What’s Killing Growth? Pensioners and Birth-Rates, Research Claims

An ageing population and lower birth rate is not just causing a pension crisis, it is changing the face of our entire economies, a new essay has claimed.

(June 28, 2013) — Thought it was debt, financial markets or a slow-down in China that was killing our economies? According to new research it is more likely to be the changing demographics in our society that is to blame

A fall in birth-rates across the developed world and the ageing population has put the brakes on growth, Rob Arnott and Denis Chaves at Research Affiliates have claimed.

And we had better get used to it, they said, as this new demographic normal is here to stay.

“The developed world is entering a new phase in which the low fertility rates of past decades lead to slow growth (in many countries, no growth) in the young adult population; young adults are the dominant engine for GDP growth,” the pair wrote in an essay published this week.

So fewer young people equals slower growth.

“The average contribution to GDP growth becomes negative between 55 and 60. This does not mean that people begin to consume more GDP than they produce after age 55, only that-on average-workers above age 55 have passed their peak in productivity.”

Additionally, retirement ages that have not kept up with longevity increases are causing a drag on GDP.

“These newly-minted senior citizens, transitioning from near-peak productivity to retirement in a single step, will be drawing on the economy while no longer producing goods and services,” the essay said.

Investors should face up to the fact that high, sustained growth is something of the past, and just because an economy is entitled “developed”, it does not mean that it will continue to outperform.

“The danger is not in the slower growth. Slow growth is not a bad thing. It’s still growth,” the essay said. “The danger is in an expectations gap, in which we consider slower growth unacceptable.”

Investors and other market participants expecting-and demanding-“implausible growth” from policy makers in an “environment in which a demographic tailwind has become a demographic headwind” should expect to be delivered “temporary outsized ‘growth’ with debt-financed consumption (deficit spending)”, the authors said.

Japan is a perfect example of this change in demographics, the essay said, illustrating the country’s specific points.

“With relatively few young workers to take the place of retiring boomers, Japan’s prospective demographic headwind may be greater than 2% per year. A transition from a 3% tailwind to a 2% headwind is shocking: it suggests a 5 percentage point drop in normal real per capita GDP growth rates from the heady growth of the 1960s to the 1980s.”

The relatively good news for “young” economies, such as India and Brazil, is that they will not end up in this state until around 2040.

However, for the rest of us, we are in for a short, sharp shock.

“[Developed markets] enjoyed demographic tailwinds during the past 60 years, so these headwinds will feel more obstructive than they are. It is human nature to consider our personal experience to have been ‘normal,’ so we evaluate subsequent events in comparison with this self-referential ‘norm’.”

To read the entire essay, click here.

Related Content: Graphic: The World Map of Retirement