Unprecedented demographic changes are under way across the world. These changes are about more than just ageing populations. While life expectancy and the number of young vs. old are important, there are many other characteristics that influence how consumers and workers behave, including gender, income, education, family background and environment.
This broad set of “people characteristics” influences economic growth, inflation, asset prices, debt, geopolitics, migration and sustainability in complex and powerful ways.1 As a result, governments must rethink policies related to retirement, labor force participation and healthcare, while investors need to save more and invest differently if they are going to meet long-term goals.
Five Major Demographic Disruptions
Of the demographic disruptions taking place, we believe these five are the most significant:
- Demographic time bomb: The steady increases in life expectancy and dramatic declines in fertility rates since 1900 are unprecedented in human history (see Figure 1). This combination is having a significant impact on economic growth, which is a function of population growth, productivity and hours worked. As population growth falls and the available labor force shrinks, GDP growth weakens—something we are already witnessing in some advanced economies, even as they recover from the financial crisis.
- Unsustainable pressure on national budgets: Although people are living longer, most still retire in their 60s. This, combined with unaffordable promises on pensions, healthcare and long-term care, is putting growing pressure on the budgets and national debt of developed countries (see Figure 2). Company pensions are facing similar pressures, and many are responding by looking for ways to reduce future liabilities.
- Demographic dividend in emerging markets: The “demographic dividend” in emerging markets, which refers to the higher number of young people and faster population growth than in developed markets, is crucial to economic growth in emerging markets.2,3 These developments alone, however, are not enough for emerging markets to grow. These countries also need to invest in educating and training young people, increasing female labor force participation and creating more jobs.
- Mass migration in a globalized world: From 1990 to 2013, global migration increased by 50% and has continued to rise in the wake of conflict in the Middle East and the promise of a better life in the West. Such mass movements of people are creating tensions between migrants and natives, furthering geopolitical unrest and triggering surprise electoral outcomes such as Brexit and the election of President Trump. Figure 3 shows the main motives for migration across different countries.
- Behavioral differences among generations: Millennials (individuals born from 1983 to 2000) are behaving differently from older generations. They are getting married and having children later, changing jobs more frequently, accumulating assets later and exhibiting lower overall confidence in their economic futures.
How Should Governments and Investors Respond?
These shifts are having a profound effect on economic growth, inflation, debt, asset prices and monetary policy. So governments and investors need to integrate an understanding of them into their policy and investment decision-making. Governments must focus on increasing economic growth by encouraging greater labor force participation and improving productivity.
Pension funds and insurers need to evaluate how shifting demographics will affect, not just liabilities, but also assets. They should encourage pension holders to save more and seek independent advice for how to prepare for a longer retirement. Investors also need to adopt multi-period financial models,4 as well as flexible, lower-cost, multi-asset solutions that can adapt to different market conditions.
To learn more about how these demographic forces are shaping the investment landscape, see Demographic Disruption – Why We Need to Save More and Invest Differently from the Q3/Q4 2017 issue of IQ magazine.
1A. Roy and S. Aggarwal, “A Demographic Perspective of Economic Growth,” CS Demographics Research, 2009; A. Roy, “Why Demographics Matter? And How?” CS Demographics Research, 2006; A. Roy, “A Demographic Perspective of Fiscal Sustainability: Not Just the Immediate Term Matters,” CS Demographics Research, 2010.
2A.Roy, A. Boussie and M. Yuan, “Latin American Demographic Focus: Structural Reforms Are Critical for Future Growth,” CS Research, 2016.
3A. Roy, S. Punhani and A. Hsieh, “Africa’s Demographic Promise: Opportunities & Challenges,” “Assessing Asia’s Demographic Promise,” 2012.
4A. Roy, “Demographics & Asset Prices,” CS Research, 2010.
The views expressed in this material are the views of Amlan Roy through the period ended 10/30/2017 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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