Deep Waves: Longevity—the undertow to the demographic wave

Introduction

In our “Deep Water Waves” publication,¹ we identified several powerful, connected and long-duration factors that will have a significant impact on investment returns over the next decades. One of these is the Demographic Wave.² Its impact is a distinct aging of the populations of some countries and high fertility rates and young populations in others. The countries that have driven global economic growth over the last generation are aging fast, creating productivity challenges.

This paper is a derivative of “The Demographic Wave” and identifies the economic, political and investment implications for countries with lower fertility and growing life expectancy. The research that underpins this paper uses the analysis of the structural positioning of 110 countries (covered by our proprietary Country Risk Framework³) to outline potential policy direction and the signposts for investors to watch for. Growing demand for credit and a more constrained access to financing will play defining roles, along with the impact of geoeconomics and climate change in the next 20 years.

Executive summary

• For investors, demographics are a driver of country risk, as they can impact productivity, economic growth, sovereign financials and debt ratings. Longevity is a powerful driver within demographics.
• The age structure of a population is the most powerful factor, and fortunately its visibility should facilitate policy planning for governments.
• As countries begin to experience the process of lengthening life expectancy, they can continue investing in their economic development. To maximize the benefits of an experienced workforce and to accommodate the attendant health care and continuous training costs, it is an advantage to be open to trade and to have flexible labor markets.
• Existing pension fund structures appear inflexible—evidence from Japan and South Korea indicates that much can be done to improve the level of basic provision, avoid elderly poverty, and eliminate acute gender inequality in the outcomes.
• Targeting the poor early with microfinance and pro-inclusion initiatives like Brazil’s “Bolsa Familia”⁴ helps to prepare for the future contraction of the workforce.
• A version of this government program could be effective at incentivizing retraining, new skills acquisition and wider education to facilitate longer working lives.
• The promise of AI appears primarily focused on areas that will extend life by way of R&D in pharmaceuticals and biotechnology in general. This is clearly a net positive, but governments need solutions for other challenges, such as the business of servicing an older population with a declining workforce. Expect bigger gains there, sooner.
• In industry, automation and the use of robots to take over physically demanding tasks are already underway. As labor forces shrink, the economic value of investment in these applications rises and, in all probability, costs fall, providing a boost to productivity.
• Taxation could incentivize rising personal pension contributions that go hand in hand with gradual increases in the retirement age. This will lead to changes in corporate behavior.
• Fintech already provides innovative solutions for retirement planning and financial management.
• There are asset allocation impacts that can also affect corporate behavior, i.e., sustained demand for a mix of growth and income generating assets with a focus on stability and moderate risk.
• We expect increased focus on valuing human capital and on treating customers fairly, especially recognizing that clients’ cognitive abilities could decline over time.
• Overriding all these issues, however, will be the need for good governance, smooth functioning of the rule of law, and monetary policy flexibility, as the cohort of retirees increases and the prioritization of inflation control over economic growth becomes a potent election issue.