MGI Research

US: From boom to bust?

| Report

Over the next two decades, demographic trends will create significant downward pressure on US household savings and net financial wealth accumulation, with potentially significant implications for economic growth in the US and globally. MGI analysis suggests that—absent changes in population trends, savings behavior, or returns on financial assets—the net financial wealth of US households will increase 1.6 percent annually between 2003 and 2024, a steep drop from the 3.8 percent per year rate between 1975 and 2003. By 2024, this slowing growth will cause financial wealth to fall some 37 percent, or $18.8 trillion, below what it would have been had the 1975 to 2003 growth rates persisted.

The US is now passing through an important demographic transition. Public discussion about the impact of this transition focuses primarily on how the aging population and, in particular, the imminent retirement of the sizable baby boomer generation, will lower national savings. This discussion often ignores additional important and potent demographic forces, including the behavioral differences in savings patterns between baby boomers and subsequent generations, the reduction in the birth rate, and the impact of the demographic transition already underway in many of the world's most important economies. To fully understand the implications of the demographic transition for net financial wealth accumulation, the impact of all these microeconomic forces must be considered and translated into results meaningful for the overall economy.

MGI found that the US is passing through an important inflection point. In the past, aging of the baby boomers supported wealth accumulation as they moved through their peak income and saving years, but was overwhelmed by strong behavioral trends to save less. In the next 20 years, however, the baby boomers will enter retirement and will reinforce these behavioral trends to create a significant financial "headwind:” baby boomers will save less, younger generations will continue to save less, and birth rates will slow. The resulting decline in the growth rate of financial wealth accumulation means there will be less household savings to support a fast-growing retiree population and it will become more difficult to support domestic investment and sustain strong economic growth.

If the US is to navigate smoothly through this demographic transition, US households and their government will need to take actions to increase saving, reduce borrowing, and work to further improve the returns that households obtain on their portfolios.