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I want the Canadian rights to the "Old Guys Rule" business model.

I saw an "Old Guys Rule" T-shirt on an old guy in Chelsea (Quebec, not England) yesterday! I had never heard of it before.

This story is MASSIVE. It's big, and global. It's a mixture of age and income. People used to work until they died. Now they retire. So they want to save. Plus, there are relatively fewer young borrowers to middle-aged savers. This is much bigger than all the stuff I blog about. It's one of those things I think about and worry about but don't blog about. Because I don't have anything interesting to say. Other than: "This is BIG!".


Interesting sign in chalk above.

I wonder if this crop of old guys is going to be the last to retire en-masse and we're going to see a return to dying in harness? Trends in real wages and savings (esp in the US!) being what they are ...

Question for the macro guys: how do you stabilize an economy that wants to/needs to shrink because of population loss/die off?

Patrick: "we're going to see a return to dying in harness?" - and if old guys are less productive or in other ways less able than younger people, what will an economy where old guys rule look like?

Nick: "this is BIG" - incomprehensibly so. I find it easier to get my mind around specific implications of population aging - family parties two or three times as many grandparents as grandchildren, for example.

Incomprehensibly big, and - as demographics go - blindingly fast.

It's already the case, at least in the US, that retirement is becoming less common. (I've argued for some time that *mass* retirement was really something that lasted only about 50 years--from the immediate post-WWII period to about 1995.) For example, the labor force participation rate of those 55 years of age and older in the US fell from 43.3% in 1948 (when the CPS began) to 29.4% in 1993. It has since recovered to 40.2% in 2011, roughly the same level as in 1960. (The employment-population ratio fell from 42% in 1948 to 28.1% in 1993, and has since recovered to 37.6% in 2011, roughly its 1970 level.) I expect this increase in the labor force participation (and employment) of older people to continue, partly as a result of imporved health and increased longevity, and partly because of changes in retirement income provision, from defined benefit plans to defined contribution (i.e., "you're on your own--make your own investment decisions, and the best of luck to you") systems.

Patrick: "Question for the macro guys: how do you stabilize an economy that wants to/needs to shrink because of population loss/die off?"

Three (contradictory) answers:

1. No problem, as long as it takes a year or two to happen, or you have the demographic data and retirement projections to see it coming. Monetary policy just tightens or loosens whatever to keep inflation on target.

2. A problem, but manageable, with reasonable foresight and forward planning. Fiscal policy needs to make an accurate long term projection of revenues and expenditures so that in 20 years we don't look back and really wish we had tightened or loosened 20 years ago.

3. Potentially a massive problem, and it is next to impossible to predict how the whole financial system and saving/investment will cope with this unprecedented change. We will be flying blind using totally inadequate theoretical models without any past experience to guide us and tell us if those models are totally out to lunch. The whole financial sector will need to get massively bigger. When you talk about a "savings glut" you ain't seen nothing yet. Will real interest rates on safe assets go permanently negative? Will some asset prices try to go to infinity? The recent financial crisis was just the first installment of a new story. (My occasional random posts on "Trill perpetuities" and "does the economy need a bubble" etc. are pathetic attempts to try to get my head around stuff like this.)

Nick, the question I have for you is - given that consumption needs vary over the lifecycle (young people buy houses and stuff, middle aged people have houses full of stuff and don't want any more), how does the NGDP target vary with the demographic composition of the population?

Frances: It doesn't. That's (probably) a feature, not a bug. You get higher inflation when GDP is dropping, which is when equilibrium real interest rates will probably be lower, which is when you want higher expected inflation to keep clear of the Zero Lower Bound.

Nick, to maintain a steady "standard of living", I need lots of income when my kids are young and I'm trying to buy a house, relatively less after they've left home and my house is full of stuff, and then more again when I'm old and need health care. So from an individual perspective, it would make sense to have a high "domestic product" in one's 20s, 30s, and 40s, a lower "domestic product" in one's 50s and 60s, etc. Since the aggregate "domestic product" target is presumably just the sum of the individual domestic product targets, wouldn't it make sense to vary the target with the demographic composition of the country?

In other words, stop fretting about the fact that econ growth goes in the tank when the population ages, people don't need any more stuff anyways.

Frances: but we would be targeting *Nominal*, not *Real*, GDP. So the price level would rise or fall as (potential/Long Run equilibrium) real GDP fell or rose with demographics.

Nick: "So the price level would rise or fall" Isn't deflation - or higher than expected inflation - a bad thing?

Frances, Nick,

At a spry 47, I already have too much stuff (no kids - makes it easy). But I've always kinda figured that my spending wouldn't so much decrease as shift to services (like doctors and spas and casinos) and to a higher quality of consumables (like the unusually good bottle of wine I bought today to compensate for buying my first pair of reading glasses - oh wait, that's stuff. I guess I'm no quite done on that front.). Is it necessarily the case that old folks stop spending? Or is it a matter of scale?

Jeff, ultimately, it's an empirical question. There's something called the "retirement consumption puzzle": people don't seem to smooth consumption over their life-cycle, as econ theory would predict, but rather their consumption drops sharply once they retire. I could probably come up with some kind of evolutionary story that links spending (even on spas and casinos) to sexual reproduction, but other people could come up with other stories.

Frances Woolley: "what will an economy where old guys rule look like?"

Tokugawa Japan? The traditional retirement age in Japan is 50.

Frances: Good luck with that getting the kids out of the house by your 50's and 60's thing.

Boy, I sure do hate it when mere facts force me to rethink. I guess I'd sort of heard of the "retirement consumption puzzle". To this non-economist, it sounds like a "macro" observation with an interesting, but understudied "micro" story behind it.

I can imagine, now that my brain is engaged, that folks who rely on Social Security for most of their retirement income would cut back on spending. And that could seriously tip the scales.

Can you suggest a treatment of the subject (with a good summary) for the uninitiated? The Google points me to separate articles by Hurd, Lundberg and Haider, but I have to write more software on Monday and can't give away too many of my brain cells this weekend. Reading a paper is one thing. Analyzing three to determine which makes most sense sounds really hard.

Wikipedia is unfamiliar with the concept. That pretty much exhausts my Web search skills.

Jeff, I'll file that in my "things I should write about" folder. Right now I'm up to my eyeballs in course outlines, papers that need to be done by the end of the summer, etc., so I'll be limiting myself to posts that are useful for my students, or ones that I feel I really *have* to write.

My own view? I think it's best explained by loss aversion - people *hate* running down their savings. Given a choice between taking money out of savings, or doing without, a lot of people will do without. (Note the asymmetry here - people aren't prepared to sacrifice present consumption to acquire savings - this is a form of status quo bias). That's (to my mind) a pretty obvious explanation, but I don't know of anyone who's written it up.

Thanks, Frances. Your explanation has the ring of truth, certainly. I can't count the number of times my Mom insisted, even as she was getting more and more ill toward the end of here life, "never spend the principle". And I think perhaps this factors into my own planning more than I necessarily care to admit, even to myself. I may not be a parent, but I am an uncle.

I browsed the abstracts of the three papers Google puts at the top of the list. I've forgotten how to make a bibliography, but in informal notation, here's a summary:

Hurd & Rohwedder (2004): decreases in consumption appear to be fully anticipated by retirees, contrary to consumption smoothing model, and relate to decreased work expenses and increased home production

Lundberg, Startz & Stillman (2001): food consumption data show 8% decrease upon retirement of married males, not so much for singles, women. Supports a model of marital bargaining where women live longer and men get less decision making power when they aren't bringing home the bacon.

Haider (2003/2005): the decline isn't actually all that big for people who retire when they expect to.

And I'll toss in one more, which looks to be an expansion on the first one above. I'll just quote the last sentence of the abstract.

Hurd & Rohwedder (2008): "We conclude that at the population level there is no retirement consumption puzzle in our data, and that in subpopulations where there were substantial declines, conventional economic theory can provide the main explanation."

Hey, that was kinda fun.

Following Jeff,

let me throw in Modigliani's "Life Cycle Hypothesis/Model" and as a suitable/accesible reference his nobel price lecture 1985 http://www.nobelprize.org/nobel_prizes/economics/laureates/1985/modigliani-lecture.html
(some of his older stuff is difficult to get to, outside a really big, old, anglo university)


Axel Boersche-Supan International Comparison of household savings behaviors: The German Puzzle

(why generous German Social Security actually let to lower savings and Capital/production ratios :-)

Frances, I think I remember a paper, (from a woman in Portugal/Ireland ?), linked by you, which describes stalling productivity levels in GIPSI states and eastern Germany. I dont find it. Do you still have it current ?

I am going to go out on a limb here, and say that in North America, this demographic shift is a lot less important than people believe.

For me, the big shift is in inequality. As far as the economy is concerned, it is one dollar-one vote, not one person-one vote, so why do we look at demographics, instead of wealth-weighted demographics, or at least income-weighted demographics?

Wealthy families tend to have fewer children than poor families, so a drop in inequality is going to be similar to a baby-boom and vice versa. Therefore it is easy for us to manufacture an economic baby boom even if the underlying demographics are different.

rsj for Fed Chairman!

rsj - that's a really interesting observation. It makes me think about some of the posts Nick and Stephen have written about demographics and saving, which then connects to some of the old arguments people like John A Hobson made about imperialism, which (if I can remember drunken grad school conversations) was something along the lines of income inequality leads to under consumption leads to imperialism...

genauer - I don't usually post on productivity - perhaps use the search?

Donald Coffin:

Your argument is a non-sequitur. The DB Pension provision model, aside from other issues, drastically underestimated the improvement in longevity we have seen. It is unclear who should get the benefit of longevity improvement in a DB pension model, the employer or the individual. By default it has been the individual though "target benefit plans" make the difference negotiable. It is also unclear why it is a bad thing that if a person is healthy at 67, they cannot continue to work.

from defined benefit plans to defined contribution (i.e., "you're on your own--make your own investment decisions, and the best of luck to you") systems.

The real problem with DB pensions is the longevity risk. With a DB pension, you are asking every sponsor to become a life annuity provider, in other words a life insurer. This, on its face, is terrible planning and most corporations are simply unfit for this kind of risk. Put this way it is very clear why DB plans have detonated the balance sheets of many sponsors and others find the risk unacceptable.

The true mistake we have made made in Canada, the US and the UK is not making making pension provision into am independent fifth pillar of the financial system. Life Insurers through annuity contracts would have been a better choice for pension provision, not least of which because they offer larger pools and better actuarial support. Company-based pension sponsorship should never have been used as a widespread model.

The history of DB pensions outside of government is actually very short, there were very few plans before 1945, a boom from 1950 to 1975, and steady shrinkage thereafter.

I'd say when you elect AGW deniers and neocons into majority government, when your Minister of health for your fastest growing demographic (Indians) says diabetes and obesity rates are caused by a lack of seal blubber/revenue, instead of claiming nutrition is Provincial jurisdiction...it is time for intelligent people to wirte off the country. Mulcair probably choked to death on a chicken sandwich and won't realize it till after the next election.

Just like the Americans bombed mixed economies the 2nd 1/2 of 20th century, bombed often superior economic models, we ceased to do things like encourage AB to manufacture green hydrocarbon-based products. So now that we've deadended ourselves (which means plateaus given resources), why don't the elderley just move to AB?!

The aging population may be coming of 'age' (no pun intended!) and are on the increase, but they are also probably the most affluent group around. The 'Old Guys Rule' shop may be onto a winner of a demographic there.

That store is sooo cool. I live in London but next time I'm up north, I'll make a point of checking it out.

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