Not In Kansas Anymore (NIKA)

Demographic Shifts and You

Demographics. You can't beat it, and you've already joined it. Demographic changes are promising to bring major changes to practically every country in the world over the next 10, 25, 50+ years, and those changes don't all look good.

Yes, part of the change is brought about by an increased life expectancy around the world, due both to a decrease in infant mortality as well as a genuine extension of the average age of death (the life expectancy calculation includes death at all ages, so kids who die at 1 year old affect the average the same as people who live to 105 do). But part of the demographic change is brought about by a decrease in the birth rate.

Stanley Kurtz has written an excellent overview of the demographics issue during his review of four books on the topic. These books look at population decline, not growth, because the population growth rate has been falling, and is now expected to go below replacement level worldwide in less than a century. The last set of U.N. numbers I saw (admittedly a couple of years ago) project population to peak in the 8-10 billion range.

I think I'm going to have a lot to say over time about demographic changes and their implications for politics, global power balance, the economy & finance, culture, and more. But to start things off, here are a few quotes from the article:

Taken together, these four books suggest that we are moving toward a period of substantial social change whose tantalizing ideological implications run the gamut from heightened cultural radicalism to the emergence of a new, more conservative cultural era.
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Not a single industrialized nation today has a fertility rate of 2.1, and most are well below replacement level.
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Remarkably, the sharp rise in American fertility rates at the height of the baby boom - 3.8 children per woman - was substantially above Third World fertility rates today. From East Asia to the Middle East to Mexico, countries once fabled for their high fertility rates are now falling swiftly toward or below replacement levels.
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On the contrary, America's massive unfunded entitlement programs have the potential to spark a serious social and economic crisis in the not too distant future. And the welfare state in the rest of the developed world is on even shakier economic ground.
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By 2050, the combined cost of Social Security, Medicare, Medicaid, and interest on the national debt will rise to 47 percent of gross domestic product - more than double the level of expected federal revenues at the time. Without reform, all federal spending would eventually go to seniors. Obviously, the system will correct before we reach that point. But how?
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Even without a "meltdown," long-term prospects for the economy and the welfare state in rapidly aging societies seem uncertain at best.... Hard landing or not, and the political power of the elderly notwithstanding, there seems a very real chance that America's entitlement programs will someday be substantially scaled back. But what sort of struggle between the old and the young will emerge in the meantime, and how will a massive and relatively impoverished older generation cope with the change?

Then, when talking about a potential economic meltdown caused by the demographic changes, he says:

What might such a "meltdown" look like? Peterson, Kotlikoff, and Burns spin out essentially the same scenario. The danger is that investors might at some point decide that the United States will never rein in its deficit. Once investors see America's deficits as out of control, they will assume their dollar-based securities will be eroded by inflation, higher interest rates, and a serious decline in the stock market. Should a loss of confidence cause leading investors to pull their money out of U.S. securities, it could set off a run on the dollar. That would create the very inflation, interest rate increases, and market decline that investors feared in the first place. Such has already happened in Argentina, which Kotlikoff and Burns use as a paradigm in which loss of investor confidence brought down the economy in a kind of self-fulfilling prophesy. The danger is that the United States and the rest of the industrialized world may already have entered the sort of debt trap common among Third World nations. A rapidly aging Japan is even more vulnerable than America, say Kotlikoff and Burns. They add that, should investors looking at teetering modern welfare states and the long-term demographic crisis bring down any of the advanced economies, the contagion could spread to others.

Here's a brief summary of some of the issues we face:

• Services for the elderly: The amount of money saved doesn't matter, there simply won't be enough people to do the work, so people will have to retire later (see below for a link with more details on this issue). One potential way around this issue is the development of smarter, smaller and more capable robots. In 20 or 50 years, it will probably be common for many people, especially the elderly, to have a robot "nurse" to help out around the house.


• Taxes: We're already in deep, deep debt both on an individual as well as federal level. Federal promises for the future can not be met. Entitlements are going to grow, while the fraction of the population working will shrink, so taxes are going to have to go up, and that still won't help. Benefits will be cut at some point.


• Immigration is one way for any individual nation to deal with part of the problem, but anti-immigration sentiment is on the rise in the US.


• People are not replacing themselves. Why the disincentive to pro-create? Tax incentives and government programs don't seem to help encourage baby production in other countries, but making it financially easier to have kids can't hurt. It may soon be in senior citizens' best interests to contribute more of their time to child-rearing, so that people of child-bearing age will be willing to have kids. It sounds cold, but without children, there won't be anyone to take care of people as they age.


• Probably more issues I'm forgetting for now.

John Mauldin has written a number of his investing newsletters focusing on demographic changes. Take a look at his November 15, 2002 letter where he argues that people will have to work longer (he predicts that Boomers will, on average, work until they're 72 or 73) - it's not a matter of how much money they've saved. There simply won't be enough people of the current working age to handle all the work that needs to be done (increasingly, that work will involve taking care of the elderly). He provides a great, simple model for understanding why this is.

So, what are your thoughts on retirement? Do you expect to work until you're 60? 70? How much are you counting on Social Security?

Posted by Tom Nugent at March 23, 2005 10:56 AM