How Global Aging Will Reshape the Economy and Financial Markets Richard Jackson Center for Strategic and International Studies Exchange Traded Forum 2011 Toronto May 11, 2011 Part I The Global Demographic Transformation Behind the developed-world age wave: Falling fertility and rising longevity. Total Fertility Rate and Life Expectancy: G-7 Countries Total Fertility Rate Life Expectancy at Birth 1960-65 1980-85 2005-10 1960-65 1980-85 2005-10 Canada 3.7 1.6 1.6 71.4 75.9 80.7 France 2.9 1.9 1.9 70.7 74.7 81.2 Germany 2.5 1.5 1.3 70.3 73.8 79.9 Italy 2.5 1.5 1.4 69.6 74.7 81.2 Japan 2.0 1.8 1.3 68.9 76.9 82.7 UK 2.8 1.8 1.8 70.8 74.0 79.4 US 3.3 1.8 2.1 70.0 74.3 79.2 Source: UN (2009) The developed countries are entering an unprecedented era of “hyperaging.” 45% 40% Elderly (Aged 65 & Over), as a Percent of the Population, 2010-2050 39% 35% 34% 35% 31% 29% 30% 27% 27% 25% 20% 23% 19% 20% 23% 21% 17% 15% 24% 27% 23% 20% 20% 17% 14% 13% 10% 5% 0% US Source: UN (2009) UK France 2010 Canada 2030 Germany 2050 Italy Japan Along with aging populations, most developed countries will have stagnant or contracting ones. 40% Cumulative Percentage Change in the Working-Age Population (Aged 20-64) and Total Population: 2010-2050 34% 30% 22% 25% 20% 16% 8% 10% 8% 9% 0% -5% -10% -9% -20% Total Population -30% Working Age (Age 20-64) -18% -23% -25% -31% -40% -38% -50% US Canada UK France Italy Germany Japan Source: UN (2009) The developing world is still much younger, but it too is in the midst of the “demographic transition.” Demographic Indicators for the Developing World Life Fertility Rate Expectancy Median Age Total Pop. Change Elderly Share 1975 2010 1975 2010 2010 2030 2050 2010 2030 5.1 2.7 57.2 67.0 27.5 31.6 34.6 6.2% 9.8% 13.7% 48.7% Sub-Saharan Africa 6.7 5.2 45.5 51.7 18.5 20.6 24.6 3.1% 3.6% 5.2% 131.2% Muslim World 6.2 2.9 52.2 68.2 24.7 29.4 32.8 4.6% 7.4% 12.2% 69.5% China & East Asia 4.7 1.7 63.2 73.2 34.4 41.6 46.4 8.4% 16.3% 24.2% 1.8% India & South Asia 5.4 2.7 51.4 64.9 25.4 30.3 34.0 5.1% 8.4% 12.4% 52.6% Russian Sphere 2.1 1.4 69.3 67.3 38.2 44.5 48.6 13.5% 20.1% 26.3% -26.7% Eastern Europe 2.4 1.4 70.0 74.9 38.9 46.0 51.2 14.9% 21.6% 30.0% -17.6% Latin America 5.1 2.3 61.3 73.5 27.7 33.5 37.5 6.9% 11.7% 17.4% 38.8% Developing World 2050 2010-50 Source: UN (2009) Part II Challenges for the Developed World Rising Retirement Costs Falling fertility and rising longevity translate directly into a falling support ratio of workers to retirees. Number of Working-Age Adults (Aged 20-64) per Elder (Aged 65 & Over), 2010-2050 5.0 4.6 4.5 2010 2030 2050 4.0 A falling support ratio in turn translates into a rising cost rate for PAYGO retirement systems. 3.6 3.5 3.0 3.0 3.0 2.7 2.6 2.4 2.0 2.0 1.9 1.5 1.4 1.2 1.0 0.0 US UK Source: UN (2009) Canada France Germany Italy Japan Rising Retirement Costs CSIS “Current Deal” Projection: Government Old-Age Benefits, as a Percent of GDP, 2007–2050 Public Pensions 2007 2030 2050 Health Benefits 2007 2030 2050 Total 2007 2030 2050 Canada 3.9% 7.0% 8.4% 3.6% 6.1% 8.9% 7.5% 13.1% 17.3% France 11.2% 17.8% 19.6% 4.5% 7.8% 10.2% 15.6% 25.6% 29.8% Germany 10.0% 17.0% 20.4% 4.1% 6.3% 8.5% 14.1% 23.3% 28.9% Italy 12.3% 18.9% 24.6% 3.4% 5.5% 7.5% 15.7% 24.4% 32.1% Japan 9.1% 13.9% 19.3% 4.0% 6.0% 8.0% 13.2% 19.9% 27.3% UK 5.8% 7.9% 8.5% 4.0% 6.3% 8.8% 9.8% 14.2% 17.3% United States 4.1% 6.6% 7.0% 4.2% 8.0% 10.2% 8.3% 14.6% 17.2% Developed World 8.8% 13.7% 16.6% 3.8% 6.3% 8.6% 11.2% 17.9% 22.5% Note: Data refer to benefits to persons aged 60 and over. Pension projections assume retirement ages remain unchanged and benefits continue to replace the same share of wages they do today. Source: The Global Aging Preparedness Index (CSIS, 2010) Rising Retirement Costs Few countries will be able to raise taxes enough to cover more than a fraction of the age wave’s cost. Most will have to cut benefits—but the required adjustments are large and are likely to meet growing political resistance from aging electorates. The likely alternatives: crowd out other spending or let deficits grow— undermining national savings and growth. Public Benefits in 2007, as a Percent of Total Elderly Cash Income Average 3rd Quintile Canada 31% 47% France 59% 72% Germany 47% 76% Italy 55% 77% Japan 39% 61% UK 42% 69% US 22% 38% Source: The Global Aging Preparedness Index (CSIS, 2010) Slower Economic Growth The slowdown in workforce growth in the developed world will translate into slower growth in GDP. Average Annual Growth Rate in the Working-Age Population (Aged 20-64), by Decade Japan and some faster-aging European countries face a future of secular stagnation. Canada 1.7% 1.1% 1.2% 0.5% 0.2% 0.1% France 1.0% 0.4% 0.6% -0.2% -0.1% -0.2% 0.0% Productivity and living standard growth may also slow as rates of saving and investment decline. Germany 1.1% 0.2% -0.2% -0.3% -1.2% -1.2% -0.9% Italy 0.9% 0.2% 0.3% Japan 0.7% 0.4% -0.4% -1.0% -0.7% -1.5% -1.5% UK 0.6% 0.4% 0.6% 0.3% 0.0% 0.1% 0.3% US 1.4% 1.2% 1.1% 0.6% 0.3% 0.6% 0.6% Aging workforces may be less flexible, less mobile, and less entrepreneurial—putting a further drag on economic growth. 1980s 1990s 2000s 2010s 2020s 2030s 2040s Source: UN (2009) 0.0% -0.3% -0.6% -1.2% -0.9% Emerging Capital Shortages As more of the population enters its harvest years, consumption rates will rise and savings rates will fall. Growing fiscal deficits may exacerbate the decline in household savings rates. The danger of a “Great Depreciation” in financial markets as postwar baby booms retire is overstated. Instead, aging developed countries are likely to become even more dependent on capital imports from a younger and fastergrowing developing world. Adults Aged 20 & Over by Age Group, as a Percent of All Adults US Canada EU15 Japan Source: UN (2009) 2010 2020 2030 2040 Age 20-34 28% 28% 26% 26% Age 35-59 47% 42% 41% 41% Age 60 & Over 25% 30% 33% 33% Age 20-34 20% 20% 17% 18% Age 35-59 37% 34% 32% 31% Age 60 & Over 20% 25% 29% 31% Age 20-34 24% 22% 20% 19% Age 35-59 46% 44% 40% 38% Age 60 & Over 31% 34% 40% 43% Age 20-34 22% 18% 18% 16% Age 35-59 41% 41% 38% 34% Age 60 & Over 37% 41% 45% 50% Shifts in Economic Structure and Business Psychology The secular economic shift from manufacturing to services will accelerate. The “youth demographic” will give way to a new “silver demographic.” Cumulative Percentage Change in the Canadian Population, by Age Group and Time Period 100% Age 0-19 90% Age 20-39 80% Business growth will come to depend more on market deepening than on market broadening. 70% Adjustment costs in both product markets and labor markets will rise. 40% Age 40-64 Age 65 & Over 65% 60% 54% 50% 30% 20% Stagnant or contracting markets will increase the risk of “beggar-thyneighbor” protectionism. 10% 5% 3% 3% 2% 0% -10% -3% 1990-2010 Source: UN (2009) 2010-2030 90% The Impact on Social Mood As societies age, the overall social mood may become more risk averse and “small c” conservative. Smaller families may find it more difficult to socialize the young—and care for the old. Share of Population with Less than 20 Years of Life Remaining, by Country, 1950-2050 35% 30% Japan Italy Elder-dominated electorates may lock in current public spending commitments at the expense of new priorities. As the developed countries age, they will also grow more diverse—challenging social cohesion in some countries. 25% Germany UK 20% Canada France 15% US 10% 1950 1970 1990 2010 2030 2050 Source: CSIS calculations based on UN (2007) and Human Mortality Database, University of California, Berkeley and Max Planck Institute for Demographic Research Part III Global Aging and Emerging Markets The Promise of the “Demographic Dividend” The demographic transition opens up a window of opportunity for economic growth and development. Falling dependency burdens and larger shares of the population in the working years boost per capita GDP. Over time, this demographic shift may also encourage higher labor-force participation rates, higher saving rates, and greater investment in human capital. The dynamic is called the “demographic dividend”— and it explains as much as two-fifths of the growth in living standards in East Asia since the mid-1970s. Working-Age Population (Aged 20–64), as a Percent of the Total Population, 1975–2050 1975 1990 2000 2010 2020 2030 2040 2050 East Asia 46.8 55.7 59.6 64.1 63.9 61.5 57.8 56.5 Eastern Europe 56.8 58.3 60.4 63.8 62.1 60.5 58.9 54.6 Latin America 43.8 48.5 52.3 56.3 58.0 57.3 56.5 55.3 Muslim World 42.6 45.1 49.1 54.3 56.1 56.3 56.8 55.9 Russian Sphere 57.7 59.6 60.8 65.6 63.5 61.1 61.3 57.3 South Asia 45.2 48.1 50.8 54.8 56.9 57.2 58.1 57.6 Sub-Saharan Africa 42.0 41.1 42.1 43.5 44.9 47.2 50.6 53.0 Note: Highest share is highlighted. Source: UN (2009) Risks to Growth and Stability: Squandered Dividends The demographic dividend creates an economic opportunity , but does not guarantee economic success. Large parts of the developing world are nearly as far through the demographic transition as East Asia, yet have not come close to matching its stellar growth performance. Average Annual Growth Rate in Real GDP Per Capita (in 2005 PPP Dollars) by Period, 1975–2009 Average Annual Growth Rate in Real GDP Per Capita 8.0% 7.0% 6.0% 5.0% 6.9% 7.1% 1975-95 1995-09 1975-09 1975-09 1995-09 Brazil China India Russia 1.5% 9.0% 5.1% 4.0% 1.3% 8.3% 3.6% 1.1% 4.5% 4.1% 4.0% 3.5% 3.7% 3.0% Over the past 10 to 15 years, economic growth has finally begun to accelerate in a large number of emerging markets. 1.1% 7.8% 2.6% -0.8% 2.0% 2.5% 1.5% 1.7% 1.2% 1.8% 1.1% 1.0% 0.8% 0.2% 0.0% Whether the recent boom represents a long-term shift toward higher growth rates remains to be seen. Source: World Bank (2010); Angus Maddison (2010); and UN (2009). Risks to Growth and Stability: The Second Wave of Global Aging The demographic dividend is already ending in some of today’s fastest-growing emerging markets. Elderly Share and Average Annual Growth Rate in the Working-Age Cumulative Percentage Population, Change by Decade in the Russian China vs. the United States: Elderly (Aged 65 & Population, 2010-2050 Over), as a Percent of the Population, 1970-2050 30% As in the developed world, rapid population aging may soon become a drag on economic growth. 0% 25% China faces a massive age wave that is due to arrive while it is still in the midst of development. -10% 20% Russia’s economy has been riding high on the commodity boom, but its ruinous demographics are undermining its long-term growth potential. 15% -20% Brazil 4.3% 5.0% China 6.2% China 5.1% 7.5% 10.0% 13.9% 19.1% 23.0% India -11% 4.0% 3.7% Russia By the 2030s, India will be one of the few of today’s leading emerging markets whose demographics will still be favorable to growth. 1980s 1990s 2000s 2010s 2020s 2030s 2040s 2010-30 2010-50 Elderly (65+), % of Population S. Korea 10% -30% Brazil China 5% India -40% Russia 6.1% 8.1% 11.2% 14.7% 18.4% US 4.6% 5.5% 7.1% 8.8% 10.8% 10.2% 11.2% 12.6% 14.3% 17.8% 20.8% 23.7% -18% 4.4% 6.2% 9.2% 13.3% 19.5% 27.3% 33.6% Average Annual Growth Rate in the Working-Age -25% Population (Age 20-64) 2.9% 2.3% 2.0% Total 2.8% Population 1.7% 1.4% 1.2% 0.5% 0.2% -0.2% 0.5% -0.2% -0.7% -0.6% -35% Working-Age (Age 20-64) 2.5% 2.4% 2.3% 1.9% 1.3% 1.1% 0.7% 0.7% 0.1% 0.4% -0.9% -1.0% -0.7% -1.6% 0% 1970 S. Korea -50% 1980 2040 2.9% 1990 1.6% 2000 0.7% 2010 0.3% 2020 -1.1% 2030 -1.5% -1.6% 2050 Source: UN (2009) Source: UN (2009) Source: UN (2009) Population Pyramids of China and India in 2010, 2030, and 2050 Men Women 100+ 100+ 100+ 90-94 90-94 90-94 80-84 80-84 80-84 70-74 70-74 70-74 60-64 60-64 60-64 50-54 50-54 50-54 40-44 40-44 40-44 30-34 30-34 30-34 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 80000 40000 0 40000 80000 80000 80000 Women 40000 0 40000 China 2010 0 40000 80000 0-4 80000 India 2030 India 2010 Men 40000 40000 0 40000 80000 India 2050 100+ 100+ 100+ 90-94 90-94 90-94 80-84 80-84 80-84 70-74 70-74 70-74 60-64 60-64 60-64 50-54 50-54 50-54 40-44 40-44 40-44 30-34 30-34 30-34 20-24 20-24 20-24 10-14 10-14 10-14 0-4 0-4 0-4 80000 80000 40000 0 40000 China 2030 80000 80000 40000 0 40000 80000 China 2050 Source: UN (2009) Risks to Growth and Stability: Journeys can be more dangerous than destinations. Societies undergo tremendous stress as they move from the traditional to the modern. When plotted against development, most of the stressors describe an inverted-U—meaning that they become most dangerous midway through the transition. These stressors include: Contact with the global marketplace and culture Urbanization Environmental degradation Growing income inequality Growing ethnic competition Religious extremism The "Inverted U" Relationship Level of Stress & Risk of Violence Stage of Demographic Transition & Development Part IV The Shape of the Global Economy The Developed World: A Shrinking Share of Global Population 25% Developed World Population by Region, as a Share of World Total, 1950-2050 Population as a Share of World Total US Western Europe Japan Other English-Speaking Countries 20% 1950 2005 2030 2050 6% 5% 4% 4% 10% 5% 4% 3% 3% 2% 1% 1% 3% 2% 2% 1% 15% Japan 10% Other English-Speaking Countries Western Europe US 5% 0% 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: The Graying of the Great Powers (CSIS, 2008) 12 Largest Countries Ranked by Population Ranking 1950 1 2 3 4 5 6 7 8 9 10 11 12 China India US Russian Federation Japan Indonesia Germany Brazil UK Italy Bangladesh France 2010 2050 China India US Indonesia Brazil Pakistan Bangladesh Nigeria Russian Federation Japan Mexico Philippines India China US Pakistan Nigeria Indonesia Bangladesh Brazil Ethiopia Philippines Dem. Rep. Congo Egypt Germany (16) France (21) UK (22) Italy (23) Russian Federation (16) Japan (19) UK (27) France (29) Germany (30) Italy (37) Source: UN (2009) Note: Rankings for developed countries that have fallen below 12 are in parentheses. The Developed World: A Shrinking Share of Global GDP 70% Developed World GDP (in 2005 PPP Dollars), as a Percent of World Total, 1950-2050 GDP as a Share of World Total 1950 2005 2030 2050 US Western Europe Japan Other English-Speaking Countries 60% 29% 23% 3% 9% 22% 19% 17% 17% 10% 7% 7% 4% 3% 7% 5% 4% 50% 40% 30% 20% 10% 0% 1950 Japan Other English-Speaking Countries Western Europe US 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: The Graying of the Great Powers (CSIS, 2008) The Composition of G-20 GDP: From Majority to Minority Partners GDP (in 2005 US Dollars) by Country or Country Group, as a Percent of G-20 Total, 2009-2050 100% 90% 28% Emerging Markets 80% 50% 70% 59% Other G-7 60% 50% 38% US 40% 72% 24% 16% 30% 20% 50% 41% 34% 10% 26% 24% 2030 2050 0% 2009 Source: Carnegie Endowment for International Peace (2010) Some Bottom Lines Long-term decline of the developed world and rise of emerging markets, especially in East and South Asia. The United States is a partial but important exception to hyperaging and population decline. Economic success will depend on leveraging differentials in population and economic growth rates across different regions of the world. Yet aging societies with stagnant or contracting domestic markets may face increasing political pressure to roll back globalization. Likely global slowdown starting in the mid-2020s as “second wave” of global aging sweeps the developing world. Question: Who can replace East Asia as the engine of global growth? Population by Region as a Percent of World Total, 2005-2050 2005 21.5% 2030 17.5% 2050 14.0% Latin America 8.6% 8.8% 8.8% Muslim World 17.2% 19.6% 21.1% 5.4% 3.5% 2.5% South Asia 22.9% 24.5% 25.2% Sub-Saharan Africa 11.1% 15.1% 18.8% United States 4.6% 4.3% 4.1% Rest of the Developed World 8.8% 6.8% 5.5% East Asia Russia & Eastern Europe GDP (in 2005 PPP Dollars) by Region as a Percent of World Total, 2005-2050 2005 2030 2050 13.3% 26.0% 29.3% Latin America 8.3% 6.6% 6.3% Muslim World 9.2% 9.6% 10.3% Russia & Eastern Europe 7.1% 6.7% 5.1% South Asia 6.4% 10.3% 13.5% Sub-Saharan Africa 2.2% 3.1% 4.5% United States 22.3% 18.6% 16.9% Rest of the Developed World 31.4% 19.1% 14.1% East Asia Source: The Graying of the Great Powers (CSIS, 2008) We live in an era defined by many challenges, from global warming to global terrorism. None is as certain as global aging. And none is likely to have such a large and enduring effect on the shape of national economies and the world order. CSIS/GAI.ORG GAPINDEX.CSIS.ORG 30% China vs. the United States: Elderly (Aged 65 & Over), as a Percent of the Population, 1970-2050 25% 20% China US 15% 10% 5% 0% 1970 1980 1990 Source: UN (2009) 2000 2010 2020 2030 2040 2050 Cumulative Percentage Change in the Russian Population, 2010-2050 2010-30 2010-50 0% -10% -11% -18% -20% Total Population Working-Age (Age 20-64) -25% -30% -35% -40% -50% Source: UN (2009)