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1 February 2013 CFA Institute Journal Review

Sponging Boomers: The Economic Legacy Left by the Baby Boomers Is Leading to a Battle between the Generations (Digest Summary)

  1. Thomas M. Arnold, CFA

In the past, the Baby Boomer generation has implemented favorable policies to take advantage of income generation. These policies will not benefit the generations that follow when the Baby Boomers unwind their positions and receive benefits during retirement.

What’s Inside?

By virtue of its size, the Baby Boomer generation experienced fantastic economic growth through a surge in the available workforce (including women) and increasing asset prices. As the Baby Boomers retire, receive retirement benefits—many of which they voted to create—and unwind their accumulated fortune from the previous decades through favorable tax policies, a large transfer from the state will be extracted.

How Is This Article Useful to Practitioners?

Practitioners can benefit from understanding how the Baby Boomer generation created favorable policies over time to benefit itself and how its considerable size will most likely keep such policies in place. Consequently, the next generations will most likely struggle to achieve the same sort of economic growth as the Baby Boomers.

As the Baby Boomers liquidate positions during retirement, asset prices will depreciate. When they extract benefits from the state during retirement, there will be a large wealth transfer from the state in terms of the benefits received versus contributions through taxation. Furthermore, the large amount of government debt that has accumulated, combined with these drags on future economic growth, will leave a very challenging set of circumstances for future generations to try to thrive in.

Understanding the situation of Baby Boomer investors versus that of investors in subsequent generations should help practitioners develop appropriate investment strategies.

Abstractor’s Viewpoint

It is interesting to me that the author points out that previous tax policy, as well as retirement and health care policy, may have been shaped by the Baby Boomer generation for its own benefit. It is not illogical to consider such a thing to be true, but making such a judgment does not really matter to the investment professional. What does matter is how the generations following the Baby Boomers adjust to the economic drag that may be extracted by the Baby Boomer generation. A growth solution does not seem to be an option, which makes other, less popular solutions more likely.

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