Briefing

Ageing Populations: the great constant

In 2011, the global population crossed 7 billion. It will pass 8 billion in 2030; probably reach 9 billion by 2050, before peaking at 10.1 billion by 2100. By 2070, there is a 50% probability that it will fall.^[1]

The starkest manifestation of this demographic trend is not the increase in population per se, but the fact that the world faces a population time bomb of old people. Ageing is becoming the crux of the demographic issue. Population growth is no longer driven by birth rates (which have plummeted pretty much everywhere around the world with a few significant exceptions), but by an increase in the number of elderly people.

The reason is simple: we are now living to an advanced old age. In the West, there is a sharp uptick in people turning 60 and, in 20 years from now, there will be an explosion in the numbers turning 80. Significantly, in most rich countries, the 85-94-year-old age bracket is the fastest-growing segment of the population. Most of the rest of the world will follow the same course in the next few decades: according to the UN, the number of over-60s worldwide is expected to double by 2050 to 2.1 billion.

This staggering growth of an ageing population poses numerous and unprecedented challenges. It has a direct impact on geopolitics, how we deal with debt and fiscal policies, the access to resources, the burden we impose on our planet, the rate at which we adopt disruptive technologies, and even on the distribution of wealth (intergenerational inequality is a big issue).

Rapid population ageing is becoming a major public policy concern in many countries around the world. The immediate problems it poses are threefold.

1. It leads to a reduced working-age population just as the percentage of dependent elders explodes. This means that as the population ages, it goes from stimulating the economy to depressing it, as fewer young adults equals fewer people purchasing new homes, new furniture, new cars and the like. Fewer people are likely to take entrepreneurial risks, as ageing workers are more interested in protecting the status quo than in creating new businesses. The rates of savings and investment tend to decline. Unless we change our existing social models (more of that below) and our culture (by combining old age and entrepreneurship), an ageing world is destined to be a poorer world.
2. It entails rising medical and health expenses, such as greater caregiving needs for those who are ill and infirm, plus an associated opportunity cost since caretakers’ productive time could be spent working on other valuable activities. In general, older adults are more likely to require additional medication, hospitalisation, and special services.
3. It places fiscal stress on a country through its pension system as more and more adults qualify for payments. As a result, benefits grow at a faster rate than corresponding contributions.

What to do? There are solutions to alleviate the ageing problem, but each is limited in scope. The only country where they have all been tried concomitantly is Japan – the country that boasts one of the longest ever recorded life expectancies (84 years) and the highest elderly (ages 65+) population share worldwide (at 27 per cent). In a nutshell, the potential solutions include the following, in no particular order:

1. Increase the fertility rate by making it to easier to have children. This can be done by policy measures such allocating funds to new childcare facilities, reducing educational costs, or / and improving family housing;
2. Increase female labour force participation;
3. Raise productivity by focusing on technological innovation;
4. Relax immigration restrictions;
5. Increase the age for retirement and pension eligibility; and
6. Improve health for elderly populations (or “health span”: living better for longer).

The latter – improving health – is the most compelling policy measure by far, because it’s easier to implement than all the others and can yield tremendous results at very little economic cost while improving economic and social welfare.

Copious evidence in the economic literature shows that protecting and improving an ageing population’s health enhances its productivity and labour force participation, which in turn amplifies the beneficial effect of other measures such as an increase in the retirement age. In addition to savings in healthcare costs, effective health promotion programmes lead to gains in productive labour hours and output. A healthier population also leads to higher savings rates, lower medical expenses, and even increased foreign direct investment.

At the moment, health policies rarely go beyond awareness and education campaigns (they include improved diets, more active lifestyles, reduced tobacco and unsafe alcohol consumption, and vaccination), but in the future this will change. Ageing well (health span) will become paramount – both from a personal and public (i.e. fiscal) perspective – that wellness will be increasingly incentivised, if not “compulsory”.

In the US and the UK, some insurance companies already incentivise wellness behaviour with the help of technology, by providing for example their clients with wearable devices that track their activity (with a view of expanding it to add extra years of life).

As they expand, such insurance policies mean that the risk pool will contract: life insurance will become more personalised and based upon wellness evidence. It also means that the price of coverage for unhealthy behaviour (or simply bad luck: bad genes) will increase. The wellness industry will benefit, but the societal and moral implications of a world in which the fittest and healthiest ‘win’ (and pay less) are mind-bogglingly complex.

From an investor’s point of view, adjusting a portfolio to rising longevity begs three fundamental questions that will reshape much of the global economy and the world of investing in the years to come:

1. Who will take care of the elderly?
2. Where are they going to live?
3. How will they age “gracefully” (our sixth point above)?

Investing in the plethora of sectors related to longevity will become an even more compelling theme. Any goods or services that demonstrably prolong longevity or make it healthier and happier will be a hit. Apart from the obvious (like medical technologies, cruise-ships retirement homes and the “wellness economy” at large), anything related to physical exercise – the strongest anti-ageing medicine of all – will boom.

Thierry Malleret
01.01.2019

Footnotes

1. Source: UN Population Division estimates ↑