What an Aging Population Means for the Economy and Markets
Investors have understandably been fixated on the trajectory of inflation, interest rates and other headline-grabbing economic issues. Over time, though, the economy and markets are at least as impacted by demographic shifts. In this week’s Markets in a Minute, we examine the so-called silver tsunami, a global demographic trend with implications for investors and policymakers alike.
The Boomer Effect
The global population is getting older fast, and that has a lot to do with the aging of the post-World War II baby boom generation, one of the largest-ever demographic cohorts. In general, people are living longer and having fewer children, and these trends are also contributing to the graying of the global population.
In 2020, about one in six people in the United States was age 65 and older. In 1920, the ratio was less than one in 20, according to the Census Bureau. The World Health Organization estimates that the number of people ages 60 and older globally will grow by 40% over the 10-year period ending in 2030.
What are the ripple effects of the silver tsunami? The list is long and includes a number of shifts that policymakers will have to manage. Here, we look at a few considerations.
The Homeownership Divide
In 2022, the homeownership rate for households headed by people ages 65 and older was a whopping 78%, roughly equal to what it was in 1990, according to our analysis of Federal Reserve data. The rate for households headed by people ages 35 to 44 – a stage in life when many Americans are newly married and starting families – fell by five percentages points to 62% over the same period.
Because people are living longer, it only makes sense that the homeownership rate for older adults has remained relatively high over time, and there are upsides to this. For instance, the stable housing costs associated with owning a home (versus renting) make it easier to age in place.
However, the high rate of homeownership among older adults may be limiting ownership options for younger generations, particularly because the supply of housing hasn’t kept pace with demand. Today’s high mortgage rates only complicate the picture. They not only make it more expensive to buy but discourage many homeowners (not just boomers hoping to downsize) from moving and giving up attractive financing terms locked in years ago.
Health care and government finances under pressure
As the population ages, demand for health care is rising, straining a system that’s already grappling with a labor shortage and ever-higher costs. Ironically, the labor shortage in health care is tied in part to the fact that its workforce is aging and, thus, shrinking as people retire.
What’s more, rising health care costs, growing enrollment and other factors are making it increasingly difficult for the government to manage Medicare, the federal health insurance program for people 65 and older. Medicare spending is projected to rise to a whopping 18% of total federal spending in 2032, from 10% in 2021, according to the Kaiser Family Foundation (KFF).
Medicare Costs as a Percentage of Total Federal Expenditures
Source: Kestra Investment Management with data from FRED, Kaiser Family Foundation. FRED Data from January 1967 through January 2023. Post 2023 represents projected costs as of 2032.
Rising Medicare spending not only threatens the program’s financial stability but puts pressure on the federal budget and pushes up out-of-pocket costs for Medicare beneficiaries, notes Kaiser. Policymakers have taken steps to address Medicare’s fiscal challenges, but they clearly have more work to do.
The Labor Question
Just as the baby boom helped stimulate the economy for decades, the aging of this influential generation could be a drag on economic growth if, among other things, we end up with a much smaller supply of workers.
A basic model for forecasting economic growth takes into account increases in labor productivity and the supply of workers. On a fundamental level, the supply of workers is directly related to population growth. So, the rate at which our population grows (because of births, deaths and immigration) has a direct impact on how fast our economy can grow.
One study by National Bureau of Economic Research found that over a 30-year period ending in 2010, every 10% increase in the share of the 60-plus population decreased per-capita economic growth by 5.5%.
Until recently, the U.S. population has remained young relative to Japan and parts of Europe because of higher birthrates and a steady flow of immigrants. Interestingly, the aging of the global population (along with possible changes in government policy) could slow immigration to the United States in the coming years, reducing a key supply of workers just as boomers are exiting the workforce. Japan[AR1] [KM2] , which has the world’s oldest population, serves a stark example of how an aging population and low levels of immigration can contribute to economic stagnation.
Silver Linings
Of course, the silver tsunami has silver linings too.
Boomers also own a huge share of all private U.S. businesses. The Federal Reserve estimates that the value of private businesses held by people ages 55 and older represents more than 70% of the total value of all private businesses. In the coming years, a record number of boomers will be seeking to sell businesses, which should lead to more-robust mergers and acquisitions activity. The upcoming rate-cutting cycle could bolster sales activity, whether for homes or businesses.
Keep in mind too that the aging of the global population is tied to advances in health care as well as social and policy changes that have lifted the entire global economy and should continue to do so. We’ll be keeping a close eye on how this important demographic shift plays out in the coming years.
Invest wisely and live richly,
Kara
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