What does an ageing society mean economically? This question is becoming more pertinent as more developed countries become older, have fewer children and thus are likely to see a more top-heavy population pyramid in the years to come. The Market Realist website has recently published a series of papers analysing the likely economic trends of an ageing, industrialized country.
After discussing the phenomenon of an ageing world (something that regular readers of DID should be familiar with) the authors of the report predict that this will “keep global economic growth muted in the years to come”. By 2050 there are estimated to be 3.9 working age people for every person aged over 65. If this prediction proves to be true, then the ratio of workers to retirees will have plummeted over 100 years (the same ratio in 1950 was 11.75). This increasingly older global population will see low labour productivity levels and a lower propensity to spend (and a greater propensity to save). Furthermore, such an ageing population will require more entitlement spending from their governments.
According to the report, this all means that “accommodative monetary policies” are likely to stay and “economies will remain in a low-rate cycle for a long time”. We are certainly seeing that in New Zealand, as some banks have brought in interest rates that are the lowest seen in this country since the 1950s. It is a good time to have a mortgage!
In terms of equity yields, the authors conclude that:
“An older population tends to steer away from risky assets like US equities and invest more in safe-haven assets like US Treasuries. This could mean that bond market yields are likely to stay low in the long term, as bonds continue to be instruments of choice for the older, risk-averse population.”
On the other hand, it is predicted that the labour participation rate of those aged above 65 years will increase. In 2002, it is estimated that just over 20% of those aged 65-74 in the USA were working. By 2012 this number had increased to 26.8%. By 2022 this number is predicted to rise to 31.9%. And this could be a positive for our economies:
“If capitalized on properly by broad economic and policy changes, aging populations could actually prove to be assets in the long term. The older population has amassed experience and wealth, which—if harnessed properly—could even stimulate economic growth.
Some companies are already adjusting to the demographic shifts by making workplaces more suited to the aging workforce. In a recent report, Harvard Business Review observed that productivity at BMW increased by 7% after the auto giant introduced older worker–friendly initiatives like custom shoes and more lucid computer screens. Harvard Business Review has also observed that companies like Xerox and Marriott have experienced enhanced productivity and better employee retention after introducing transition programs that enable older employees to shift seamlessly from taxing job responsibilities to those more suited to their needs.”
So an ageing population is likely to result in global growth remaining at a lower level than before, interest rates remaining historically low and the number of elderly co-workers increasing.