Because so much of the US economy is driven by consumer spending, the retirement of baby boomers will have a drastic effect on economic growth, writes Robert Hsu, editor of China Strategy.

This year marks the beginning of a new era, as the oldest of the 70 million US baby boomers born between 1946 and 1964 reach the traditional retirement age of 65. The baby boomers are the largest and richest demographic group ever, controlling roughly 70% of the aggregate wealth in the US.

Even though many Americans are staying healthy and productive longer, there will still be an unprecedented number of US workers entering retirement during the next 18 years, and not nearly enough people entering the workforce to replace them.

According to research from the United Nations, by 2030 there will be three workers for every retiree in the US economy, down from five workers just a few years ago.

This ongoing development has significant implications for stock-market investors, and it is important to take a step back and make sure that we are aware of the macro trends that will affect our investments in the months and years to come. Let's take a look…

As the most prosperous demographic group in world history, US boomers make major impacts when they act together:

  • When they invested in stocks for retirement, their funds fueled the US bull market of the 1980s and 1990s
  • When they reached peak spending years, domestic consumption made up two-thirds of US economic growth
  • And now that they start to retire, what will happen when sell stocks to finance their retirement and cut back on spending?

Considering that more than 70% of the US economy is driven by domestic consumption, with tens of millions of Americans set to retire over the next 18 years, I think that the US will likely enter a prolonged period of slower economic growth.

This is because the demographic group born in the late 1960s and 70s that followed the boomers, widely known as Generation X, simply does not have enough people or resources to fill the shoes left by retiring boomers. The roughly 35 million US "X-ers" between their early 30s and late 40s numbers only half as many as the generation before.

As a member of the Generation X demographic myself, I see that many of my peers are not as financially secure as the previous generation. Although some X-ers prospered by entering booming industries, such as the Internet and hedge funds, the majority of Americans in their 30s and early 40s are in much worse financial shape than the boomers.

As a result, both in sheer numbers and purchasing power, the US X-ers simply won't be able to fill the consumption gap left by retiring boomers.

Although I actually think the US stock market will do relatively well in 2011, because of the Fed's aggressive monetary stimulus to re-inflate financial markets, the likely slowdown in consumption and liquidity caused by retiring baby boomers will limit the upside for US stocks—similar to what we have seen in Japan and other developed East Asian countries.

Subscribe to China Strategy here...

Related Reading: