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Low Western pensions will change demand patterns

Chemical companies, Consumer demand, Economic growth, Financial Events, Pension funds
By Paul Hodges on 24-Sep-2011

Pension fund Sept11.pngNext week, the blog publishes Chapter 5 of its ‘Boom, Gloom and the New Normal’ eBook, co-authored with John Richardson. This looks in detail at the major changes taking place in demand patterns as the BabyBoomers (those born between 1956-70) enter the 55+ age group.

This cohort already includes 272 million people, 29% of the Western population, and it is growing every day.

The book argues that the over-55s simply do not need to buy new houses, or extend their present homes. Equally, they no longer want to buy new autos every few years. So it is hard to imagine that these key sources of chemical and polymer demand can recover to earlier SuperCycle levels.

Stimulus programmes and tax cuts cannot force people to buy things that they no longer need or want.

This seems plain common sense. But our discussions with central bankers and policymakers over the past few months have made it clear that this is not a consensus view, as the blog discussed recently.

Equally, the chapter highlights the very real financial problems facing the over-55s as they reach pension age. The chart above gives an example of the mountain that has to be climbed.

It is based on official US earnings statistics, starting from 1979. Over the period to the end of 2010, a worker on median wages would have earned a total of $811,096, and have a pension fund of $242k by the end of 2010 (purple line), based on the assumptions that they:

• Earned median wages from 1979 – 2010 (blue line)
• Saved a regular 10% of this income (red line), a total of $81110
• Achieved the average S&P 500 Index growth as a return on their investment each year.

This employee would have earned $39k in 2010 on median earnings. Yet their pension fund would provide an annual pension of only ~$10k/year, with inflation proofing.

Of course, no one chart can cover all circumstances. Some people will have managed to save more, and will have been more successful with their investments. But saving 10% of income each year is a stiff target. And US earnings are generally higher than elsewhere in the West.

Clearly a pension of $10k/year will not fund the prosperous retirement that most people are expecting. In turn, it provides another reason why chemical companies should assume that demand patterns will change in the West, as we transition to the New Normal.