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1bn people joining New Old 55+ mean pension promises turn sour

Consumer demand
By Paul Hodges on 23-Oct-2015

New Old 1950- Oct15aHow long is it before you expect to receive a pension?  How much do you hope it is going to be?  These are key questions for all of us.  And, of course, they are key for companies as well.  They can only sell to people who need – and can afford – their products and services.

  • The chart above, based on latest UN Population Division data, highlights the paradigm shift underway
  • The number of people in the New Old 55+ generation is rising from 250m in 1950 to 1.8bn by 2030
  • In terms of total world population, their numbers will double from 11% to 22% over the same period
  • And the real surge in numbers is only just starting to occur, as the chart shows
  • The BabyBoomers’ increased life expectancy means the world is adding 1bn New Olders between 2000 – 2030

The position in some wealthy countries is actually worse. In the US, for example, 20% of the population will be aged 65+ by 2029.

UK taxes Sept15

Ageing populations have very serious implications for demand, as I discussed earlier this month, as the New Old already own most of what they need.  And it also has serious implications for government finances,as the second chart shows from the respected Institute for Fiscal Studies in the UK:

It highlights how tax payments mirror spending and income patterns.  As the Financial Times notes:

“The most heavily taxed period is unsurprisingly during the second half of working lives, when earnings generally peak. Between the ages of 43 and 56, the IFS estimates that the average amount of tax paid exceeds £10,000 a year”

The youngest Boomers (those born in 1970), are already 45 and in this peak tax paying period.  The generation behind them is very much smaller.  In the West, fertility rates have been below replacement level for the past 45 years, since 1970.  They are also now below replacement levels in many emerging economies including China, Brazil and Russia.Mercer pensions Oct15

It is easy, although rather frightening, to see the impact of these developments on pensions, as a new report from Melbourne Mercer warns:

  • Only Denmark and The Netherlands have “first class” pension systems
  • Very few countries have linked pension age to increased life expectancy
  • Most will probably be unable to pay promised pensions as a result

Our pension age was set a century ago, when most people never lived to collect it. Today, as Mercer note, “living to 90 and beyond will become commonplace”.

Common sense tells us that today’s younger generation cannot afford to pay pensions on today’s basis for their parents. And it is doubly unfair to ask them to do this, as they are unlikely to receive similar benefits when they are older:

Older societies such as Japan are already facing major problems. The tragic suicide of a pensioner in the summer highlighted the fact that many cannot afford to live on their pension, which can often be less than $1k/month.  Rent and compulsory insurances can take 40%, leaving people with just a few hundred dollars/month on which to live.

Other countries such as Brazil are already in pension crisis, as the New York Times reports.  Fertility rates have more than halved to 1.8 babies/woman over the past 35 years, whilst life expectancy has risen from 63 to 75.  Yet Brazilians retire at an average age of 54, and spouses and daughters often inherit their pensions after they die.

Of course, no politician wants to tell the electorate that they will not receive their expected pension.  Instead, they pretend that printing money via stimulus policies can somehow magically help solve the problem of slowing growth.  All of us will pay the price for their cowardice.

Similarly, companies who fail to recognise the consequences for spending and demand patterns risk going out of business.  The 1bn people joining the New Old generation are the main growth market for the future.  They will have increasingly precarious incomes, and 425m of them will live in Asia.