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There will be a top tier of older people who will continue to spend like there’s no tomorrow even as inflation bites, and a lower 75% who will have to penny-pinch © Spotmatik/Dreamstime
Conventional economic theory holds that ageing is disinflationary. Older people and households typically consume less than younger ones, and they often downsize their homes to account for being empty nesters. Therefore, economic models typically factor in an increasing share of old and/or non-working people as being net negative for demand and thus disinflationary, as this long-term IMF study shows.
But we may be at an important pivot point in this theory, at least in some rich countries such as the US. Boomers are living much longer, and are increasingly unwilling to downsize. The coronavirus pandemic made those who are still working (and there are many, since today’s older people are healthier and also want to bolster their retirement savings with income) more likely to hang on to their large homes rather than make do in a one-floor apartment. They can certainly afford it, since they still control more than half the country’s wealth, and show little sign of wanting to pass it along to the next generation.
What’s more, they are spending more not only on healthcare, but also on other services. Research from the National Transfer Accounts project, which tracks consumption patterns across 40 countries, found that consumption not only doesn’t fall with age in places such as the US, Germany, France and Japan, but also that the young and old typically consume more than they earn as workers, which is inflationary.
Some of this involves debt spending and the wealth effect of higher asset prices over the past several decades. We may be leaving that era, perhaps for a long time, what with the Federal Reserve’s interest rate rises driving markets lower. But I still know plenty of older people who are living much larger than their millennial kids (who came of age in the post-financial crises era, and have paid for it with reduced salaries and expectations).
Indeed, there are venture capitalists, like the famous Alan Patricof, who are doubling down on older people who are part of a “silver tsunami” of consumers who will continue to spend in good markets and bad. Patricof, who is in his late eighties, is pouring millions into a venture fund that’s investing in health, wellness and financial services for older people.
I can see it both ways. I’m 52, but my husband, a writer, is 68. Having chosen creative ventures over a big salary, he’s ready to scale back as his income declines. I myself haven’t been able to put as much away for retirement as my Fidelity advisers say I should have, in part because I’ve had to save nearly $500,000 to send two children to college debt-free (how’s that for consumption?). I’ll be working forever, and spending less after the youngest leaves for college. My husband’s brother, on the other hand, is a retired corporate compensation lawyer who takes several fancy overseas trips a year, has three properties that need maintenance, and seems to have no shortage of energy or money for consumption.
I suspect that like most Americans, older people will be quite bifurcated in their consumption habits, with a top tier who will continue to spend like there’s no tomorrow even as inflation bites, and a lower 75 per cent who will, like my own parents in the inflationary 1970s, be penny-pinching. But the bigger problem is that as the proportion of the population able to work starts to shrink relative to those who are no longer productive, as will be the case as the boomers continue to retire, there will be more people competing to consume fewer goods and services. That means prices are likely to rise — as will political battles between boomers and millennials, both of who will want their share of a decreasing national economic pie.