“We are living in the midst of the most remarkable demographic transition in history,” according to Bank of America Merrill Lynch.
In a thematic investment note sent to clients last week titled “The Silver Economy — Global Ageing Primer”, the investment bank says we’re about to hit “peak youth” due to people living longer and longer and fertility rates around the world declining.
Analyst Beijia Ma and her team write in the note:
We are arriving at “peak youth” for the first time in human history with the number of persons aged 65+ expected to outnumber children under-5 by the end of this decade. Ageing has also become a universal phenomenon, and by 2050E, 80% of older people will live in EMs. Life expectancies of 300-400Y or even an infinite extension of life expectancy may be within reach in our lifetimes.
While the last sentence might sounds a little science fiction, the reality is that more people are living for longer and longer, with the average global life expectancy expected to 77.1 by 2050, meaning there will be around 2.1 billion over 60s around the world, versus 901 million today.
The big problem is the number of working-age people is actually set to decline due to falling fertility rates, rather than rise in-line with the number of pensioners. The global fertility rate has roughly halved since 1950 and Bank of America says we could be “heading towards a potentially catastrophic decline in population.”
The ratio of working age people to pensioners is forecast to fall from 8:1 today to 4:1 by 2050. Bank of America says governments around the world are not prepared this “demographic tidal wave”:
Age-related spending makes up 40% of government budgets in DMs, and rising age-related costs are likely to push 60% of sovereigns into speculative grade. QE and low interest rates are exacerbating longevity risk for the one in five corporate pension funds that are already underfunded. Individuals are also inadequately prepared for the coming crisis, with nearly two out of three employees globally not saving for retirement. Women, the young, and poorly educated are at greatest risk.
Put simply, there simply isn’t enough money for all these pending pensioners.
We can see the above problems playing out right now in Britain with BHS and Tata Steel. BHS’s ballooning pension deficit has meant the scheme has had to be taken on by the state-backed Pension Protection Fund, while the government is considering stepping in to tackle Tata Steel’s huge pension scheme to make the at-risk steel business more attractive for buyers. Both funds have struggles to generate returns to cover members in a low-interest rate environment.
Bank of America says “immigration is part of the answer to address looming ageing challenges with the immigration of younger workers slowing the demographic transition and broadening the tax base.” I argued last year that German Chancellor’s motivation for welcoming hundreds of thousands of Syrian immigrants was for precisely this reason — to tackle Germany’s ageing population.
However, the investment bank’s primary concern isn’t how governments tackle this looming “demographic tidal wave” — it’s finding investment opportunities.
BoAML says “the private sector will play a pivotal role in addressing longevity challenges” and predicts that the global ageing population will boost healthcare, financials as more people save, care, and consumer goods, as the elderly enjoy spending more in their retirement.
Long age, short youth.