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Pension promises unaffordable due to demographic change

Consumer demand
By Paul Hodges on 02-May-2014

Italy Apr14As promised yesterday, the blog looks today at the impact of today’s rapidly ageing populations.  The key point is that global life expectancy been rising for over 40 years, whilst fertility rates have been falling.  A paradigm shift is thus inevitable, where future demand will be very different:

    • 1970 Onwards.  Growth accelerated, as the population became concentrated in the wealth creating 25 – 54 age group, and the need to spend money on dependent children reduced. It then moved into SuperCycle mode as large numbers of women became able to re-enter the workforce after childbirth, and also won major increases in their earnings relative to men
    • 2001 Onwards.  Growth began to slow, as the number of wealth creators reduced due to more and more BabyBoomer men and women joining the New Old 55+ group. This slowdown is now accelerating, as the New Old represent a replacement economy.  They already own most of what they need, and their incomes are reducing as they enter retirement

It also doesn’t take a rocket scientist to work out that this combination of increasing numbers of New Old, when combined with decreasing numbers of Wealth Creators, means that pension promises are unlikely to be honoured.

Or as the chairman of one of the world’s Top 5 banks told the blog privately, “everyone knows pensions will never be paid on the basis currently assumed“.  To which the blog replied, “everyone seems to know – except the ordinary people who still expecting their pensions to be paid on the basis now promised.”

Italy is the world’s 8th wealthiest country, and offers a good example of what the future has in store, as the chart shows:

      • As in the rest of the West, its fertility rates have been below replacement level for 40 years
      • Meanwhile its life expectancy has already risen from 65 to 80+, and is still rising
      • As a result, it now has 50% more adults over 65 than children under 10

This is potentially a double blow for companies, as it means future sales and profits will be much lower than expected:

      • There will be 370m people aged over 60 by 2030 in the world’s wealthy regions, 4 times the 1950 level
      • They will be 29% of the total population, versus just 12% in 1950
      • There will also be 1bn aged over 60 by 2030 in the world’s poorer regions, 10 times the 1950 level
      • They will be 14% of this population, compared to 6% in 1950

The crisis facing the world’s toy industry today is just one example of the massive disruption that will impact almost every company over the next few years.  Demographic shifts take a while to be noticed, because they take place year after year.  But their cumulative impact is enormous and irreversible.

Even if women suddenly decided to have more babies today, it would take 25 years for this to change the economic picture.  And during the period, the balance would actually become worse, not better.  Children, wonderful though they are, are dependents and not wealth creators.

If the blog had one wish, it is that companies would wake up to the fact that these major demographic changes will have an enormous impact on their future sales and profits.  Tomorrow’s winning companies will be those focused on providing affordable goods and services for cash-strapped older and younger people.