Market Overview
If everybody retires, nobody retires
What happens when two-thirds of your country’s population is old enough to quit working? When one in five is past age 75? When the average age of the whole population – including students, toddlers and newborn babies – is 50?
In Japan, they’re not asking, “What happens?” They’re asking, “What happened?” So, the real question before us is, “Can it happen here?” And while the answer is “yes,” it’s a soft yes. Our culture and our markets are markedly different from Japan’s and we might be better insulated from the worst effects of an aging economy.
Japan’s geriatric jam
Through the 2000s and 2010s, the age of the average Japanese citizen soared. It’s still drifting upward, and probably will through the rest of this decade, but has mainly leveled off. So, Japan works well as a model for how much an aging population can affect an economy.
The most immediate effects are on spending for medical care (of which about one-third is for long-term care), social security and private pension payouts. which have all risen rapidly over the course of the 21st century. Medical care for the elderly in Japan amounted to 6.9% of gross domestic product in 2020, and Mitsui & Co. projects it to go up to 7.8%. While that’s only a 0.9 percentage point difference, it’s actually a 13 percent increase. The distinction is important to us because health care accounts for 17.8% of American GDP – roughly twice that of the rest of the developed world, according to The Commonwealth Fund. If Japan’s present is our future, then we can expect our healthcare costs to peak at 20.1% of our total economy. Fun fact: Japan has the developed world’s longest life expectancy at 84.7 years and the U.S. has the shortest at 77.0.
Most Japanese workers spend their whole career with one company then retire, according to the Organisation for Economic Cooperation and Development. Men call it quits at 68 and women at 67, according to an academic paper. While it’s legal to keep an employee on after that, it’s frowned upon and, in Japan, frowns have the force of law. Also, Japan has a notoriously low fertility rate. CNN recently reported it dropped to an all-time low of 1.2 babies per woman, compared to a 2.1 rate required for a stable population without immigration. Oh, and net migration into Japan is almost non-existent, according to United Nations figures. As a result, the ratio of working people to retirees is a paltry 2.1.
“Japan’s economic crisis is essentially a demographic crisis,” according to a European Union white paper. “The declining numbers of young people in the labour force has led to a shortage of workers in manufacturing and the ageing of the workforce has provoked a decline in production and innovation, and therefore a drop in Japan’s manufacturing exports as a share of global exports. The growing elderly population is bringing down savings, while the decreasing labour force is resulting in a declining return on investment and reducing the investment rate.”
Japan’s most dire economic challenge – a currency that’s the weakest it has been in 30 years – is hard to blame on the retirees. If you were to draw a through-line, it would start with the labor shortage caused by the demographic crisis, which would drive up wages. Higher wages lead to inflation and inflation leads to devaluation. But the reality is, the monetary policy set by the Bank of Japan has been out of step with reality for years, so the bottoming out of the yen was inevitable.
Still, the impact of an aging population is as bad as it’s going to get in Japan and its economy is seeing green shoots already. The country managed to avoid a recession most observers expected in the first half of 2024. While the rest of the developed world is still trying to drive a stake through the heart of the recent bout of high inflation, Japan has already solved it. Core inflation – which peaked at only 4.3% -- is down to 2% and food and fuel prices also seem to have been tamed.
And things are not likely to get any worse than they are now – or at least, not due to the aging of the population. Japan had a much shorter baby boom than the rest of the world. Its post-war generation is already 80-ish and, candidly, Japan is likely to have fewer retirees as a percentage of the population going forward.
America’s challenge
Things are different here. Our boom didn’t end until 1964, meaning that a significant portion of that generation is still in peak earning years, and another chunk are still healthy, active and deferring full retirement.
The bad news, as we noted, is that Americans lives shorter lives than Japanese on average. Our economic issues related to an aging population will sort themselves out 7.4 years faster here than there. Still, there are less grim reasons for optimism. First, our birth rate is higher: 1.6%. While that’s not the prescribed 2.1%, it’s down a tick from the Covid-19 pandemic, which had the same effect as a two-year-long power outage.
But it doesn’t have to be any higher here because we have immigrants. Since 1990, we’ve seen between 1.0 and 1.9 million new immigrants every year , the World Bank calculates, except for much lower counts in 2020 and 2021. Between 500,000 and 1 million of them become naturalized citizens.
Combine that with a broader, more balanced economy as well as a more stable currency, and the U.S. has some enviable advantages. Still, studies indicate that the older the population, the slower the economy is likely to grow, although the lived experience might not be too bad.
“But that doesn’t mean that the American economy … [is] doomed by an aging population, according to the FiveThirtyEight blog. “In fact, though overall economic growth is threatened by population aging, the opposite is true for per capita wages, consumption and productivity, which may actually rise in such a scenario. That’s because an aging population means more capital per available worker, assuming that savings rates stay the same.”
Aging receivables
Getting old doesn’t mean inevitable decline. Yes, there come some limitations, but we develop smarts to offset the slows.
And the smart thing is to see your age in the context of the nation’s age. Some industrial sectors expect to benefit from the elder economy, according to Morningstar: Healthcare of course, but also Finance and Consumer Discretionary. The Manufacturing sector which could find labor in short supply, according to the U.S. Census Bureau, might struggle.
Also, it matters very much whether you’re retired, preparing to retire or still have decades to go. Pendulums swing, and, by the time the youngest readers of this space retire, the markets will be coming to terms with how the economy will reshape itself after all those Social Security, pension and 401(k) deposits stop coming.
Those are some broad brushstrokes, though. To help you identify the best opportunities at the ticker-symbol level, consult a trusted financial professional.
Special note
We’ve been giving Boeing a hard time the past couple months, so we’d like to take a moment and recognize the company’s success with its truly historic Starliner launch and docking. Godspeed, Suni Williams and Butch Wilmore!
