Aging baby boomers (those born between 1946 and 1964) will likely put pressure on global pension systems and challenge economic stability. However, this large and influential demographic may also create opportunities for savvy investors.
The worldwide dependency ratio, or the number of dependents (those under the age of 15 and over 64) per 100 people, is forecast to rise 13.5% by 2050, according to UN projections. These shifting demographics will limit future government budget flexibility, especially for those who have generous entitlement programs.
In the US, social security is nearly 25% of annual government spending, or about 4.9% of annual GDP, according to the Congressional Budget Office (CBO). Aging populations will likely impact the outlay of this program over the next 25 years, sharply increasing program expenses. Social security will likely grow to nearly 6.2% of GDP by 2040, according to CBO projections. The social security program hints at an underlying problem that many advanced nations will face in the coming 20-30 years: a shortfall in program finances to meet rising obligations.
Not all dependency ratios are created equal; forecasts reveal that certain geographies are likely to feel the slow burn harder than others, and some regions will experience significant advantages from changing demographics. With the exception of Africa, where dependency ratios will fall by 22.7%, all regions will record a rising dependency ratio till 2050. Europe (+46.6%) and North America (+29.2%) are forecast to record the sharpest growth, followed by Asia (+20%) and Latin America (+16.3%).
Dun & Bradstreet has created a scorecard for nations that could have issues meeting long-term obligations by using current general gross government debt as a percentage of GDP and forecast dependency ratio growth. Initially, Europe appears to likely receive the blunt edge of the sword due to aging demographics. Looking more closely we can see that developed nations such as Austria, Italy, Japan, Portugal, Singapore, South Korea, and Spain are most likely to face difficulty meeting future entitlement obligations. (Note: This is notwithstanding any black swan events such as a sudden economic crisis that could put further pressure on governments to meet future obligations, forcing them to raise taxes or reduce entitlement benefits, creating higher future associated economic costs.)
Opportunities in Certain Industries
Aging populations will likely put stress on public pensions, but will also provide an opportunity for businesses within the senior care and construction segments.
An increase in senior care services such as companion or caregivers who meet the social needs of elderly people will create growth. Health care needs will be the most prominent and increased demand for nursing services, doctor care, and ambulatory services.
Construction firms can take advantage of the changing demographics and profit by building more retirement communities or assisted-living facilities.
Africa: An Untapped Continent
The other side of the equation takes into account areas of rapidly dropping dependency ratios. Africa is poised to record a decline in its dependency ratio of 22.7% from 2016 to 2050.
A less overall dependent population, mixed with a sharply rising GDP growth rate over the next 30 years, will likely create a mix of a younger to middle-age population that has increasing disposable income. Businesses that rely upon private consumption as primary income, such as retail and food services, will greatly benefit from this trend.
The majority of African countries that stand to benefit from changing demographics also carry comparatively lower Dun & Bradstreet country risk ratings. These ratings reflect current poor economic, political, and commercial environments, and should be considered when comparing investment objectives.
Adam Morehouse is a Macro Analytic Consultant on D&B’s Global Data, Insight & Analytics team. He covers parts of the Asia Pacific region as a contributor to D&B Macro Market/Country Insight Products. He also contributes to D&B’s monthly economic tracker, adding both commentary and analysis. Adam holds a BBA in finance from James Madison University in Harrisonburg, Virginia, and an MBA in financial management from Pace University in New York City.