The future of Generation X. The future of millennials. Population growth vs. population control. Demographics, the study of populations and the groups within them, plays a massive role in shaping our society and it's a topic we discuss at great length in our Future of Human Population series.
But in the context of this discussion, demographics also plays a straightforward role in deciding the economic health of a nation. In fact, one need only look at the population projections of any individual country to guess its future growth potential. How? Well, the younger a country's population, the more vibrant and dynamic its economy can become.
To explain, people in their 20s and 30s tend to spend and borrow much more than those entering their senior years. Likewise, a country with a large working age population (ideally between 18-40) can use its labor force to power a profitable consumption or export driven economy—as China did throughout the 1980s until the early 2000s. Meanwhile, countries where the working age population is shrinking (ahem, Japan) tend to suffer from stagnating or shrinking economies.
The problem is that mush of the developed world is growing old faster than they are growing young. Their population growth rate in below the average 2.1 kids needed to at least keep the population stable. South America, Europe, Russia, parts of Asia, their populations are gradually shrinking, which under normal economic rules, means that their economies are expected to slow and eventually contract. The other problem this slowdown causes is an exposure to debt.
Debt’s shadow looms large
As hinted at above, the concern most governments have when it comes to their graying population is how they will continue to fund the Ponzi scheme called Social Security. A graying population impacts old age pension programs negatively both when they experience an influx of new recipients (happening today) and when those recipients pull claims from the system for longer stretches of time (an ongoing issue that depends on medical advancements within our senior healthcare system).
Normally, neither of these two factors would be an issue, but today’s demographics is creating a perfect storm.
First, most Western nations fund their pension plans through a pay-as-you-go model that only works when new funding is funneled into the system through a booming economy and new tax revenue from a growing citizen base. Unfortunately, as we enter a world with fewer jobs (explained in our Future of Work series) and with the population shrinking in much of the developed world, this pay-as-you-go model will begin running out of fuel, potentially collapsing under its own weight.
The other weakness of this model appears when governments that fund a social safety net are assuming that the money they are setting aside will compound at growth rates between four to eight percent annually. In other words, governments expect that every dollar they save will double every nine years or so.
This state of affairs isn't a secret either. The viability of our pension plans is a recurring talking point during each new election cycle. This creates an incentive for seniors to retire early to start collecting pension cheques while the system remains fully funded—thereby speeding up the date when these programs do go bust.
Funding our pension programs aside, there is a range of other challenges rapidly graying populations pose. These include the following:
A shrinking workforce may cause salary inflation in those sectors that are slow to adopt computer and machine automation;
Increased taxes on younger generations to fund pension benefits, potentially creating a disincentive for younger generations to work;
Larger size of government through ramped up healthcare and pension spending;
A slowing economy, as the wealthiest generations (Civics and Boomers), start spending more conservatively to fund their lengthening retirement years;
Reduced investment into the greater economy as private pension funds draw away from funding private equity and venture capital deals in order to fund the pension withdrawals of their members; and
Prolonged stretches of inflation should smaller nations be forced to print money to cover their crumbling pension programs.
Now, if you read the previous chapter that described the Universal Basic Income (UBI), you might think that a future UBI could potentially address all the concerns noted thus far. The challenge is that our population may grow old before the UBI is voted into law in most aging countries around the world. And during its first decade in existence, the UBI will likely be funded substantially through income taxes, meaning that its viability will depend on a large and active labor force. Without this young workforce, the quantity of each person's UBI could be lower than is necessary to meet basic needs.
Similarly, if you read the second chapter of this Future of the Economy series, then you'd be right in thinking the inflationary pressures of our graying demographics may counterbalance the deflationary pressures technology will place upon our economy over the coming decades.
What our discussions about the UBI and deflation are missing, however, is the emergence of a new field of healthcare science, one that has the potential to reshape entire economies.
Extreme life extension
To address the social welfare bomb, governments will try to enact a number of initiatives to try and keep our social safety net solvent. This can involve increasing the retirement age, creating new work programs tailored to seniors, encouraging individual investments into private pensions, increasing or creating new taxes, and yes, the UBI.
There is one other option that some governments may employ: life extension therapies.
We wrote in detail about extreme life extension in a previous forecast, so to summarize, biotech companies are making breathtaking strides in their quest to redefine aging as a preventable disease instead of an inevitable fact of life. The approaches they are experimenting with mainly involve new senolytic drugs, organ replacement, gene therapy, and nanotechnology. And at the rate this field of science is progressing, the means to extend your life by decades will become widely available by the late 2020s.
Initially, these early life extension therapies will only be available to the rich, but by the mid-2030s, when the science and tech behind them fall in price, these therapies will become accessible to all. At that point, forward thinking governments may simply include these therapies into their normal health spending. And for the less forward thinking governments, not spending on life extension therapies will become a moral issue that people will turn out in force to vote into reality.
While this shift will substantially expand health care spending (hint to investors), this move will also help governments kick the ball forward when it comes to dealing with their senior citizen bulge. To keep the math simple, think about it this way:
Pay billions to extend the healthy working lives of citizens;
Save billions more on reducing senior care spending by governments and relatives;
Generate trillions (if you’re the US, China, or India) in economic value by keeping the national workforce active and working for decades longer.
Economies begins to think long term
Assuming we transition to a world where everyone lives substantially longer lives (say, up to 120) with stronger, more youthful bodies, current and future generations who may enjoy this luxury will likely have to rethink how they plan their entire lives.
Today, based on a widely expected lifespan of roughly 80-85 years, most people follow the basic life-stage formula where you stay in school and learn a profession until the age of 22-25, establish your career and enter into a serious long-term relationship by 30, start a family and purchase a mortgage by 40, raise your children and save for retirement until you reach 65, then you retire, trying to enjoy your remaining years by conservatively spending your nest egg.
However, if that expected lifespan extended to 120 or longer, the life-stage formula described above is completely scrapped. To start, there will be less pressure to:
Start your post-secondary education immediately after high school or less pressure to finish your degree early.
Start and stick to one profession, company or industry as your working years will allow for multiple professions in a variety of industries.
Marry early, leading to longer periods of casual dating; even the concept of forever-marriages will have to be rethought, potentially being replaced by decades-long marriage contracts that recognize the impermanence of true love over extended lifespans.
Have children early, as women can devote decades to establishing independent careers without the worry of becoming infertile.
And forget about retirement! To afford a lifespan that stretches into the three digits, you'll need to work well into those three digits.
Link between demographics and the GDP decoupling
While a declining population isn't ideal for a country's GDP, it doesn't necessarily mean that said country's GDP is doomed. Should a country make strategic investments into education and productivity enhancements, then per capita GDP could grow in spite of a falling population. Today, in particular, we're seeing jaw-dropping productivity growth rates thanks to artificial intelligence and manufacturing automation (topics covered in earlier chapters).
However, whether a country decides to make these investments depends heavily on the quality of their governance and the funds they have available to upgrade their capital base. These factors could spell tragedy for select African, Middle Eastern, and Asian countries that are already racked with debt, run by corrupt autocrats, and whose populations are expected to explode by 2040. In these countries, excessive demographic growth could pose a serious risk, all while the rich, developed countries around them keep getting richer.
Weakening the power of demographics
By the early 2040s, when life extension therapies become normalized, everyone in society will begin thinking more long term about how they plan their lives—this relatively new way of thinking will then inform how and what they vote on, to whom they will work for, and even what they choose to spend their money on.
This gradual shift will bleed into the leaders and administrators of governments and corporations who will also gradually shift their governing and business planning to think more long term. To an extent, this will result in decision making that is less rash and more risk averse, thereby adding a new stabilizing effect on the economy over the long term.
A more historic effect this shift could produce is the erosion of well-known adage, ‘demographics is destiny.' If entire populations start living dramatically longer (or even living indefinitely), the economic advantages of one country having a slightly younger population begins to erode, especially as manufacturing becomes more automated.
Future of the economy series
Third industrial revolution to cause a deflation outbreak: Future of the economy P2
Automation is the new outsourcing: Future of the economy P3
Future economic system to collapse developing nations: Future of the economy P4
Universal Basic Income cures mass unemployment: Future of the economy P5
Future of taxation: Future of the economy P7
What will replace traditional capitalism: Future of the economy P8