global perspectives

What happens when a demographic dividend becomes a deficit?

What happens when a demographic dividend becomes a deficit?
Henk Grootveld - Head of Trends Investing

Henk Grootveld

Head of Trends Investing
Pascal Menges - CLIC Equities, CIO Office

Pascal Menges

CLIC Equities, CIO Office

The demographic dividend that has provided the foundation for so much economic advancement over the past six decades has been lost and will be replaced by a demographic deficit that will last the coming sixty years. The depletion of the workforce in the largest economies will inevitably have large economic consequences, affecting inflation, urgently requiring healthcare and pensions reforms, and for societies to adapt.  


Expect structurally higher inflation…

An ageing population influences inflation in two ways. First, the shrinking workforce shifts the equilibrium between production and consumption as the balance between workers, who normally produce more than they consume, and non-workers, who do the opposite, shifts. Second, this shrinking workforce lowers the labour supply to the economy – just as ageing simultaneously creates more demand for labour in service sectors like healthcare.

The strong labour supply and mass savings of recent decades made the demographic dividend a deflationary force. In addition, the prices of many consumer goods and services came down, or were at least contained by the combination of globalisation and digitalisation. These three factors, a growing workforce, digitalisation and globalization, have enabled central banks to structurally lower benchmark interest rates since 1980.

However, since 2020, the demographic dividend has become a deficit, globalisation has peaked, and digitalisation has claimed the low hanging fruit among most industries, with the exception of healthcare. Therefore, in our view, it is logical to expect structurally higher inflation in the coming decades.


…changes to the healthcare system…

Rising demand for healthcare, in addition to the abundance of systemic inefficiencies, has led to healthcare costs outstripping GDP growth. Without changes to the healthcare system, costs will simply continue to outgrow GDP due to two connected reasons: the ageing of societies and the growing number of chronically ill patients.

The majority of healthcare costs are spent in the last years of life and, due the ageing of societies, the number of people reaching that point will increase substantially in the coming years. On top of that, the incidence of chronic illness tends to increase with age.  In 2019, for example, 60% of adults in the US had one or more chronic conditions, which required lifelong, and therefore expensive, treatment.

Rising costs are highlighting the need for digital solutions. So far, the conservative healthcare industry has been very hesitant to welcome the disruptive forces of digitalisation, even though health technology has the potential to lower costs and improve outcomes. In the consumer services and manufacturing sectors, digitalisation has simplified processes, eliminated intermediaries and, above all, lowered costs. The healthcare system is in sore need of this treatment, and we are likely to see this become more of a priority, going forwards.

The cost issue can also be mitigated through the promotion of preventative measures. Some governments promoted healthy lifestyles before the pandemic but this will now become a policy feature in many countries. General practitioners, lifestyle coaches and psychotherapists are all trying to improve peoples’ lifestyles and prevent obesity-related or other chronic diseases. Employers see the benefit: their employees are more likely to be more productive, loyal and have longer tenures.


…overdue pensions reform…

If we are to live long and prosper, pension provisions must evolve, too. Worldwide, there are three pensions systems: unfunded pay-as-you-go (PAYG), funded defined benefit (DB) and funded defined contribution (DC). The latter is increasingly seen as the future model for investing for retirement as it transfers the funding burden away from the state to corporations and individuals. However, it burdens people with all of the risk of the outcome, too.

Many governments have undertaken pension reforms to ‘balance’ their PAYG systems. This simply means making pension systems less generous by restricting early retirement, reducing benefits, increasing pension taxes and lifting the retirement age. Increasing the retirement age is an appropriate measure, as it has been fixed at 65 years for more than a century while life expectancy has simultaneously increased by almost 50 years – and remains on the rise thanks to scientific progress in healthcare.  The 2019-20 French pension reform strikes, however, illustrate that such changes are difficult for the middle class to swallow and would mean political suicide for any elected politicians proposing them.

To compensate for lower PAYG state pensions, governments have introduced defined-contribution (DC) schemes, in which each person invests for their retirement through an individual account in a tax-free manner and funded by employer and employee. These schemes have incentivised private pension savings, and can complement or even replace, government-paid PAYG pensions.

This shift of responsibility from the collective to the individual is a clear growth opportunity for asset managers, wealth advisers and, not to forget, financial educators – not only in the accumulation phase, but also in the retirement phase when their assets are drawn down and investment risk get reduced.


…and a more inclusive society.  

According to the United Nations we are in the decade of healthy ageing where society urgently need to adapt to their ageing population. We must become more inclusive of older people: how they move, use amenities and spend leisure time. Practical facilities need to integrated into planning, from access ramps to wider, obstacle-free pavements, better public transport connections and, potentially, autonomous-driving infrastructure. In addition, the social environment of cities needs to accommodate the interest of the elderly – and foster interaction across generations.

Society also needs to address a shortage in primary, rehabilitate, palliative and end-of-life care, given that demand is increasing. In order to contain the total healthcare bill, the WHO recommends governments to continue to invest in these types of home care as much as possible in order avoid expensive and unnecessary hospital care.

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