“Demographics show that we are entering a battle between young and old. I call it the 'Age War.' The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.”
If you listen closely, just below the buzz of today’s headlines, there’s a burgeoning topic that’s about to explode on the scene. It’s been ringing in my ears for a couple of months. The next battle in the global populist war won’t be socio-economic, it’ll erupt from the growing friction between young and old.
The relentless murmuring started with a business trip to London and Tel Aviv. In London, I attended a panel discussion with two former prime ministers of the United Kingdom (UK), Tony Blair and David Cameron. The conversation naturally addressed the challenges the UK faces in the post-Brexit world. Sadly, the UK has suffered through at least three major disasters in the past 15 years — the Global Financial Crisis (GFC), Brexit, and the pandemic. As a result, there’s been some long-term scarring to the UK economy, politics, and society. Chatting with clients and colleagues following the panel, it became clear that as the UK attempts to find solutions to its problems, tensions between the young and old are rising.
Later, I met one of my closest friends for lunch. We were neighbors growing up and he now lives in London with his family. It didn’t take long for our conversation to turn to his 90-year-old mother and my 83-year-old father, both physically fit as fiddles but experiencing cognitive decline. So many people in my age group are wrestling with long-term care options for aging parents. A challenge that is only going to multiply for future generations.
Having lived in London for three years from 2008 to 2011, my visit felt like a homecoming of sorts, one that coincided with China’s lunar new year. Finally free of COVID-19 travel restrictions, more than 200 million unmarried Chinese had returned home to celebrate, only to be peppered with questions from parents and relatives about when they planned to marry and start a family. At the same time, Chinese authorities announced that in 2022, for the first time in 60 years, China’s population had declined.1 With fewer taxpaying workers to fund an already strained social welfare and healthcare system, China faces the frightening possibility of growing old before growing rich.
In Tel Aviv, the seemingly independent notes in my head started to form a more audible tune. I had been to Tel Aviv once before, more than a decade ago. Today, the horizon was filled with new skyscrapers and cranes developing more commercial and residential properties. On the drive from the airport to my hotel, the construction of the Tel Aviv Light Rail, a mass transit system for central Israel, caught my attention.
I couldn’t help but contrast the energetic vibe in Tel Aviv with the tension in London. My Israeli colleague reminded me that Israel is about the size of New Jersey and has its fair share of challenges too. But despite the daily disruption and considerable expense, Israel has committed to making the necessary investments to materially improve its infrastructure. And no surprise, almost a third of Israel’s population is under the age of 17 and the median age is about 30, nearly a decade younger than most developed market countries.2
That nagging ringing in my head didn’t go away when I returned home. In early January, it took 15 ballots to elect Kevin McCarthy as the Speaker of the House of Representatives — the most since before the Civil War. On January 19, the US breached the debt ceiling again, forcing the Treasury Department to start taking extraordinary measures to keep the government afloat and setting up another showdown between Republicans and Democrats this summer.
In mid-February, the nonpartisan Congressional Budget Office (CBO) released “The Budget and Economic Outlook: 2023-2033,” which warned that the Treasury Department would exhaust its ability to pay all its bills sometime between July and September. The report also forecast that US budget deficits will average $2 trillion between 2024 and 2033, approaching pandemic-era records by the end of the decade3 — which will likely fuel Republican demands for spending cuts.
On February 15, former South Carolina governor and United States ambassador to the United Nations, Nikki Haley formerly announced her candidacy for president. The Republican candidate immediately tried to drive home a major difference between herself and her two major competitors — President Biden and former President Trump — by controversially suggesting that politicians over 75 years old should be required to take a mental acuity test. Nikki Haley is 51 years old. In one fell swoop, Haley purposefully made age a major issue in US politics.
Finally, like a thunderbolt it struck me. That constant annoying humming in my head was the unsettling realization that the battle lines between young and old were being drawn.
I turn 50 years old later this year. That milestone — not quite young but not too old — places me almost perfectly to objectively explore the young vs. old dynamics and the potential implications for investors.
Americans are getting older. The statistics are staggering. In less than two decades older Americans will outnumber children for the first time in US history. According to the US Census Bureau, by 2060, nearly one in four Americans will be 65 years and older, the number of 85-plus will triple, and the country will add a half million centenarians.
The bigger challenge may be that there will be far fewer younger Americans to care for and support the elderly. For almost three decades, from 1980 to 2007, the US birth rate was stable at about 65-70 births per 1,000 women between the ages of 15 and 44. But, since the GFC, the US birth rate has fallen by 20%.4
Businesses are struggling to find qualified, skilled workers in today’s already tight labor market. Despite the demand for skilled workers, the supply of labor remains constrained with the unemployment rate at 3.4%, a 54-year low, and the labor force participation rate stuck in neutral.
As a result, there are far fewer younger workers contributing to ballooning entitlement programs like Social Security, Medicare, and Medicaid. These cracks in the foundation may lead to a Grand Canyon sized disaster in the future.
Meanwhile, the CBO’s report on the budget and economic outlook for the next ten years paints an equally bleak portrait of the US fiscal position. In the short-term, declining year-over-year government tax receipts combined with skyrocketing interest costs are further complicating an already difficult fiscal situation.
Generous fiscal policies from both Republicans and Democrats have left government spending above its long-term average. When this has happened before — mid-1980s, mid-1990s, and early 2010s — negotiations to raise the debt ceiling became a catalyst for deficit reduction.
It’s difficult enough to raise the debt ceiling in divided government. Adding in deficit reduction discussions makes the process more challenging and the potential impacts more significant for financial markets.
Today, it’s difficult to envision successful solutions to these long-term fiscal problems. Afterall, elections are decided by the people that show up at the polls. In the US, older voters are the most likely to cast their ballots. Typically, more than 60% of people 65 and older vote, the best turnout of any age group. Only about 30% of people 18 to 24 vote in elections, the lowest turnout of any age group.5
This gap in turnout gives older people political clout beyond their numbers alone. Rest assured that older people vote to protect their federal entitlement benefits from programs like Social Security and Medicare. And, with the percentage of politicians over the age of 70 increasing, Congress is fast becoming a mirror image of its most important constituent — older voters. The last two presidents have been septuagenarians. And we’ve never had a Generation X president, let alone a millennial.
Younger people who don’t vote find it difficult to connect their one vote with the final election outcome, especially in firmly red and blue states. Sadly, young people’s faith in democratic politics is lower than any other age group, and millennials across the world are more disillusioned with democracy than Generation X or baby boomers were at the same age. In the US, 63% of millennials were satisfied with American democracy in their early 20s, but by their mid-30s the number decreased to just 50%. Contrast that with the 74% of US baby boomers who were satisfied with democracy in their mid-30s and the 68% who remain so today.
The risk is that with so many younger people disengaged from politics and elections, there may not be enough younger voters — and politicians — to enact the changes necessary to improve the US fiscal situation.6
There’s no mystery to the actions required to avoid going over the fiscal cliff. Just like the formula for losing weight — eat healthier, drink less, and exercise more — the solution is easy to identify, but damn near impossible to implement. In fact, politicians and older voters have conspired to keep kicking the fiscal can down the road.
The federal government could reduce spending. But, after paying for costly entitlement programs and rising interest expenses on debt, the choices of which programs to cut and by how much becomes increasingly more difficult. Increasing taxes would help improve the US fiscal situation. But Americans hate taxes and politicians know it. Raising taxes might result in greater contributions from younger workers into strapped entitlement programs. However, tax younger workers too much and the risk is that an already disengaged group becomes increasingly withdrawn, further reducing any chance for real change. It’s a delicate balance.
The federal government could modify entitlement program benefits. For example, they could lower the benefit payments or raise the age in which people can begin collecting their benefits. Some have even suggested means testing for participation in government entitlement programs. As the fiery exchange between President Biden and Republicans at the State of the Union address demonstrated, this is a hot button issue. That’s why since the early 1980s, potential changes to Social Security benefits have become the third rail of US politics. This isn’t just a US problem. France’s plans to increase the retirement age for most workers has been met with massive strikes and protests this year.
Our saving grace is the exorbitant privilege the US receives from the dollar being the world’s reserve currency. Should that status ever weaken, the fiscal reckoning will be devastating. Most will scoff at the idea that the US dollar could lose its status as the world’s reserve currency. But it’s happened to other countries in history. That’s why it’s so dangerous to use political brinkmanship to threaten a US debt default by failing to raise the debt ceiling.
The deteriorating US fiscal position combined with the challenging demographic outlook will likely lower long-term economic growth. Over longer periods of time this will probably lead to a disinflationary environment. And, given the wide range of possible outcomes, interest rates are likely to remain volatile.
Journalists often use a technique at the end of an interview where they ask an open ended question, “Is there anything that I haven’t asked you about?” Some of the best stories come from this clever journalist trick. I remember being asked this question by a Financial Times journalist in New York City in 2014. My answer was to keep a watchful eye on the rise in global populist sentiment. At the time, I couldn’t quite put my finger on why, but it felt like this movement was going to have staying power. In the years that followed, we’ve seen Brexit, Donald Trump, Jair Bolsonaro, Bernie Sanders, and so many other examples of global populism.
Today, that same antenna is up as the unsettling buzzing in my head points to a new populist frontline. Fiscal positions in the US and many places around the world are in tough shape. In the US, the debt ceiling showdown is looming. The CBO report on the budget and economic outlook over the next ten years paints a bleak picture. The question now becomes how changing demographics could make an already difficult problem worse.
Age is going to be a huge topic in the next presidential election, one that could spark greater engagement and participation among disillusioned younger voters. And if the higher turnout of younger voters in the 2022 midterm elections becomes a trend, home ownership and student debt will be debated alongside Social Security and Medicare. Populism’s always been fueled by conflict, but as politicians come under fire to do something about yawning debt and deficits, could there be greater appetite as the generational clash brews to build bridges, not divides? Our ability to tackle today’s fiscal challenges and find solutions depends on our ability to find middle ground.
It’s easy to dismiss these problems as something that future generations will have to solve. That’s a mistake. The longer we wait to take our medicine, the bigger the fiscal crisis will be when it finally does arrive. The US can’t outrun its fiscal challenges forever. The time to act is now.
1 Eleanor Olcott, “China’s singles fight family pressure to get married as population declines,” Financial Times, January 26, 2023.
2 “Over 3 million Israelis are younger than 17 – study,” I24 News, November 16, 2022.
3 David Lawder and Richard Cowan, :U.S. could face debt-ceiling crisis this summer without deal, CBO warns,” Reuters, February 15, 2023. Congressional Budget Office’s “The Budget and Economic Outlook: 2023-2033.”
4 Melissa Kearney, Phillip Levine and Luke Pardue, “The Mystery of the Declining US Birthrate,” Econofact, February 5, 2022.
5 Emily Brandon, Why Older Citizens Are More Likely to Vote, US News and World Report, October 20, 2020.
6 “Faith in democracy: millennials are the most disillusioned generation in living memory,”Bennett Institute for Public Policy, Centre for the Future of Democracy at the University of Cambridge, October 2020.
The views expressed in this material are the views of Michael Arone through the period ended February 26, 2023 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.
Investing involves risk including the risk of loss of principal.
Past performance is not a reliable indicator of future performance.
All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.