By Michael Milken
The Wall Street Journal
September 19, 2006
SANTA MONICA, Calif. -- On July 4, along with more than 9,000 other American post-war babies, I turned 60. Our generation, the 78 million American baby boomers born between 1946 and 1964, has had a profound social and economic impact around the world for more than half a century. As we start moving into our seventh decade, it's logical to ask what effect baby-boomer retirements will have on real estate and financial markets. The question is logical, but it puts the emphasis on the wrong side of the equation. The real future value of U.S. assets won't be determined by retirements, but by policy decisions on education, taxation, regulation, immigration, international investment and the environment.
Baby boomer asset liquidation isn't really a financial market issue because (1) there's plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they'll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) as baby boomers live longer and healthier, their new mantra will become "Who wants to retire?" and (5) most assets won't need to be sold.
I will examine each of these points.
1. Large parts of the developed world are awash in liquidity -- Japan has more than $10 trillion -- and we're also seeing a buildup in several countries with small populations. Norway, the UAE, Taiwan, Singapore and others each have hundreds of billions of dollars available for investment beyond the immediate needs of their citizens -- in some cases, as much as $50,000 per person. To put that in perspective, Hewitt Associates reports that the median amount in a U.S. 401(k) plan is just $27,100.
2. The "BRIC" nations -- Brazil, Russia, India and China -- will continue to grow faster than the U.S. and, with the U.S. and Japan, will become the world's major economic powers by mid-century. There are 600 million children in China and India whose future buying power will grow at least as fast as their rapidly improving educations. As the BRICs accumulate wealth, they will want to diversify their holdings globally. America stands to benefit as richly from that diversification as it did from European investment in the 19th century.
China and India combined to produce nearly half the world's economic output in 1820 compared to just 1.8% for the U.S. Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets.
3. Recent U.S. financial innovations -- including new markets for securitized mortgages and credit-card liabilities, collateralized loan and high-yield bond obligations, and financial derivatives -- helped to spread risk and created tens of millions of jobs by freeing up investment capital for growing businesses. As these financial technologies are deployed throughout the world, they will increase prosperity by multiplying the value of human capital, social capital and real assets. They have the potential to create as much as $50 trillion to $100 trillion in worldwide liquidity.
In the U.S., the value of home mortgages equals 95% of the nation's gross domestic product. The ratio is considerably lower in other countries: mortgages in Germany total about 69% of GDP; in Japan, it's 36%; and in Russia, less than 1%. A worldwide securitized mortgage market alone could free up some $20 trillion for productive investment by unlocking the unused capital in residential real estate.
4. More baby boomers are asking themselves, Why retire? It's a cliché to say that 60 is the new 40, but it has some biological and psychological validity. Advanced biomedical research is leading to continued progress against cancer, heart disease, arthritis, dementia and other conditions that forced people out of the workforce before they wanted to quit. In the future, aging workers will be healthier and will use broadband technology to live and work from anywhere at the increasing proportion of jobs that involve knowledge rather than physical labor. They'll spend more years earning income, often in multiple careers, instead of selling assets.
Fewer people will retire in their 60s simply because they know that average life expectancy at birth is increasing at an astounding rate. Americans, who could expect to live an average of 47 years in 1900, now enjoy life spans approaching 80 years. (It already exceeds 80 for women.) An American who makes it to age 65 can look forward to living almost two decades more. Worldwide, the increase has been even more dramatic. In a single century -- despite wars, AIDS and other scourges -- the global average more than doubled to 66 years. Nobel laureate Robert Fogel believes it will exceed 100 years within this century.
More than just the length of life, the number of healthy years will also increase. When people are vibrant into their 80s and 90s, 65 will evolve from the traditional retirement age to a mid-career milestone for those who choose to keep working. Who wants to retire when you have fulfilling work, when you earn a good income, and when you feel great? According to a Yahoo! poll, 70% of people over 55 say it's never too late to start a new business.
5. Many baby-boomer assets won't be liquidated. The Federal Reserve reports that the wealthiest 5% of American households own about 60% of the nation's assets. Ninety percent of all stock is owned by 10% of investors. Debate continues about how this concentration of wealth affects our society, but what seems irrefutable is that the owners of most wealth will have no urgent need to raise cash. A retiree with a $10 million net worth doesn't sell stocks to buy groceries or pay the mortgage. He can easily live on dividends and interest while preserving assets for his grandchildren or a favorite charity. And if wealthy retirees don't sell their assets, they won't put pressure on valuations. In the top 1% of households -- which own a third of U.S. assets -- net worth starts above $10 million and moves well into the billions. Rather than sell assets, these families endow non-profit institutions and give their wealth to foundations, which are growing in number and size.
If the top 5% of wealth holders won't be liquidating their 60% of U.S. assets, what about the remaining 40% of assets owned by 95% of the population? For most baby boomers, the biggest chunk of their net worth is the equity in their house. Many of these houses will be transferred to the next generation through inheritance. For those properties that will be sold, their future prices will be greatly influenced by policy decisions affecting social capital -- things like good schools, clean air, cultural attractions, reasonable regulations and safe streets. A community that ignores the quality of its schools will eventually see that neglect reflected in its real estate market.
The best way to assure the future value of American assets is to focus on succeeding in the worldwide competition for human capital. We have some excellent preschool programs and the world's best system of higher education; but we need to shore up our K-12 educational infrastructure -- especially in science -- to help the next generation compete on a world stage.
When I went to Wall Street in 1969, the major providers of investment capital had adopted regression analysis and concluded that the future would be much like the past. So they financed yesterday's industries. Today's predictions of a coming asset liquidation problem seem to make the same mistake of projecting the past into the future. There's one thing I can predict about the future with complete confidence: it won't be anything like the past. It never is. But as long as we maintain asset values by enhancing human and social capital, I believe the future of the baby boomers -- and their nest eggs -- is secure.
Mr. Milken is chairman of the Milken Institute. (This essay is the first in a two-part series on baby boomers, which concludes tomorrow with a contribution by Jeremy Siegel.)