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Con Keating: Longevity: A maturing problem

16 Sep 2019

This month, Con Keating looks at the investment challenges that rising longevity and a declining population might bring.

This has been a summer of extremes and surprises. If these climatological events, the wildfires, storm-force winds, torrential rainfall and record temperatures are harbingers of an Anthropocene epoch, new risk management techniques and structures are needed. These pose an immediate challenge for the engineers and urban planners.

The science of global warming and climate change is incontestable. It is, of course, predicated upon an ever-growing population and yet more urbanisation; the history of the past two centuries.

However, it seems that the UN’s central population projection of nearly 10 billion people by 2050 is excessive. The cause for the doubt surrounding this projection is rapidly falling human fertility. In Europe, Japan, China, Brazil and India this is already below replacement rates. Fertility in Africa has fallen dramatically but remains above replacement rates.

The dramatic improvements in infant mortality during the past century have played a part in the declining size of families; the spare to the heir is redundant if the heir is unlikely to die in childhood. It appears that high female literacy and education lead inexorably to lower fertility rates. The variation we observe in the timing of decline is a product of the differing economic and social circumstances of the countries considered, but it is by no means true any longer that a country needs to be modern and highly developed for declining fertility to be evident. Based on current trends, it appears that the peak global population will be reached by 2035, somewhat below 9 billion, and that from 2040 onwards it will be plateaued or declining.

As we have seen in the case of Japan, this brings significant economic challenges. Indeed, it represents a serious challenge for capitalism as we have come to know it. Clearly it is well within the time horizons of our pension systems, funded and unfunded, public and private.

Concurrent with this fertility trend, declining mortality has led to an ageing population. The proportion of elderly has risen, while dependency ratios have increased markedly. They will continue to do so. It is fortunate that state finances are now and will be less strained by the costs of education of large childhood cohorts. In this world, consumption demand is lower and differs from the demand of the more balanced populations of the past 50 years. It is true that robotics and artificial intelligence can serve to substitute for labour in the production process, but robots don’t buy white goods – and nor for that matter do the elderly. The highest levels of consumption demand arise in the early years of raising a family.

The scale and ubiquity of this population ageing simply cannot be offset to any meaningful degree by immigration, labour force participation will be far more important.

There is a green dividend to the population ageing and decline scenario; with the exception of health care, this smaller older population should need and demand less – there is evidence from the US and Japan to support that idea. The extent and precise consequences of this shift for greenhouse causes and effects are open questions. This is a world with adequate resources; a world with non-existent or negative growth; a world of high unutilised industrial capacity. This probably augurs well for international relations, but even that prospect is clouded by the likelihood that some nations will grow old before they grow rich.

We might ask if such a population would find investment in debt securities preferable to equities. We may reason that in this no-growth world, lower for longer characterises the prospects for interest rates, but we should also ask what, with these prospects, motivates saving at all. Of course, demographics alone do not determine our destiny and there are many instances, from Thomas Malthus to Paul Ehrlich, where projections from them have failed to materialise, but the principal concern here is the total lack of consideration, the absence of any public debate or even any sign that our regulators have given these possibilities any thought at all.

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