Baby Boomers have pumped up the global economy with their profligate ways for nearly two decades. It's been a great party. Now the music's over.
Generalizations about the 79 million people born between 1946 and 1964 are overdone and easy to debunk. Boomers went to Woodstock, voted for George McGovern and, so the thinking goes, cared deeply about the Rolling Stones. Boomers also helped put Ronald Reagan and fellow Boomer George W. Bush in the White House and turned Nashville into a cultural capital.
But what Baby Boomers of all persuasions have done, without dispute and to an unprecedented degree, is spend money instead of saving it. During the 1990s, Baby Boomers accounted for about half of all consumer spending in the United States, according to a recent McKinsey Global Institute study.
Affluent Boomers had more to spend than most of their Depression-baby parents could have dreamed. Their appetites buoyed sales of everything from Bavarian sedans to Sumatran coffee to Swedish furniture. Boomers could make or break a brand. Boomers embraced Toyota, and helped make it the world's dominant car maker. They shunned Oldsmobile, and it died. Boomers have driven the explosive growth of the computer and consumer electronics industries, accounting for half the money spent on techno-gadgets, big-screen televisions, laptops and the like, according to McKinsey.
When Boomers ran out of cash, they financed their dreams. The U.S. household saving rate plunged to 2 percent of income in the 2000-2005 period, when Boomers were hitting their earning peak, from 10 percent during the early 1980s. Imposing McMansions sheltered occupants with five-figure credit card balances, exotic balloon mortgages and V-8 powered sport utility vehicles financed over five and six years, all adjuncts to a lifestyle that depended on cheap credit and cheap oil.
Now, millions of Boomers are realizing that "hope I die before I get old" was just a sarcastic line in a rock and roll song, not a life plan.
Baby Boomers are rounding into the final laps of their careers largely untested and unprepared for what could be the worst economic crisis in their lifetimes. The sluggish 1970s and early 1980s overshadowed the college years and early work lives of the bulk of the Boom generation. But with a few mild hiccups, it's been easy riding since then.
Until now. Some economists and demographers say the Baby Boomers themselves are driving the current turmoil. As Boomers send their kids out into the world, they are entering the phase of life when income starts to fall, spending slows and houses get sold. The same generational heft that Boomers used to create fads for hula hoops, sport utility vehicles and Harleys will now work against them as all of them rush to cash out and slow down at once. That puts more houses up for sale to far fewer buyers: a younger generation that is also less able to afford them.
"The generational crash is when there are too many older homeowners and not enough buyers," says Dowell Myers, a University of Southern California professor.
"This is like winter coming," adds Harry S. Dent, an author and consultant who says the United States is headed for a slump that will last until 2020. It will take that long for the financial wreckage from this boom-bust cycle to be cleared away, he says, and for the 79.4 million strong "Millennial Generation" -- most of whom are still in high school or college -- to enter adulthood and start buying homes, cars and gadgets of their own. "It happens once every 80 years," Dent says of this sort of demographics-driven economic cycle. "It's going to be difficult."
But even if these pessimistic views prove overdone, the U.S. economy will need to find a way to grow without relying on Boomers spending their last dimes. Companies that depend on Boomers are hunkering down for the short term and re-evaluating what it will take to succeed long term.
"Our research is telling us ... they need a good argument on why the purchase of a luxury good is a rational decision," says Jack Pitney, vice president of marketing and product development for BMW AG's U.S. arm. BMW's response: Emphasize the virtues of a free-maintenance offer on new cars, or the safety features on its SUVs.
Economists and demographers say Boomers will need to replace some $2 trillion of wealth lost in retirement funds during the recent stock meltdown, plus the billions in home equity that have vanished in the housing crash. Government policy makers will have to figure out how to provide for a huge cohort of people who could live well into their 80s. That task is rendered more complicated by the likelihood that proposals to privatize Social Security or enforce more saving in stock funds are nonstarters, at least until the memories of the past six months fade.
Without the financial magic that inflated the now-burst credit bubble, the options are old-fashioned.
Olivia Mitchell, a professor at the Wharton business school and a former member of a bipartisan commission established by President Bush to study possible reforms of the Social Security system, says the market crash should be a wake-up call for Boomers to "understand risk better," starting with the risk that they may live way past 64.
"The Baby Boomers are going to have to work longer and eat less," Mitchell says. "And go back to what my mother was doing -- saving string."