Salient to Investors:

  • Expanding populations fueled global prosperity with both workers and consumers but global aging threatens to cause chronically weak economic growth, a more volatile international economy and the risk of a new financial crisis triggered by innovative investments dubbed “death derivatives.”
  • Rob Arnott at Research Affiliates said our era of the most benign demography for GDP growth in history is ending, and a future with vast numbers who no longer produce and a diminished workforce assures class and generational conflict. Arnott and colleague Denis Chaves said living standards will rise more slowly as the demographic tailwind of the post-World War II era turns into a headwind.
  • A 2012 National Academy of Sciences study predicts US output per person through 2030 will rise only two-thirds as fast as in the past half-century due to falling birthrates and longer lifespans. The ECB says European workers must double their productivity – to levels seen in the 1990s Internet boom in the US – for economic growth to reach just 2 percent.
  • China’s working-age population over the next two decades will shrink as a result of its one-child policy, reducing more than 2 percent from annual growth.
  • The IMF posits that central bankers’ traditional tools may prove ineffective in economies dominated by older populations, leading to greater volatility, while persistently low interest rates could invite frequent brushes with deflation or reckless private-sector borrowing.
  • The BIS said that if people live just 3 years longer than current forecasts – or the typical margin of error – the $15 trillion to $25 trillion in global pension fund obligations will increase by $1.4 trillion to $3 trillion, and losses arising due to longevity risk may affect destabilize the financial system.
  • An American male born in 1940 had a life expectancy of just over 61 years versus over 76 years if born in 2012.
  • The National Academy of Sciences said that the US is not facing an insurmountable challenge if it adopts early changes to Social Security, Medicare and Medicaid, higher savings rates and longer working lives.
  • 19 percent of Americans age 65 and older work, the highest level since 1965 and almost twice the 1985 low.
  • Eurostat predicts that by 2050, fewer than 2 European workers will support each retiree versus 4 today.
  • The Census Bureau estimates that by 2030, more than 1 in 5 Americans will be at least 65 versus 1 in 7 today, and by 2056, the over 65s will outnumber the under 18s for the first time.
  • George Magnus at UBS said the labor supply is going to become stressed, and a return to 3 or 4 percent growth is not going to happen. Magnus said immigration at 10 to 20 times current levels could help Europe avoid further declines in the working-age share of its population but that is not going to happen.
  • The US labor force over the next decade will grow at an annual rate of just 0.5 percent, or one-fifth the rate between 1974 and 1981.
  • Annual US growth rates will likely fall below 2 percent versus more than 3 percent during the two decades that preceded the last recession.
  • National Academy of Sciences said that even if the US admitted almost 1 million extra immigrants each year, the retiree-to-worker ratio would continue rising.
  • More than 40 percent of Japan’s population is neither employed nor looking for work.
  • Greenspan said the sheer number of retiring baby boomers already has rendered obsolete the inverted yield curve forecasting tool.
  • Patrick Imam at IMF said older individuals have little appetite for borrowing or risk so may be less sensitive to interest-rate movements than younger populations. Imam said the Fed et al may need to act more dramatically to manage an economy dominated by the old: like raising or lowering interest rates by a full percent rather than the customary quarter-point moves.
  • Most corporate pension plans already are underfunded: Towers Watson say the 429 Fortune 1,000 companies that sponsor defined-benefit plans were $418 billion short at the end of 2012.
  • Amy Kessler at Prudential Financial said pension managers do not use up-to-date tables and so may perceive that their liability is lower than it actually is.
  • If each covered person lived on average one year longer than anticipated, the global pension bill would rise by $450 billion to $1 trillion. A cure for cancer, for example, would mean that the investment banks et al that assume longevity risk would face catastrophic losses as pension plan participants lived years longer than envisioned.
  • Adam Posen said the demographic changes facing pension funds and insurance companies is scary and remain among the biggest dangers for which there is simply no good answer.

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