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America is sitting on a demographic time bomb. Their economy boomed thanks to the “baby boomers” that brought prosperity to the nation. However, they have got old and now is the time for them to retire and be replaced by a younger generation. The problem is that the number of people retiring is far more than the number of people coming into the workforce to replace them.
As a result, the burden on new employees is much higher as compared to the baby boomers. These new employees will help fund a failing social security and entitlement program which many have been calling a “Ponzi scheme”.
However, this is not the only bad news facing the millennials. They are likely to be facing a stock market crash of epic proportions. This crash will not be a market anomaly. Instead, it will be the result of foolish policies implemented by the government. This crash is not something which will catch the market unexpected. Instead, it is predictable and likely to last over a long period.
This crash will be caused by the Employee Retirement and Income Security Act (ERISA). In this article, we will understand what ERISA is and how it is likely to bring about a crash.
The ERISA act is a government law that was passed in 1974. This law allowed people to save taxes on their income today if they invested the money in the stock market. Hence people were given the option to invest with pre-tax dollars and make a return on the larger amount. However, the government was not going to forego their taxes. The government still believes that the taxes are owed to them. They will collect these taxes when the assets are finally sold. It is for this reason that the government believes that it has the right to ask people to sell their assets and pay the government what is due.
The ERISA act, therefore, has a provision that can allow the government to force the shareholders to sell their assets when they are 70 years of age. They do not have to sell all the assets instantaneously since that would lead to a mega crash. However, all the assets have to be sold off within a 15 year period. Sellers can choose to sell their assets in one go or small chunks over a larger period. However, all the assets owned by baby boomers in their retirement accounts will eventually hit the market during this period.
Demographics play a very important role in the stock market of any nation. This is because demographics are the driving force behind factors like risk appetite, investment horizon, expected rate of return, etc.
The ERISA act is going to amplify the demographic problem of the United States. At first, the ERISA act has incentivized baby boomers to put inordinate amounts of money in the stock markets. This has continued for 35 years and has resulted in large portfolios owned by this generation. Now, the ERISA act does not give a choice to baby boomers to pass on the investments to the next generation. They have mandated the selling of these stocks in a 15 year period. The result if going to be that very few people will be buying whereas large amounts of people will be selling.
The newer generation will have to bear with higher deductions from their salaries to support the unfunded liabilities picked up by the government. They are unlikely to have money to turn the tide when the baby boomers start selling. It is estimated that for every 5 sellers, there is going to be only 1 buyer in the market. This will end in a massive downward push on the market and will cause a crash bigger than the world has ever seen. The most surprising part about this entire story will be the fact that the marketplace will not cause the entire boom and bust cycle. Instead, it will be caused by faulty government planning and implementation of foolish policies.
This crash is likely to cause major disruptions in the lives of people like the Great Recession did. The majority of people in America are living paycheck to paycheck. They do not have any savings apart from the ones they put in their 401k’s and Roth IRA’s. This stock market crash will have a double whammy effect on the people. Firstly, it will lead to a contraction of the economy. This means that a large number of people are going to be out of work. Not only will they be out of work but their savings will also be wiped out! The losses are going to be catastrophic.
The ERISA act is likely to have implications outside the United States as well. Many US investors have their money invested in emerging markets. They have invested either directly or through the use of mutual funds. Regardless of the investment vehicle being used, they will pull out their funds from these markets once the stocks begin to collapse. This will lead to a downward spiral and a crisis of confidence that could lead to significant damage to the economy.
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