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Jay

As the Baby Boomers continue to enter retirement, the U.S. faces one of the most dramatic demographic shifts in its history. The baby boom ran from 1946 to 1960, during which time the fertility rate in the United States was nearly twice its 20th century average. Because a high proportion -- slightly under a quarter -- of the current population was born in that period, their age has a strong influence on the average of the population. Thus the U.S. is, on average, growing older because of the baby boomers. This shift has strong implications for factors that depend on the age distribution of the population, like per-person productivity, health care costs, the savings rate, and social security funding.

Who Benefits from an Aging Population

For all its difficulties, the Boomers’ retirement will have very definite benefits for some aspects of the U.S. economy. On the whole, the leisure, health care, and financial industries are likely to benefit most.

• Carnival Cruise Lines (CCL) and Royal Caribbean Cruises (RCL) stand to benefit from an increase in senior traffic, as both derive a large percentage of their income from passengers over 55. Royal Caribbean in particular has more than doubled its market capitalization in the last five years, and may continue to benefit as more seniors gravitate toward warmer-weather vacations. Retirement means more time to one’s self, and for many Boomers, that means time to travel. This is the generation of Woodstock and Timothy Leary; they have an expansive worldview and enjoy extending their horizons.

• Merck (MRK) and Pfizer (PFE) are pharmaceutical giants that will almost certainly benefit as seniors require more prescriptions and Medicare coverage is expanded. Advanced Medical Optics (EYE), which manufactures products for cataract surgery, laser vision correction, and contact lens care, stands to benefit as well.

• Walgreen Company (WAG), Rite Aid (RAD), CVS (CVS) are retail drugstores where senior citizens purchase their drugs.

• NBTY (NTY), Leiner Health Products, and Nature's Sunshine Products (NATR) are nutritional supplements manufacturers. As an increasing number of senior citizens consume more healthcare dollars, many of these elderly consumers will also consume more preventive medicines, including the dietary supplements.

• AmerisourceBergen Corporation (Holding Co) (ABC), Cardinal Health (CAH), and McKesson (MCK) are wholesalers who distribute branded and generic drugs to pharmacies, where senior citizens purchase their drugs.

• Affordable Residential Communities (ARC), which manages more than 350 senior living communities nationwide, has seen solid appreciation over the last five years as analysts anticipate strong growth in demand for senior housing.

• Brookdale Senior Living (BKD) offers senior living facilities which cater to independent and assisted living seniors. They also have been selected to assist in many elderly housing expansion projects.

• Merrill Lynch (MER), Charles Schwab (SCHW), Principal Financial Group (PFG), and MetLife (MET), all of which have invested substantial resources in developing their retirement services, will likely reap large rewards as retirement assets under management grow over the next decade. For many Boomers, retirement will require specialized financial planning as life expectancies expand and estate planning becomes more complex.

• BlackRock (BLK), Goldman Sachs Group (GS), and Lehman Brothers Fin SA (LEH) all manage pension funds for large institutional investors and will likely benefit as companies are forced to commit more capital toward funding their pension obligations.

• Stryker (SYK) offers surgical drills, saws, rasps and even cement mixers. Orthopaedic Implants segment manufactures replacement joints, spinal rods, screws, as well as many other implants. Stryker also offers rehabilitation services in over 31 states. Zimmer Holdings (ZMH) offers similar services.

• Stericycle collects and disposes of medical waste. An aging population uses more medical services than a younger population and consequently produces more medical waste for companies like Stericycle.

Impact on Medicare and Social Security

Most immediately, the Boomers will begin to draw government benefits such as Social Security and Medicare. Both entitlement programs will be exceedingly costly. In 2006, Social Security cost U.S. taxpayers about 4.2% of GDP, or approximately $554 billion. This figure is expected to increase to 6.2% of GDP by 2030, and to continue rising.

Meanwhile, the potential long-term costs of Medicare are even more severe. Currently, Medicare costs U.S. taxpayers about $230 billion per year, or 3.1% of GDP. However, these figures are expected to rise dramatically over the next 20 years as more Boomers pass age 75. In fact, government analysts estimate that by 2018, Medicare will have surpassed Social Security in terms of its annual cost.

Given these figures, the Social Security and Medicare Boards of Trustees stated in their 2007 Annual Report that, “…currently projected long-run growth rates [for the programs] are not sustainable under current financing arrangements.” Translation: Either long-term-benefits must decrease, or taxes must increase if benefits are to continue at their current levels.

Dependence on Foreign Countries

This quandary poses several difficulties for the U.S. government and for taxpayers. If current budget deficit levels persist, the federal government will be forced to pay for Social Security and Medicare by issuing new debt in the form of U.S. Treasury bonds. While this may lend long-term support to the price of the U.S. dollar, it will also allow foreign buyers—mostly Chinese and Japanese—to exert greater control over long-term U.S. interest rates.

Such a situation could become precarious if foreign buyers perceive that Treasuries no longer represent the best investment for their export-driven foreign currency reserves. For example, if euro-denominated government bonds become more attractive on a long-term basis, foreign buyers may liquidate Treasuries in large numbers, in which case long-term U.S. interest rates would soar. The resulting impact on U.S. credit and real estate markets could be severe.

Labor Burden on Younger Workers

For taxpayers, the Boomers’ retirement means that younger workers will have to bear a much larger burden in order to support the burgeoning ranks of retirees. Currently, there are 3.3 U.S. workers to support each retiree, but by 2030, this number will fall to only two. Given the political clout that seniors have and are likely to retain in the future, an increase in payroll taxes to support the Boomers’ needs seems entirely plausible. Extrapolated over a 10 to 20-year period, such an increase could represent a significant drag on U.S. economic growth. While increases in per-worker productivity may offset some of this burden, it remains to be seen how the U.S. will deal with what is arguably one of the most difficult financial burdens it has ever faced.