The Dilemmas Of An Aging Population

We all know how the Baby Boomers Generation those people born post WW2 1956-1964) have affected everything they touch as they have moved up the age pyramid (the pig in the python!) creating markets for products that previously didn’t exist and bringing much wealth to the smart marketers and service providers who could read the trends.
They have been and continue to be one of the most selfish, consuming, and hedonistic generations (sex, drugs and rock n roll babee!) known to modern civilization but they have earned great wealth and continue on into early retirement with a desire travel and pursue lifestyle options that previous generations of retirees either didn’t consider or could only dream of. Wikipedia talks about the assumption of lifelong prosperity and entitlement developed during their childhood in the 1950s by the baby Boomer generation. Even the Baby Boomers who cannot afford to widely travel or own beach front real estate are now funding their lifestyle goals at the expense of following generations. The acronym SKI (Spend Kids Inheritance eg. we are going on a SKI holiday) is one example of a word coined to try and describe the thinking behind baby boomers who are only moderately wealthy spending cash going on walking trips through the South of France or renting villas in Tuscany for the NZ winter.
There are huge opportunities to capitalize on the Baby Boomer retirement years for the providers of such things as independent retirement accommodation (own Ryman Healthcare shares yet?), health and wellness providers (we have woman only gyms, what about gyms only for people over 55), gourmet travel companies, and reverse mortgage lenders (lifestyle loans!).
But what about the kids and grandkids of the Baby Boomers?
As a Generation X-er, I have watched my parents and in laws and the Baby Boomer parents of many of my friends and acquaintances flee the family home when the nest finally empties to travel abroad and live a lifestyle that they wanted when they were younger but couldn’t afford it. A slight feeling of abandonment is normal for the people of my generation who are now in the middle of child raising. Where are grandma and grandpa? Living near the ocean or a lake somewhere well away from the location of the original nest or currently on an extended holiday learning to cook seafood pasta somewhere near the Amalfi Coast in Italy.
I talk about the Baby Boomers this way because we are fast moving to a time in their life cycle where they will be expecting a payback for the years that they have paid taxes. And they will take what they are owed! Fair enough I say! But the problem is the large amount of the population who are beginning to enter this time in their lives and the length of time that they will spend in this phase. Modern medicine has ensured that life expectancies are pushing upwards.
I have read recent articles in the news media suggesting that currently there is one retiree in every four people, but this will change quickly over the next 10-15 years to be almost one in two. At least one person depending on a handout for every person paying tax.
The options available to the government are limited but obvious. Here is a checklist:-
1) Put off making some very hard and unpopular calls by encouraging individuals to save for their retirement and hope they save enough to cover themselves for the possibly 30 years of retirement. You have to be a little naive to think that paying into a Kiwisaver account giving you a return that is a smidge over the rate of inflation is going to provide you with a lovely wealth cushion to rest back on when you are 70 but it is better than nothing right!??
2) Save money by lifting the retirement age. We have gone from 60 to 65 and I read with interest an article a few weeks ago talking about lifting the retirement age to 67. A retirement age of 70 is on the horizon! TICK!
3) Increase taxation rates and move further towards user pays. Unpopular but inevitable. This will be put off as long as possible or at least until the economy is back on track and recovered from the global credit crisis. Watch for the shift from income tax to user pays taxes such as GST. The carrot of lowering income taxes in order to raise GST will happen and will further disadvantage future generations to pay for the baby boomer’s retirement. Higher GST will decrease the tax advantages of owning rental property.
4) Introduce asset taxes! YEP I firmly believe that this is on the horizon as the only possible way to fund the Retired Generation without lifting taxes to such an onerous level that every wage earner leaves NZ and we are left with an empty grey haired nation with retirement cities full of golf carts and wheel chair access pathways. This is a last resort because it will be very unpopular, but I can’t see how else the cost of the Baby Boomers retiring can be funded. Estate or inheritance taxes (which are currently zero rated) will slowly be lifted. Ever wonder why there is a limit on tax free gifting in NZ, it is so the government can catch people in the asset tax net before they can gift their estates completely to their loved ones or lock it up easily and quickly in trusts. It will all make sense when the move is made to lift the asset tax rate from 0% to say 10%.
What is the answer for generation X-ers who will be paying for the retirees and who also be caught in this asset trap?
Save your own money for retirement and start now!
Look to capitalize on the taxation benefits of owning rental properties to help keep more of your hard earned money in your pocket ( concentrate on buying two bedroom single level brick units near shopping centres, you know there will be a ready market for these homes when you come to sell with all the retirees around!).
The more wealth you have, the less you will have to rely on a government barrel that has been emptied out by the generation above you, but lock up your wealth in a Trust or Company so that your children don’t get a nasty surprise with a tax bill on your death.
Encourage your parents to start gifting their wealth into a separate legal entity or directly to you if you have that level of trust in your family and do this now especially if you have both parents alive still – gifting at $56k a year is much quicker than $28k!!
Inspired by a great writer at his blog