The Retirement Myth
By Raoul Pal
Monday, 6th November 2023

Consider the following scenario: You have worked your entire life, now, you’ve reached the age of retirement and let’s say, you have $400k saved for retirement; Will you up your spending? Or will you collapse it to make the money last as long as possible?.

Back in 2017, I wrote one of my best-known articles titled Boom!, discussing the issues associated with an aging population that was heading into retirement with few savings. Ultimately, it became a video that we aired on Real Vision called “The Retirement Crisis” racking up over 3.5 million views.

Today, I want to revisit this because there is a growing narrative out there that suggests an aging population is in fact inflationary.

Let’s get into it…

The original argument is based on a BIS publication from 2017 by Charles Goodhart and Manoj Pradhan entitled “Demographics will reverse three multi-decade global trends”. Here is the link: www.bis.org/publ/work656.pdf
What they are suggesting here is that aging will increase the rate of inflation as retirees spend their savings, leading to a rise in tax rates and wage inflation in the labour force.

This seems completely illogical to me. And the evidence strongly suggests that the very opposite will occur.
First, the reality is that Baby Boomers don’t have much wealth to begin with. In the past, I came to a number of around $300k for total median Baby Boomer wealth. Just have a look at their 401(k) balances…

What is important to grasp here is that even if the latest numbers are $400k in total wealth for retirement, this is all the money they will have left for the remainder of their lives. Assuming the Baby Boomers are now around 70, they must plan to live for another 12 years on average.

Even with gains from investments until the day they die, that still only leaves them with about $45k per year, which is considerably lower than the median household income. The result – by necessity – has to be a fall in consumption.

In 2015, the BLS published a report titled “Spending Patterns in Age”, which suggests the very opposite of the report we are discussing in this article from the BIS.

That report from the BLS suggests the obvious behaviour of retirees: as people age their income and expenditures fall. Duh!

Have a look at the data they observed in 2013: there is a collapse in spending in key areas…

A deeper look at the data shows that spending literally goes down by half, meanwhile the younger cohort doesn’t make up for it…

Anecdotally, ask your parents about their spending habits if they have retired. I have yet to meet a singleretiree who spends as much in retirement as they did when they were working. This applies even to the wealthy.

Case in point – The Wall Street Journal came to the same conclusion amongst wealthy retirees…

The issue here is clear as day – no one knows how long they have left on this earth, and everyone’s biggest fear is to be 85 years old and broke. Or to die before their spouse and leave her or him broke. The fear is so real, that naturally, it collapses spending. And in the case of the wealthy, the focus becomes on passing wealth to their children. Not SKIing (Spending your Kids’ Inheritance).

I witnessed this in my own father’s behaviour. The moment he retired, instead of changing his 7-Series BMW every three years, he instead bought a used Audi that he drove until he died (from 65 to 80 years old). He relocated from the UK to Spain where the cost of living was much cheaper. When he was working, he’d drink Champagne and decent wine; in retirement, he and his friends would boast about the 5 Euro Cava or Rioja they’d find in in Aldi or Lidl. He used to eat at the best restaurants in London but again, in retirement, he and his friends would seek out the best priced “Menú del Día” for around 20 Euros.

It is simply NOT POSSIBLE that an aging population is inflationary due to their spending habits.

Let’s think back to the magic GDP formula:

GDP Growth = Population Growth + Productivity + Debt Growth

This means that as population growth slows (or shrinks as it is in many countries), GDP declines as does the rate of interest. This can be proven.

GDP growth falls in line with demographics…

… as does inflation…

The other argument presented in the BIS publication is that the natural rate of interest increases. Think about this... with giant debts and a falling GDP this argument makes no sense! Otherwise, you’d end up with massively positive real interest rates that would blow up the economy. The trend rate of real rates to service the economy is -1%...

Have a look at the following chart of the trend rate of GDP growth vs bond yields… as the population falls, growth falls and, as a result, so do bond yields…

The last argument the BIS paper makes is that low unemployment rates, driven by the drop in the workforce, lead to higher wage inflation. The logic there is – same demand for less workers.

However, this is simply not the case. Look at Japan’s experience. They’ve had an unemployment rate of below 3.5% for the last decade. Remember, this population is ten years older than that of the American...

And still, wages never went up…

I see zero evidence that large amounts of retirees will lead to higher levels of spending, higher rates, or inflation. It makes absolutely no sense.

This last chart I leave you with is one of the most shocking I have seen in a while.

The US Death Rate has reached new all-time highs. Why? Two key factors are at play here: the politicization of Covid, as well as the opioid epidemic. Both these factors are driven largely by a deeply fractured society where real wages haven’t increased in a generation while asset prices have rocketed in line with debt. The result? A society that is poorer than the American Dream led them to expect…

That’s it for this week. Good luck out there.

Remember, this is just a very small fraction of the work we do at GMI.

We cover the biggest secular themes in macro, crypto and technology within a full business cycle framework and also include our comprehensive GMI asset allocation model as well as our GMI model portfolio with an unrivalled, fully-recorded performance going back nineteen years.

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Raoul Pal – CEO, Founder - Global Macro Investor
Julien Bittel – Head of Macro Research - Global Macro Investor

Raoul Pal, Co-Founder & CEO - Real Vision Group. Economist, investment strategist and publisher at The Global Macro Investor, Co-founder Exponential Age Asset Management, Co-Founder Science.Magic Studios.

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