Study Has Economists Rethinking Forecasts
Carlos Torres, Rich Miller
April 13, 2006 00:10 EDT 

The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply
Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle, and William Wascher
Division of Research and Statistics, Board of Governors of the Federal Reserve System
March 2006, Preliminary Draft

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What's been said:

Discussions found on the web:
  1. David Silb commented on Apr 13

    Hmmm…… It’s the end of the “world” as we know it. But strangely I feel fine.

  2. B commented on Apr 13

    This is something that has been on a very, very select few’s radar screen for the past few years. It is a very interesting issue.

    The issue is not just one of the US but globally as some very compelling analytical studies have been done which show we are near peak global population that will decrease quite substantially in certain areas with the main driver being global wealth creation. (Wealthier populations show significantly lower birth rates over time for obvious reasons.) Again, behavioral economics.

    As an example, some modeling of Japan’s population I have seen shows populaton declines of 20% over the next 100 years. That’s about 25 million less people! When I was in Japan not too long ago, I even saw some chauvinistic Federal official make some statement that women should stay home and make babies to help Japan’s population problem. Such stupid statements are not too uncommon in a surprisingly chauvinistic/xonophobic culture amongst the feudalistic gray hairs.

    We can expect birth rates to diminish in nearly every part of the world. The one area where I saw they were not expected to decrease was the Arabic states. No surprise there if you base it on economics. Repressive corruption at its best.

    Here’s the $64 question. How does this affect American immigration which has been the MAIN driver in our wealth creation versus old line Europe? (Regardless of our miracles of American economics which is basically bullsh*t, it’s our large population growth over time that has driven our wealth more than any other esoteric rah rah.) Less people to immigrate? More countries, including Europe, looking to increase immigration to offset declining populations and the cost of social programs? Just at a time when people are forgetting what made American great: Immigration.

    Personally, I’m with Kennedy and McCain on the immigration issue. Hell, I hope Mexico never reforms. Keep those immigrants flowing across the border! Their loss, our gain! Let’s just find a way to legalize it we can all live with.

  3. Fred commented on Apr 13

    You are going to miss the Boomers after all. Fifty years of cheap, expendable labor is ending and the greatest tax cash cow ever is going dry.

  4. AZ_Cowboy commented on Apr 13

    Boomers retiring? With their $50K retirement accounts? Hilarious.

  5. royce commented on Apr 13

    Can a few guys can accurately project what will happen over ten years to an economy this large and complex?

  6. D. commented on Apr 13

    AZ Comboy:

    Forced retirment maybe? Hard to work when you’re sick. Problems do start up past 50 and the largest group in the US pop is currently around 45.

    The writing is on the wall. It’s going to be expensive especially when they think they have a right to all new therapies.

  7. Economist’s View commented on Apr 13

    A Slowdown in Baby Booming Growth?

    The Fed study discussed in this article says that projections for economic growth over the next few decades are too optimistic. The authors expect baby boom retirements to lower labor force participation by 3 percentage points, about three times as

  8. Economist’s View commented on Apr 13

    A Slowdown in Baby Booming Growth?

    The Fed study discussed in this article says that projections for economic growth over the next few decades are too optimistic. The authors expect baby boom retirements to lower labor force participation by 3 percentage points, about three times as

  9. Trent commented on Apr 13

    I think Fred nailed it on this one. The missing link in this study is that Boomers are neither prepared nor inclined to retire at 65. Their need/desire to work longer will result in labor force growth being higher, not lower than most economists expect. It will also go some way toward easing the Social Security mess.

  10. Alaskan_Pete commented on Apr 13

    This is certainly a “Big Picture” item, ahem.

    Look at the “boomers'” retirement savings. IMO, they are woefully prepared and will be working much longer than many project…certainly in the US anyway.

    As noted above, Japan is in much worse shape as is Europe.

    We know healthcare professions will endure serious shortages…as we already see in nursing, and the greying of the boomers has just begun. But there are other less intuitive professional shortages…mining engineers and professional geologists are a couple. The avg age of canadian mine geos is over 50yrs.

    For engineers like me, this at least indicates the possibility of rising wages after decades of stagnant real wage growth. But the specter of higher taxes looms as well. In short, my generation (Gen-X) has been roundly screwed by the boomers who currently run politics/big business. At some point, that will change and we’ll be screwing you back, count on it.

  11. Brian commented on Apr 13

    Alaskan Pete – interesting. I’ve read stuff like that elsewhere. We need people in all these old industries that conventional wisdom thought were over: mining, oil, railroads. The nice thing about these jobs is they can’t be sent to India. If I were 20 again I’d definitely pick something like that over computer science.

  12. muckdog commented on Apr 13

    Don’t let ’em retire! Eliminate their pensions! Oh, check… That’s happening now.

    Seriously, how many folks are going to be able to retire? I think most folks will be working well into their 60’s and up to 70. We’re probably going to see means testing in Social Security down the road, so that’ll solve that crisis.

  13. wcw commented on Apr 13

    This is a good big-picture piece, but the future effects of demographic change have been on plenty of radar screens. For the US, thanks to immigration and productivity, I don’t think adjustments will be too painful.

    Does the average 45-year-old really only have $50k in his IRA? That’s depressing.

  14. B commented on Apr 13

    The reality is senior people offer absolutely tremendous talent. How many of us thought we knew everything when we were 20 and realized we still didn’t know the half of it when we were 40 but knew 10x more than we knew at 20? (That’s a math problem.) With longer lives, they won’t want to retire fully.

    The Harvard grads–all of whom comprise the 20 something know-it-all crowd–who figured companies could save x% by cutting high wage, high healthcare espenses by hosing people over 55 will likely be hiring them back part-time or more to fill the labor shortages. Some of which we are experiencing in pockets today. Those are the same a**holes who view people as an expense. Never was a big fan of bean counters. They never understood the value of intellectual capital accrued over a lifetime of experience. It’s not found in an Excel spreadsheet. It is all just numbers for them. The reality is they had it exactly backwards. They should be hiring workers over 55 who had kids out of the house, could focus on work, were loyal, not interested in job hopping and had a life time of tremendous experiences and talent. That is why Nike sh*tcanned their newly appointed bean-counter CEO who couldn’t understand the creativity of their business.

  15. The Hube commented on Apr 13

    The big picture item that is missing from this report is that long before the boomers retire they will stop spending, driving a long term decline in the retail sector.
    Ask a 60 yr old which is more important: new car, new tv, or more money for retirement. There are WAY too many stores in this country.

  16. The Hube commented on Apr 13

    The big picture item that is missing from this report is that long before the boomers retire they will stop spending, driving a long term decline in the retail sector.
    Ask a 60 yr old which is more important: new car, new tv, or more money for retirement. There are WAY too many stores in this country.

  17. Jimmy J. commented on Apr 13

    This is the best argument I have seen for getting our immigration under control. We need to increase the quotas for educated and technically proficient immigrants. At the same time we need to get the southern border under control and then have flexible quotas for untrained immigrants to allow enough in to do the seasonal and low tech jobs that, it is claimed, Americans won’t do. Of course it wouldn’t hurt if our birth rates increased a bit as well.

  18. Anybody commented on Apr 13


    “Does the average 45-year-old really only have $50k in his IRA? That’s depressing.”

    In my opinion, it’s actually worse. Just think about all those 50 year olds who just bought their McMansion with a 30 year mortgage. In fact I firmly believe the boomers constant demand for instant gratification regardless of the cost is what will cause the savings rate to increase with thier children (whom the boomers will turn to for $ as the greatest generation die). Of course their are plenty of macro economic influnences/explainaitons, but physcologically it always boils down to “what about me”. And having to pay for your parents to live b/c they spent every dime they had, in addition to all of their inheritance will change the attitude of Generation X etc.

  19. donna commented on Apr 13

    I have several friends who bought their big house planning for it to be their “retirement fund”.


  20. drewburn commented on Apr 13

    I view it as confirmation that political pressures will build toward inflation. Remember, many of those folks who are out of jobs (or going to be) are voters. Democracies will always tend toward inflation. This is why.

  21. MAS commented on Apr 14

    Speaking of not working, where was Barry on today’s Kudlow? ;)

  22. mike simonsen commented on Apr 14

    yet another reason to open those borders, baby!

  23. Satch commented on Apr 14

    I took a quick look through the paper on the Brookings site. The authors as far as I can see stay away from saying that econ growth will fall by 0.3%, actually limiting their comments to a 0.3% fall in the supply of hours of labour.

  24. Eye Doc commented on Apr 14

    If they slow the economy down, they’re going to reduce tax revenues, and they’re going to make the whole unfunded liability in Medicare and Social Security worse, aren’t they? It seems to me that they need to keep the economy growing as rapidly as possible for as long as posssible.

  25. Satch commented on Apr 14

    The Phildelphia Fed Consensus for long term economic growth in 2000 was 3.05% vs 2.5% in the most recent quarters survey.

    Does this mean that practising economists have already incorporated the impact of declining participation rates or is this ahead of us?

  26. Damian commented on Apr 14

    The first person I heard talk about this issue what Robert Reich on NPR about 5 years ago. His point was a bit different however – he was talking about what effect this could have on the stock market.

    He divided the boomers into early boomers (early in the cycle) and late boomers – and noted that early boomers have historically done much better. He noted, as an example, that early boomers bought their houses at far cheaper prices than late boomers.

    He thought that the markets might tank when the early boomers start to pull out their money for retirement and that late boomers might be left holding the bag. Given, of course, that they may have no money in there, I’m wondering what people think.


  27. Lord commented on Apr 14

    I think higher productivity growth will, almost entirely, offset lower population growth.

  28. Anybody commented on Apr 14


    Perhaps, however the higher productivity may occur in another country in this Global economy. Surely you don’t expect Americans to put in the hours Indian, Chinese, et al, are willing to, and for far less $ (in some area’s $25.00 a month)?

  29. Steve commented on Apr 14

    IF all the boomers retire. The reality is many, probably most, will not be able to retire at 65. I imagine many boomers will be working until 75 +.

  30. Rick DeMent commented on Apr 14

    I have often wondered out loud why if Social Security is in such dire straits due to predictable actuarial declines, why is the stock market not in the same shape? I concede that the two are not exactly the same but as boomers retire, there is less and less money going into 401ks, in the meantime more globalization is eliminating 401k contributions and investment in general. Why or why not is the stock market immune to the same actuarial realities as Social Security?

    Just asking becase what I know about the stock market you could put in a thimbel.

  31. RP commented on Apr 14

    1) The workforce is not going to decline…labor demand will continue to suck workers to the work, from wherever they are, unless we starting shooting folks who cross the SBZ (not going to happen, don’t want it to happen). In high school, I was taught how to cook (Mexican Food) by an illegal alien for my first job…he was caught once while not at work, and deported from Northern California on a Wednesday…I didn’t see him at work again until that Sunday.

    2) 2+ billion people looking for better work is not inflationary, and no matter how special the boomers think they are going to be in their golden years, they will only be special in the eyes of their loan agent.

  32. Kaleberg commented on Apr 14

    As an aging boomer, I’m betting on a soft, value oriented stock market, a glut of McMansions driving down housing costs, and soaring productivity once boomers start leaving the work force en masse.

    It sounds ridiculous, but there is a shortage of jobs, not workers. If there were a shortage of workers, wages would be rising, but they are not. Once job destruction begins to add up, the remaining workers will be focused in the more productive jobs. (Didn’t Douglas Adams have a story in which a society sent all the hairdressers and middle managers off to colonize space, just to get rid of them).

    Anyone who has worked on a software project knows the truth of this. Once it becomes impossible to assemble huge teams of worthless programmers, the real work will have t be done by the few programmers available, including many who were promoted into management because they were good programmers.

    Generalize, shrink the work force, dump the process, concentrate on product, apply the inverse Peter Principle and productivity soars.

  33. RP commented on Apr 15

    Kaleberg – that last part sounds really good.

  34. im1dc commented on Apr 15

    Fascinating discussion. My two cents:

    I did not read the referenced Analysis but it is well known many Boomers have too little put away in cash/stock/bonds for retirement–this analysis apparently says the average is $50K–but that almost surely does not include the equity in their home/homes.

    Many authors believe Boomers RE assets will make up a large and significant portion of retirees retirement cache, as they downsize to smaller, less expensive, low upkeep abodes and lifestyles.

    There was no mention in the comments that more people are retiring younger today than ever before, in their early 50’s and dropping out of the workforce. This is significant, obviously those that do can afford it, maybe they made a bundle selling RE to fellow Boomers?

    And, many Boomers will continue to work, at least PT, because they are healthier and happy to do so, than previous retirees. I personally know some who have done so, stopped to care for a chronically ill spouse who then returns to activity by volunteering (Katrina, Habit, Missions work, etc.)

    This group of Boomers will want to do something to remain active, they may well need the money or just enjoy the extra cash.

    But working beyond retirement does not mean Boomers will be digging ditches or working 12 hours a day 6 or 7 days a week on an assembly line to survive only that they are able bodied and want to make some extra cash to pay for pricey Meds, a gallon of gas, winter heating bills or a 2 week summer trip to Florida to fish, golf and take the Gkids to Disney, MGM and Marineland.

    Then there are those who won’t have enough to retire. This group will be bigger than the past because the Boomer group is bigger than the past.

    But it must be understood that every generation has seniors in this situation and they generally end up living with their kids and making it that way, i.e., multigenerational households. We may see a generational resurgence in this once widely seen and frequent practice, after all the houses are big enough to handle the crowd.

    As a gray hair myself, in my daily routine in the service sector I see on a daily basis the slack work ethic/quality of many of the present generation–granted along side superior work by others their age–but I always see consistent quality work/knowledge by the +55 workers. I call it maturity.

    I lament the loss of the mature because they are replaced by young, eager but generally confused and not to knowledgeable workers who have so much to learn that they are unable to be of much help.

    Now I know these kids will eventually grow and and become motivated, knowledgeable and helpful but it would be nice to keep some gray hairs around with their valuable “intellectual capital” and other skills only picked up with years of experience. Even if they work fewer hours.

    Am I the only one who deliberately looks for older employees when seeking advice/information in businesses? I really doubt it. Anyone can give a price check but my experience is the young workers generally give erroneous advice if they have any to give at all: “Will this work on A if B” inevitably returns “Try it and if it doesn’t work bring it back for a refund”.

    To their credit many large corps want to hire seniors with experience and customer skills, Home Depot, Lowe’s, etc. check the AARP website.

  35. Lord commented on Apr 16

    Does the average 45-year-old really only have $50k in his IRA?

    A realistic estimate of what they should have would be at least 10 times that, even with housing equity. No, they won’t be retiring anytime soon.

  36. Jan Horton commented on Apr 28

    I’m wondering who came up with the date range for Baby Boomers. As a ‘Boomer’ I’m under the impression that those of us born between 1946-1956 are the Boomers. It is based on the first 10 years after the end of WWII. Now I hear it’s up to 1966 – I don’t think so . Anyone born in the 1960’s are either a change of life baby or a Boomers baby.
    This is similar to 15 minutes of fame as quoted by Andy Warhol – it’s not 15 minutes of fame it’s 15 seconds. I still remember watching his interview on a (get this) black/white tv. I wonder who is having the ‘senior moment’? (Lapse in memory).
    One last comment about retirement . It’s possible the
    Boomers are grossly under-invested. We did not have the 401K’s or the IRA’s until the 80’s, so I can see many people having to work longer. But here’s the interesting part of it, our generation didn’t have to have a college degree to get a good job, we had “Unions”. Many people I know are retired comfortably on their union pension, but that is changing. Used to be you could retire comfortably if you had 3 times your annual salary but that’s not the case anymore. Bottom line, people, only you can determine how wealthy/poor you will be when you retire. You have to invest your own money and any money coming to you via S.S. or company pension would be your traveling money.

  37. bill commented on May 14

    In reply to Jan Horton’s post April 28, I consider myself a boomer and was born in 1959. I read that the last of the boomers was born in 1963 or 1964, one of those years. Regarding the average savings of a 45 year old being $50,000, I believe it. It’s a paltry sum. And that is why I too, think boomers will keep working. The ones who just bought their McMansions, I say Congratulations: You are going to work and slave in your old age to pay it off! It has been my opinion that I never want to be a slave to a job to pay a mortgage. I have saved well over ten times the average 50 year old and can live several years without a job if need be. The jury is still out on whether many boomers will retire or not at the typical age 62 to 67. I do know there is a shortage of professionals in my field. I attribute that to other reasons and am reaping the monetary rewards. One of my sisters told me she will work until she drops. She’s 51 and in good health and she does long distance bicycle rides and regular workouts. My oldest sister has no choice but to work until she drops. She’s 53. The other sister hasn’t considered the future but will work long. I intend to do the same as I’m doing for at least 20 years. Beyond that I figure I could downsize a tad and rejoin salaried employment as a 67 year old engineer for another ten years, should I stay healthy. I do know of millionaires who are still working and will continue many years. It keeps the mind sharp and provides some social activity for the single ones. One thing for sure: We will know it when it happens (shortage of labor or more boomers working longer). I have been investing in mixed areas as a result. I agree with that one poster that value investing is the way to go in stocks. I also do precious metals and IPS for the inflation hedge, municipal bonds, international stocks, and some CDs. I think I’m all set.

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