October 2011 |
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Over the last few years American investors have been focusing their attention and investment savings on the rapidly growing developing economies like in China. That makes sense since the United States economy is currently finding its way through the “new normal” of slower growth as it repairs its balance sheet. While that may be the case today and for some years into the future, there is something on the long-term horizon that investors should keep their eye on because it will dramatically alter the competitive landscape for a number of countries, most especially China.
The world population is getting older. We see this in the United States as medical advances and healthier lifestyles have helped us live longer while younger generations have fewer children than their parents did. This evolving transformation of a nation’s demographic profile has some short-term and long-term implications for its future growth potential, investment opportunities, and quality of life.
The obvious near-term consequences of this trend in the U.S. include such concerns as the future funding of government retirement programs like Social Security and Medicare. The imbalance of a shrinking number of working people supporting a growing number of retired people presents obvious fiscal challenges for a society that believes in taking care of older generations.
It is unfortunate that our political leaders failed to do the right thing over the last 30 years to ensure these programs were adequately funded for the benefits that were promised. Instead future generations will now have to accept reductions in benefits and higher taxes to fund them.
While the United States will have its political will tested over the next year or so to get us back on a more sustainable economic growth path, there are longer-term challenges for the other developed countries in Europe and Japan as well as for some developing countries like China.
According to the article, Global Aging and the Crises of the 2020’s, written by Neil Howe and Richard Jackson and published in the January 2011 issue of Current History, “For the world’s wealthy nations, the 2020’s are set to be a decade of rapid population aging and population decline”. The authors site the United Nations Population Division whose projections show that “the median ages of Western Europe and Japan, which were 34 and 33, respectively, as recently as 1980, will soar to 47 and 52 by 2030, assuming no increase in fertility. In Italy, Spain and Japan, more than half of all adults will be older than the official retirement age and there will be more people in the 70’s than in their 20’s.”
It is not only Europe and Japan that have this demographic challenge ahead. Some of the faster growing, developing countries like China also have a “massive age wave” approaching in the 2020’s.
As the authors put it, “China may be the first country to grow old before it grows rich”. The country’s one-child-per-couple policy has created a situation where in the decade of the 2020’s, when China’s economy is expected to surpass the U.S. economy, the huge generation born before that policy will be retiring as China’s workforce stops growing.
There are many ramifications of an aging society that can inhibit the economic and social welfare of a country. It is especially difficult when the workforce of the country is actually declining, like it already is in Germany and Japan but will be in China as well.
The easy-to-see consequences are the increasing pension and healthcare costs that must be funded by government budgets when money is needed for other important things like defense and investing in new technologies and industries. However, there are other less obvious effects.
For instance, younger people tend to be more entrepreneurial while older people tend to become much more conservative with their money and lives. An aging society will have less money to invest as the retired population begins to live off their savings. This would clearly dampen economic growth, especially when more of a country’s financial resources have to support the older generations.
The good news for Americans is that the United States is not expected to age much at all over the next 20 years. By 2030, the U.S. median age is expected to rise to only 39 from its current median age of 37. According to UN projections as well as those from the U.S. Census bureau, the U.S. working-age population will continue to grow because of its higher fertility rate and, more importantly, its substantial net immigration.
Immigration is a “hot button” political issue in the United States due to the large number of illegal immigrants already in the country. However, immigration has been and will be a competitive advantage for the U.S. when compared with our trading partners in countries that have much more restrictive immigration policies.
So while the U.S. economy is currently being upstaged by China’s rapid growth and seemingly endless investment prospects, the current demographic trends show that China will begin to face serious social and economic headwinds a decade from now. Political unrest will be a major concern.
If the U.S. gets its finances back on a more sustainable course and continues to embrace legal immigration, our economy should rise in the relative ranking of the world’s most attractive economies for investment by the early 2020’s. American investors may be much more inclined to keep their investment dollars here.
