Another US time bomb ticking away

Thu, 30 Dec Pre-Open

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Although there are various factors of production, the broadest classification would reduce the choices to just three, land, labour and capital. All the others are but a sub segment of one of these three.

Usually, it is land and capital that grab the most attention. In mainstream economics, labour is perhaps the most overlooked and hardly talked about as much as capital and may be, even land. However, if there is one thing that is finite and the most difficult to replicate, it is labour.

We in India may miss this altogether. This is because we seem to be in the midst of a fantastic demographic dividend. But try and bring up this issue with the US and one would see some very concerned faces.

And why not! After all, as per Moneynews, starting January, more than 10,000 US citizens a day will turn 65, a pattern that is likely to continue for the next 19 years.

Baby boomers, as these people are collectively called, will have their retirements closely bunched together. Just as their cumulative productivity led to the US enjoying one of its most prosperous periods post the Second World War.

Indeed, during their hey days, baby boomers earned most of what they spent. And therein perhaps lies the biggest mistake. We believe the baby boomers shouldn’t have spent most of what they earned. Instead, they should have saved up enough for retirement. But that certainly does not seem to be the case.

As per statistics, some 51% of early boomer households, headed by those ages 55 to 64, face a retirement with lower living standards. It is believed that too many boomers have failed to save enough for their retirement. This can be borne out by the fact that the personal savings rate, averaged close to 10% in the 1970s and 80s. However, by late 2007, the rate had sunk to negative 1%.

While recession has helped bring up the savings rate a bit, an average boomer is still quite short on retirement corpus.

We believe this presents another serious risk for the US economy. This is because not only will lower living standards of boomers hurt the US economic growth, but they are also likely to take away significant resources from the productive section of the society.

Thus, while the US economy enjoyed above average economic growth in the past on account of the boomers spending most of what they earned and perhaps even more, it now faces lower spending from boomers and also perhaps a significant drain on the available resources of the country.

It looks like this is another bomb that is ticking away furiously and would keep hurting the US economy in the long run.