Australian Retirement Crisis: Impact Of Demographics On Consumption
In providing financial advice for over 30 years to those approaching retirement age in Australia, rarely have I seen a statement from a Federal Treasurer that is so damning on the future economic prospects of Australia than when the cost of supporting an ageing population was exclaimed to be a ticking “time bomb”.
In the same presentation, the Treasurer stated that he “wants to help older people retrain their skills to potentially stay in the workforce longer, to boost participation and productivity”.
I wrote in When the Music Stops here that:
Many Boomers that I speak to who are approaching retirement age in Australia don’t have enough savings or superannuation to see them through retirement, which means that they have continued to work past the traditional retirement age of 65. But eventually, when they do retire, they’ll place a massive burden on Australia’s financial system.
Workforce participation among over-65s has increased from 12.3 per cent to 14.6 per cent in the past five years. This is all determined by demographics. And, with around three million of Australia’s Baby Boomers (‘Boomers’) passing retirement age over the next ten years, we should see the workforce participation rate for over-65s increase even further.
What happens to spending rates?
This is a worrying aspect for the Australian economy and the Federal Budget, but from a financial adviser’s viewpoint, what is even more worrisome from our demographic shift is what will happen to spending rates.
The spending rate, or the personal consumption rate, basically follows age groups. We all think we are individuals, but our age group spends in a predictable pattern, give or take the parameters of which we earn, and some of the other behavioural aspects.
A vital ingredient when providing financial advice is analysing clients’ spending. And from my observations, it is reasonably evident that as we get older, we tend to consume less, because we bought most of the things we needed for our house, for example, when we were at our peak earning capacity. Clients of our practice who are Boomers and still working tend to buy a few more luxuries and spend a bit more on groceries than clients who are already retired.
I wrote in The Generation of Boomers here that:
As the Boomer generation retires, they are changing their spending patterns. No longer are they buying the big-ticket items – like new furniture, or a new car every three years – they are usually comfortable in their family home and have a car that they will only update every decade or so. Over a five year plus timeframe they will be spending say 60% less than they used to spend. Multiplied across the entire Boomer population and there is a dramatic economic effect, with low GDP and ever-lowering interest rates.
Consider the Velocity of Money
The other problem our economy may increasingly face with this demographic phenomenon is with the velocity of money. As I’ve experienced as a financial adviser in Australia specifically, the older Boomers get, the more they save, and the less they spend. At the end of the day, the money doesn’t go around the system. They’re not spending as much or updating things.
So, in a world where there is such a significant demographic shift, consumption and the velocity of money are basically a function of each other. Our central bank can take interest rates as low as they like, but it will have the unintended consequences of reducing consumption and the velocity of money.
This ongoing reduction in personal consumption of the retiring Boomers may well unwind the great economic boom of the last 30 or 40 years, where consumption peaked at 59% of the Australian economy. Consumption as a percentage of our economy is now 56%, and over coming decades it may continue to shrink as a percentage of the economy.
Boomer retirement age in Australia: What’s the solution to falling consumption?
Well, from a financial adviser viewpoint, to halt falling consumption, the central bank and the federal government will have to burden the millennial generation with enormous amounts of debt to drive consumption up.
But millennials won’t want to do that as they’re already saddled with property prices that are out of reach. From providing financial advice to millennials, I can also say that they are unlikely to earn enough to carry the burden and at the same time, offset the same amount of wealth as their parents. There is a mismatch here, so we can’t expect the millennials or any future generation to save the day.
Are you approaching retirement age in Australia?
If you are a Boomer and are concerned about your retirement, see our Retirement Roadmap advice package, and/or contact us for financial advice in Australia to ensure that you get to where you need to be at retirement.