This is part one in a two-part blog series.
In 2013, it seems the financial headlines have been dominated lately by policy changes of the Federal Reserve, dysfunction in Washington, China’s threat of a hard economic landing, or Europe’s ongoing sovereign debt crisis. Lost in these headlines are some major demographic trends that are already under way, or are looming on the horizon over the next decade. Many of these changes will have a profound impact on investors, governments and societies in the United States and abroad.
The world’s developed countries are aging quite quickly. As of the most recent 2010 census, the median age in the U.S. is 37.1, compared to 28.2 in 1970. This is actually fairly low in comparison to some of the world’s other developed nations.
This is not a huge surprise as the baby boomer generation is reaching middle age. It does, however, have some large implications that need to be watched closely by investors, companies and governments over the next decade.
What implications does this trend have for the U.S. and abroad? For starters, an aging population will put a large strain on healthcare costs as the number of people who need access Medicare increases. A study by Health Affairs cites aging population as a main driver of rising health care cost forecasts. It projects national health care spending to grow at an average annual rate of 5.8% over the 2012 – 2022 period (currently near 4% in 2013). By 2022 health care spending financed by federal, state, and local governments is projected to account for 49% of total national health expenditures and to reach a total of $2.4 trillion.
Second, smaller subsequent generations (Gen X, Gen Y) will have to increase productivity to maintain the current low, single-digit GDP growth in the United States. The responsibilities of the baby boomer generation upon retirement will naturally have to be absorbed by younger generations. A 2013 study released by the Georgetown Center on Education and the Workforce (CEW) indicates that this trend is already occurring. It cites that there are more job openings created as a result of retirements today than in the 1990s. The U.S. can fuel this productivity by increasing competitiveness in manufacturing, and using competitive advantages such as low energy costs and technological advancements.
Third, an increased focus will be put on fixed income and absolute return investment strategies, especially if the U.S is entering a rising interest-rate environment as many economists believe. As populations age, their risk tolerance will naturally decrease as people need to plan for their years in retirement. In 2012, only 7% of households aged 65 or older were willing to take above-average or substantial investment risk, compared to 25% of households in which the household head was between 35-49 years old. Despite a growing life expectancy, the retirement age is still 65. This has major causes for concern for social security, capital gains tax policies, and corporate pension plans. Subsequent generations will need to place an increased importance on individual retirement saving should the program terms change, or disappear altogether.
Part two of this blog will look at two additional trends of urbanization and wealth inequality.