Baby Booms and Busts: Investment Demographics

For financial professionals only

The world is getting old. Populations are aging rapidly and on a global scale; the UN predict that the number of over-65s will increase by 333% by 2097. At the other end of the scale, fertility rates have halved since 1952; we are living in a ‘grey’ world. Just how far-reaching are the economic implications of this demographic shift?

State pension, anyone?

When the state pension was introduced in 1909, few people out-lived the retirement age by many years. As such, there was little concern from the government about the sustainability of such funds. This isn’t the case today. Many younger people now accept that life longevity equals a self-financed retirement and if they didn’t, compulsory auto-enrolment should have alerted them.

On an individual level, this is a worrying issue. On a macro-economic level however, the increased number of people paying into a personal pension should mean larger flows of money that can support asset prices – in theory.

Boomers to blame

The ‘boomers’ (those born between 1946 and 1964) are one of the wealthiest demographics to have ever lived. Blessed with careers-for-life, final salary pensions and astronomic house price appreciation, it’s a generation with more money than many of them thought they would ever have.

They also bear a great deal of responsibility for the aging crisis in the western world. Retiring at 60, they can expect to live another third of that again. Their assets will need to be liquidated to pay for care and provide a long-term income.

But who will they sell these assets to? There are far fewer millennials and they have much less money. Where does this leave a vast number of people reliant on being able to access the value of the assets they hold?

Work ‘til you drop

In reality, many retirees do not have enough savings to fund a long retirement and will have to continue working.

Given the aging population crisis, it is likely that governments will encourage this, as the working age population falls. Less people working will have to support more older people. All else being equal that means less tax revenues to pay for rising care costs of a swelling cohort of pensioners. That either means tax rises and/or more government borrowing resulting in higher interest rates to attract the money.

And a decreasing labour force may result in slower economic growth. Economies grow via a rising labour force and productivity growth, ideally both at the same time. If a small cohort of workers is more productive then a decreasing dependency ratio may not be a problem. What has been dubbed the 4th Industrial revolution will drive productivity i.e. the rise of artificial intelligence and robotics, but any transition is likely to be painful as some workers lose their jobs.

Not all doom and gloom

We have really only scratched the surface of how the greying of the world may impact the markets. The interplay of longer working lives, smaller families, savings, technological changes will at various times exert a greater or lesser influence on markets. Forecasting with any degree of certainty will be difficult. Let’s not be too gloomy, Thomas Malthus in 1798 said population growth would exceed food supply resulting in famines. It did not happen.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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