By Russ Koesterich
Demographics, a subject normally confined to academia and a once-a-decade census, is experiencing a revival.
Economists and journalists are increasingly turning to the topic in order to explain everything from developed countries' relatively slow growth rates to their low level of interest rates. In my mind, this is a useful discussion. Populations' growth rates and age profiles have been shown to have important economic and investing implications.
As such, I read a post over at The Wall Street Journal's Real Time Economics blog, Forever Young? America Stays Relatively Youthful Even as World Population Ages, with interest. The post points out that while the United States is aging, it's aging at a much slower pace than much of the rest of the world.
According to the post, by 2050, about 21% of Americans will be aged 65 and up. This compares favorably with expected levels in both Japan and Europe. In Japan, the country with the worst demographics, the percentage will be 40%. Even China, still a developing country, will be older than America, with over 26% of its population 65 and above.
The good news for the United States is that a relatively young population suggests a faster growing workforce, which in turn should translate into faster economic growth, at least relative to Japan and most of Europe.
However, while the United States will be younger on a relative basis, the country will still be older than it is today and much older than it was 40 years ago. The 21% of the population over 65 by 2050 compares poorly with just 13% in 2010 and less than 10% in 1970. With the U.S. population almost certain to continue to age, what are the implications for the U.S. economy and financial market? Here are three.
- Slower growth. While the United States' demographic advantage suggests it will grow faster than other developed countries, growth is still likely to slow without an influx of immigrants or a change in fertility rates. Over the long term, a country's growth rate is a function of just two things: growth in the labor force and productivity. Unless everyone suddenly becomes more productive, an aging population suggests slower growth relative to the post-WW II average.
- Lower rates. As populations' age, people do two things: they borrow less and buy more bonds. As a result, older populations tend to have a lower equilibrium point for real interest rates. This suggests that an eventual rise in real rates may be more tempered than many analysts expect.
- Larger Deficits. The recovery has temporarily flattered the deficit, but this will not last. By 2030 there will be 35 people 65 years and older for every 100 working age Americans. This ratio is more than twice the level of 1970 and significantly higher than it was when Social Security was first established. As the number of retirees increases toward the end of the decade, entitlement spending will surge. And with fewer working age Americans supporting this spending, deficits will increase over time. Without a change in policy, budget deficits will once again grow and continue to grow until entitlement reform is addressed.
While demographics are not destiny, they do matter for the economy and financial markets. Absent changes in birth rates, immigration, or fiscal policy, U.S. economic growth is eventually likely to be slower and fiscal strains greater. Though the United States does look to be in a better position than other developed countries, it may still fare poorly compared to its younger self. Investors who are looking to mitigate or avoid the impact of aging populations may want to consider select emerging markets with better demographic profiles such as Brazil, Indonesia and India.
Sources: Bloomberg, BlackRock research, Citi Research
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.