The Demographic Dividend
I spend an inordinate amount of time thinking about demographics. That stems from my writing of Global Pension Crisis in 2013, because you cannot talk about pensions and retirement dynamics without getting into demographics. I wrote that book on the back of a course I taught about pensions at Cornell’s business school from 2008 until 2017. In fact, I found the demographics that I kept seeing and tallying every year when I updated my data and my PowerPoint slides, compelled me to write a book about what I was seeing. I taught that course which led to that book because I had run several investment management businesses that served pensions and began in 1992 by setting up the Retirement Services Department at Bankers Trust. When you build and run a retirement services business you spend a lot of time thinking about the economic process of retirement, less at the micro and more at the macro level. All of that revolves around demographics for the most obvious of reasons. The first is that pensions (especially the traditional defined benefit plans) are governed by a combination of investment performance and actuarial reality, which is a reflection of demographics. Its as simple as how much you accumulate and how much you are obligated to pay for how long. Naturally, there are lots of mathematical computations and heuristics that go into all these asset and liability balancing acts, but fundamentally, it all boils down to demographics.
When you get caught up with pension dynamics as I did, it colors your entire world view the same way that climate change reality must affect the thinking of environmentalists. You want to refrain from being fatalistic and you want to come back to positive solutions to improve the situation, but that all has to operate within the context of the macro-demographic reality. In its simplest form, demographics are about how population grows and how population dies. Fertility, age composition and longevity are the key statistics that need to be considered. The entire discipline of economics, often called the “dismal science”, is predicated on demographics. When the Scottish historian Thomas Carlyle coined the phrase, he based it on the work of Thomas Malthus, who famously studied population and the ability of the world to feed its burgeoning cohorts. What could be more central and fundamental to life?
I made sure to tell all of my students over the years, not just those taking the pensions course, that nothing would define their working lives and perhaps their overall lives more than the global pension crisis that was coming down the tracks at us like the 3:10 from Yuma. My stated purpose was to tell them that awareness was the key because the timing cycle of retirement easily lends itself to ignoring the issues until it is too late. That’s not only about the march of time, but also about the power of compounding, which is critically important not to miss out on during the retirement lifecycle. I also used to say that like any massive tidal wave that is coming at you and which you are somewhat powerless to stop, the secret to survival is to figure out how to get on top of the wave and surf your way out of it lest you get crushed by the crashing wave. There will undoubtedly be ways to avoid complete disaster, many of which we cannot imagine in advance in a rapidly changing world, but the need to get out ahead of it and perhaps even be opportunistic about it seems clear to me.
Then COVID hit us between the eyes and I wondered if I had been silly to think that there might not be other, bigger problems to face than the impending pension crisis. There were moments during COVID when it seemed that pensions were a distant concern compared to the immediacy of a global pandemic that was changing our way of life and our perspective of the future. I was honestly surprised at how resilient the global economy and the markets in general were to the dislocation created by COVID. I really thought it would be worse. It was both strange and encouraging to me that people seemed to muscle through it. That did momentarily make me wonder if the worry and hype I had attributed to the global pension crisis was overblown. Would we take that temporal problem (it really is caused by the Baby Boomer demographic bulge) in stride, adjust, stay calm and carry on, as the British like to say? But as the world slowly recovered from a longer than anticipated bout of COVID, humankind went mostly right back to where it was with its problems. The trauma of WWII seemed to have changed mankind for the better, but the trauma of COVID was sort of a non-event except for a few arenas where change was probably due anyway (like movie theaters, malls and office space). The 7 million who died from COVID are a statistical blip and not even a speed bump in the demographic trends, but it didn’t feel that easy while we were in it.
Now that we are more or less out of the COVID business, we seem to be making up for lost time on the demographic march to oblivion and the reflection of that in the retirement crisis. Putting off changes to national pension policy in France has gotten lots of attention this year. We all want to be sympathetic with revolutionary Frenchmen, but privately we all think they are being rather self-indulgent by thinking that increased longevity and growing unfunded pension liabilities shouldn’t come with some degree of postponed retirement. Russia has avoided worrying about their impending retirement crisis by waging war on Ukraine. If we are cynical enough, we might even believe that Putin attacked Ukraine specifically to take the relatively prosperous smaller country as Russia’s retirement kitty. If you can’t earn it and save it, maybe you can just steal it. And China got their wake-up call ten years ago on the pension front, as I pointed out in my 2013 book (which sold as many copies in Mandarin as in English). They got busy trying to raise fertility and population growth after thirty years of doing the opposite and overshooting. And of course they have their own retirement piggy bank in Taiwan, I suppose. But India is the interesting BRIC in the wall to watch right now.
After hanging out behind China in total population forever and despite China being 2.9X bigger in landmass than India, India is set to eclipse China in total population. In fact, it is estimated by the UN population folks that India will pass China in total population in June, a mere two months from now. The inflection point will be at about 1.423 billion people. By 2050, it is estimated that India will be at 1.7 billion compared to China, which is expected to recede to about 1.3 billion. Just for reference, with the US currently at 332 million, our 2050 fate will put us between 384 and 496 million, depending on our immigration policies, where most of our population growth has been coming from for a while now.
A topic which is getting a lot of play due to the lapping of China by India, is something called the Demographic Dividend. That is a catchy way of characterizing the effect of declining fertility and increasing longevity. That combination has generally been considered to be an equation for development and prosperity. If deficit spending is what made America great, what made China great was the demographic dividend mandated by politburo policy. But that formula for success is less clear now in an aging world that now exceeds 8 billion and is starting to put on the demographic brakes. In countries where declining fertility means increasing workforce, it may still have a dividend in the demographic shift. But where decreasing fertility is accompanied by increasing retiree population due to improved healthcare and increased non-working longevity, that’s a problem.
I have long been an advocate of more open border immigration policies. Them’s fighting words amidst Republicans, which seems strange to me. Do they not see that we have spent our demographic dividend long ago and now only have a demographic debt burden to show for it? I want growth for my grandchildren and growth only comes with population growth. It is not responsible to push for more natural fertility (there go the Republicans again with their Right to Life thinking), but we NEED immigration population growth and the programs to support that with education and integration programs. That’s how we get back some of that demographic dividend we so badly crave.