2005 May 07 Saturday
McKinsey Sees Global Wealth Reduction Due To Aging Populations

McKinsey consultants Diana Farrell, Tim Shavers, and Sacha Ghai say economic growth in industrialized countries will decrease due to lower savings rates as a result of aging populations. (site requires free registration)

Finding solutions won't be easy. Raising the retirement age, easing restrictions on immigration, or encouraging families to have more children will have little impact. Boosting economic growth alone is not a solution, nor is the next productivity revolution or technological breakthrough. To fill the coming gap in global savings and financial wealth, households and governments will need to increase their savings rates and to earn higher returns on the assets they already have.

...

As the elderly come to make up a larger share of the population, the total amount of savings available for investment and wealth accumulation will dwindle. The prime earning years for the average worker are roughly from age 30 to 50; thereafter, the savings rate falls. With the onset of retirement, households save even less and, in some cases, begin to spend accumulated assets.

The result is a decline in the prime savers ratio—the number of households in their prime saving years divided by the number of elderly households. This ratio has been falling in Japan and Italy for many years. In Japan, it dropped below one in the mid-1980s, meaning that elderly households now outnumber those in their highest earning and saving years. Japan is often thought to be a frugal nation of supersavers, but its savings rate actually has already fallen from nearly 25 percent in 1975 to less than 5 percent today. That figure is projected to hit 0.2 percent in 2024. In 2000, the prime savers ratios of Germany, the United Kingdom, and the United States either joined the declining trend or stabilized at very low levels. This unprecedented confluence of demographic patterns will have significant ramifications for global savings and wealth accumulation.

Countries that have been financing the American current accounts deficit by buying US Treasuries will cease to have the savings available to do so. Less capital will be available.

The rising cost of pensions and health care get all the press attention (and in America perversely pensions get more attention than the far greater problem with health care). But the McKinsey analysts see declining savings as an equal or greater problem.

Most of the public discussion on aging populations has focused on the rapidly escalating cost of pensions and health care. Little attention has been paid to the potentially far more damaging effect that this demographic phenomenon will have on savings, wealth, and economic well being. As more households retire, the decline in savings will slow the growth in household financial wealth in the five countries we studied by more than two-thirds—to 1.3 percent, from the historical level of 4.5 percent. By 2024, total household financial wealth will be 36 percent lower—a drop of $31 trillion—than it would have been if the higher historical growth rates had persisted.

Unlike Merrill Lynch, McKinsey is not bullish on America.

The United States will experience the largest shortfall in household financial wealth in absolute terms—$19 trillion by 2024—because of the size of its economy. The growth rate of the country's household financial wealth will decline to 1.6 percent, from 3.8 percent.

My guess is that George Bush's proposal to reduce the Social Security benefits for middle and higher income workers might boost savings because people would realize they need to save more for their retirements.

Here's a really interesting twist on the higher savings rates of continental Europeans: They save more but get lousier returns on their savings.

UK and US households compensate for their low savings rates by building wealth through high rates of asset appreciation. Their counterparts in Continental Europe and Japan save at much higher rates but ultimately accumulate less wealth, since these savings generate low or negative returns.

My guess is that the trend toward global capital markets will decrease the difference in average returns by investors from different countries.

If a shortage of capital causes possessors of capital to demand a higher rate of return then this would be bearish for stock markets. Why? Think about stocks that issue dividends. The prices of the stocks would have to be lower per dollar of dividend to compensate for higher interests available from bonds. But slower rates of rises of stock prices will compound the problem by lowering household net worths.

McKinsey's report reinforces my belief that the biggest economic problem facing the industrialized countries is their aging populations. But immigration is not a solution because immigrants to both Europe and the United States do more poorly than native born on average. Granted, there are Chinese, Korean, and Indian immigrant engineers who are making far more than the average white guy in America. But in America the Hispanics on average have far lower levels of educational attainment and lower incomes as compared to whites even in later generations. Similarly, in Europe the Arabs do far worse educationally and economically than the natives. Also in America the immigrants are not much younger on average than the native born.

I favor a few policies to address the economic problem caused by aging populations.

  • Stop letting in poorly educated immigrants and immigrants whose jobs pay poorly. Let in only those who will earn salaries that will generate far more tax revenue than they get in benefits and who will raise the national average per capita GDP.
  • Raise retirement ages. People are not as physically worn out at age 65 as they were back in the 1930s. Well, retirement age levels should reflect rising health of those in their 60s.
  • Accelerate education as a means to get people into the workforce at earlier ages. Let high school and college students study 12 months of the year and to advance through courses at faster rates. How? Video recorded high resolution lectures made at multiple camera angles (to include blackboards) to allow kids to learn for as many waking hours as they can handle. Also add in the ability to take tests in testing centers at high schools and universities or via the web.
  • Accelerate biomedical research to develop the means to slow and reverse aging. Then people could work for much longer.
  • Automate medical care with electronic medical records, expert systems for doing diagnosis, and more automated methods of diagnostic testing using nanotech sensors.
  • Implement health savings accounts so that people have incentive to save with pre-tax dollars to treat future health care needs.

The McKinsey analysts point out that corporations could dramatically boost 401k savings enrollment rates by requiring new employees to opt out rather than opt in.

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Share |      By Randall Parker at 2005 May 07 04:41 PM  Civilizations Decay


Comments
JRM said at May 7, 2005 10:09 PM:

"Raise retirement ages. People are not as physically worn out at age 65 as they were back in the 1930s. Well, retirement age levels should reflect rising health of those in their 60s. "

I feel that many people share this sentiment. Just today my father said he believed people should work until they are at least 70 because people live longer today and if they don't stay in the workforce, they might run out of savings in their old age.
If Bush wants to reform Social Security, raising the retirement age would be the best place to start.

crush41 said at May 8, 2005 12:33 PM:

Agreed. Indexing social security to average life expectancy would also encourage aging citizens to take better care of themselves, and I understand that it would more than make up for the projected "shortfall" to be experienced in 2008, 2014, or whatever the latest estimate is. By eliminating early eligibility and setting the age to receive benefits at 75, the number of recepients drops 60% to roughly 3% of the population. It would have to be phased in over time, etc, but no benefit cuts (slowing of benefits-growth) would have to take place nor would payroll taxes need to be increased.

Bartelson said at May 8, 2005 4:33 PM:

"Raise retirement ages. People are not as physically worn out at age 65 as they were back in the 1930s. Well, retirement age levels should reflect rising health of those in their 60s. "

Yes, but there are still a large number of people who are physically worn out at age 65. What about them?

"By eliminating early eligibility and setting the age to receive benefits at 75, the number of recepients drops 60% to roughly 3% of the population."

Why would any black man - whose life expectancy is less than 75 - want to participate?

Randall Parker said at May 8, 2005 4:53 PM:

Bartelson,

First off, instead of having two different benefit levels for retiring at two ages (e.g. 62 and 65) I'd have a sliding scale with more dates at which to choose to retire and better benefits the longer they keep working. Give people financial incentives to work longer and they will work longer.

Also, I'd institute the use of physicals and criteria of the sort that insurance companies use to predict longevity and I'd fund more research into predicting longevity. Then offer earlier eligibility to start collecting for those who have actuarial odds for lower longevity. Though I think that would be hard to sell politically.

Also, I'd have earlier retirement for the disabled.

Matthew Cromer said at May 8, 2005 7:16 PM:

I'm with you on most of these proposals. Not sure the "study 12 hours a day" proposal would work. The important task is to get talented kids to enjoy learning, not cramming in 12 hours worth of facts a day.

Randall Parker said at May 8, 2005 7:48 PM:

Matthew,

For me high school was boring torture by incredibly slow rates of teaching aimed at the average student. Once I got to college and the pace quickened the tedium was greatly relieved. I figure there are a lot of high school students who are in that position. Why not let them watch college level lectures and lectures on topics that are intellectually much more challenging?

Also, recorded video could be pitched at the interests of students. If some students wanted to watch Renaissance art history they could. If others wanted to watch history of Roman Empire military campaigns they could. Still others could pursue their curiosity about astronomy or music.

If still others wanted to grow up to become a paramedic, nurse, or doctor they could watch medical lectures on infectious disease treatment or trauma treatment. Kids could actually see that their learning in their high school years was relevant to what they want to do when they grow up. I figure it would get some of them more excited about learning.

Matthew Cromer said at May 9, 2005 6:26 AM:

OK Randall I think I see where you are coming from now.

Yes, the "standard" education is hopelessly dull and slow-paced for the bright. Good suggestions.

crush41 said at May 9, 2005 10:59 AM:

Why not let them watch college level lectures and lectures on topics that are intellectually much more challenging?

Also, recorded video could be pitched at the interests of students. If some students wanted to watch Renaissance art history they could. If others wanted to watch history of Roman Empire military campaigns they could. Still others could pursue their curiosity about astronomy or music.

Does anyone see any downside to Randall's plan? You are absolutely correct that many students are not learning anywhere near their potential during primary education--the "gifted" program that allows the kind of intellectual exploration that you suggest is limited to the top 2.5% of students in most school districts and to only one hour per day.

Earning college credit through this independent study was available in my high school, and I took advantage of it, but it is far too limited both in the amount of time that it is alotted and in the number of students it is available to.

The trend towards cutting off special education for the tails and moving everyone back into the "mainstream" is irrational. Coupled with a lack of discipline in public schools, it guarantees that bright students are going to be hopelessly bogged down by rudimentary material and teachers unable to control their classrooms.

And that doesn't even take into consideration how instructional choices would effectively filter out the ideological spin of many educators, as only the best videos, etc are selected.

Finally, it would cut back on the costs of teachers while improving the pedagogical effectiveness of the material being taught.


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