How Global Aging Will Reshape the Economy and Financial Markets

Richard JacksonCenter for Strategic and International Studies

Exchange Traded Forum 2011Toronto

May 11, 2011

Part I

The Global Demographic

Transformation

Behind the developed-world age wave:Falling fertility and rising longevity.

Total Fertility Rate and Life Expectancy: G-7 Countries

 Total Fertility Rate Life Expectancy at Birth

1960-65 1980-85 2005-10 1960-65 1980-85 2005-10

Canada 3.7 1.6 1.6 71.4 75.9 80.7

France 2.9 1.9 1.9 70.7 74.7 81.2

Germany 2.5 1.5 1.3 70.3 73.8 79.9

Italy 2.5 1.5 1.4 69.6 74.7 81.2

Japan 2.0 1.8 1.3 68.9 76.9 82.7

UK 2.8 1.8 1.8 70.8 74.0 79.4

US 3.3 1.8 2.1 70.0 74.3 79.2

Source: UN (2009)

The developed countries are entering an unprecedented era of “hyperaging.”

US UK France Canada Germany Italy Japan0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

13%

17% 17%

14%

20% 20%23%

19%21%

24% 23%

29%27%

31%

20%

23%

27% 27%

34% 35%

39%

2010 2030 2050

Elderly (Aged 65 & Over), as a Percent of the Population, 2010-2050

Source: UN (2009)

Along with aging populations, most developed countries will have stagnant or contracting ones.

US Canada UK France Italy Germany Japan-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%34%

25%

16%

9%

-9%

-18%-23%

22%

8% 8%

-5%

-25%

-31%

-38%

Total Population

Working Age (Age 20-64)

Source: UN (2009)

Cumulative Percentage Change in the Working-Age Popu-lation (Aged 20-64) and Total Population: 2010-2050

The developing world is still much younger, but it too is in the midst of the “demographic

transition.”

Source: UN (2009)

Demographic Indicators for the Developing World

Fertility RateLife

Expectancy Median Age Elderly ShareTotal Pop. Change

1975 2010 1975 2010 2010 2030 2050 2010 2030 2050 2010-50

Developing World 5.1 2.7 57.2 67.0 27.5 31.6 34.6 6.2% 9.8% 13.7% 48.7%

Sub-Saharan Africa 6.7 5.2 45.5 51.7 18.5 20.6 24.6 3.1% 3.6% 5.2% 131.2%

Muslim World 6.2 2.9 52.2 68.2 24.7 29.4 32.8 4.6% 7.4% 12.2% 69.5%

China & East Asia 4.7 1.7 63.2 73.2 34.4 41.6 46.4 8.4% 16.3% 24.2% 1.8%

India & South Asia 5.4 2.7 51.4 64.9 25.4 30.3 34.0 5.1% 8.4% 12.4% 52.6%

Russian Sphere 2.1 1.4 69.3 67.3 38.2 44.5 48.6 13.5% 20.1% 26.3% -26.7%

Eastern Europe 2.4 1.4 70.0 74.9 38.9 46.0 51.2 14.9% 21.6% 30.0% -17.6%

Latin America 5.1 2.3 61.3 73.5 27.7 33.5 37.5 6.9% 11.7% 17.4% 38.8%

Part II

Challenges for the

Developed World

Falling fertility and rising longevity translate directly into a falling support ratio of workers to retirees.

A falling support ratio in turn translates into a rising cost rate for PAYGO retirement systems.

US UK Canada France Germany Italy Japan0.0

1.0

2.0

3.0

4.0

5.04.6

3.6

4.5

3.5

3.0 3.0

2.62.72.4

2.01.9

1.5 1.41.2

2010 2030 2050

Number of Working-Age Adults (Aged 20-64) per Elder (Aged 65 & Over), 2010-2050

Source: UN (2009)

Rising Retirement Costs

CSIS “Current Deal” Projection:Government Old-Age Benefits, as a Percent of GDP, 2007–2050

 Public Pensions Health Benefits Total

2007 2030 2050 2007 2030 2050 2007 2030 2050

Canada 3.9% 7.0% 8.4% 3.6% 6.1% 8.9% 7.5% 13.1% 17.3%

France 11.2% 17.8% 19.6% 4.5% 7.8% 10.2% 15.6% 25.6% 29.8%

Germany 10.0% 17.0% 20.4% 4.1% 6.3% 8.5% 14.1% 23.3% 28.9%

Italy 12.3% 18.9% 24.6% 3.4% 5.5% 7.5% 15.7% 24.4% 32.1%

Japan 9.1% 13.9% 19.3% 4.0% 6.0% 8.0% 13.2% 19.9% 27.3%

UK 5.8% 7.9% 8.5% 4.0% 6.3% 8.8% 9.8% 14.2% 17.3%

United States 4.1% 6.6% 7.0% 4.2% 8.0% 10.2% 8.3% 14.6% 17.2%

Developed World 8.8% 13.7% 16.6% 3.8% 6.3% 8.6% 11.2% 17.9% 22.5%

Note: Data refer to benefits to persons aged 60 and over. Pension projections assume retirement ages remain unchanged and benefits continue to replace the same share of wages they do today.Source: The Global Aging Preparedness Index (CSIS, 2010)

Rising Retirement Costs

Few countries will be able to raise taxes enough to cover more than a fraction of the age wave’s cost.

Most will have to cut benefits—but the required adjustments are large and are likely to meet growing political resistance from aging electorates.

The likely alternatives: crowd out other spending or let deficits grow—undermining national savings and growth.

Public Benefits in 2007, as a Percent of Total Elderly Cash Income

Average 3rd Quintile

Canada 31% 47%

France 59% 72%

Germany 47% 76%

Italy 55% 77%

Japan 39% 61%

UK 42% 69%

US 22% 38%

Source: The Global Aging Preparedness Index (CSIS, 2010)

Rising Retirement Costs

The slowdown in workforce growth in the developed world will translate into slower growth in GDP.

Japan and some faster-aging European countries face a future of secular stagnation.

Productivity and living standard growth may also slow as rates of saving and investment decline.

Aging workforces may be less flexible, less mobile, and less entrepreneurial—putting a further drag on economic growth.

Average Annual Growth Rate in the Working-Age Population (Aged 20-64), by Decade

 1980s 1990s 2000s 2010s 2020s 2030s 2040s

Canada 1.7% 1.1% 1.2% 0.5% 0.0% 0.2% 0.1%

France 1.0% 0.4% 0.6% -0.2% -0.1% -0.2% 0.0%

Germany 1.1% 0.2% -0.2% -0.3% -1.2% -1.2% -0.9%

Italy 0.9% 0.2% 0.3% -0.3% -0.6% -1.2% -0.9%

Japan 0.7% 0.4% -0.4% -1.0% -0.7% -1.5% -1.5%

UK 0.6% 0.4% 0.6% 0.3% 0.0% 0.1% 0.3%

US 1.4% 1.2% 1.1% 0.6% 0.3% 0.6% 0.6%

Source: UN (2009)

Slower Economic Growth

As more of the population enters its harvest years, consumption rates will rise and savings rates will fall.

Growing fiscal deficits may exacerbate the decline in household savings rates.

The danger of a “Great Depreciation” in financial markets as postwar baby booms retire is overstated.

Instead, aging developed countries are likely to become even more dependent on capital imports from a younger and faster-growing developing world.

Adults Aged 20 & Over by Age Group, as a Percent of All Adults

2010 2020 2030 2040

US Age 20-34 28% 28% 26% 26%

Age 35-59 47% 42% 41% 41%

Age 60 & Over 25% 30% 33% 33%

Canada Age 20-34 20% 20% 17% 18%

Age 35-59 37% 34% 32% 31%

Age 60 & Over 20% 25% 29% 31%

EU15 Age 20-34 24% 22% 20% 19%

Age 35-59 46% 44% 40% 38%

Age 60 & Over 31% 34% 40% 43%

Japan Age 20-34 22% 18% 18% 16%

Age 35-59 41% 41% 38% 34%

Age 60 & Over 37% 41% 45% 50%

Source: UN (2009)

Emerging Capital Shortages

The secular economic shift from manufacturing to services will accelerate.

The “youth demographic” will give way to a new “silver demographic.”

Business growth will come to depend more on market deepening than on market broadening.

Adjustment costs in both product markets and labor markets will rise.

Stagnant or contracting markets will increase the risk of “beggar-thy-neighbor” protectionism.

Shifts in Economic Structureand Business Psychology

1990-2010 2010-2030-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2%5%

-3%

3%

65%

3%

54%

90%Age 0-19

Age 20-39

Age 40-64

Age 65 & Over

Cumulative Percentage Change in the Canadian Population, by Age Group and Time Period

Source: UN (2009)

As societies age, the overall social mood may become more risk averse and “small c” conservative.

Smaller families may find it more difficult to socialize the young—and care for the old.

Elder-dominated electorates may lock in current public spending commitments at the expense of new priorities.

As the developed countries age, they will also grow more diverse—challenging social cohesion in some countries.

The Impact on Social Mood

Share of Population with Less than 20 Years of Life Remaining, by Country, 1950-2050

Source: CSIS calculations based on UN (2007) and Human Mortality Database, University of California, Berkeley and Max Planck Institute for Demographic Research

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

10%

15%

20%

25%

30%

35%

Japan

Italy

Germany

UK

Canada

France

US

Part III

Global Aging and Emerging Markets

The demographic transition opens up a window of opportunity for economic growth and development.

Falling dependency burdens and larger shares of the population in the working years boost per capita GDP.

Over time, this demographic shift may also encourage higher labor-force participation rates, higher saving rates, and greater investment in human capital.

The dynamic is called the “demographic dividend”—and it explains as much as two-fifths of the growth in living standards in East Asia since the mid-1970s.

The Promise of the “Demographic Dividend”

Working-Age Population (Aged 20–64), as a Percent of the Total Population, 1975–2050

1975 1990 2000 2010 2020 2030 2040 2050

East Asia 46.8 55.7 59.6 64.1 63.9 61.5 57.8 56.5

Eastern Europe 56.8 58.3 60.4 63.8 62.1 60.5 58.9 54.6

Latin America 43.8 48.5 52.3 56.3 58.0 57.3 56.5 55.3

Muslim World 42.6 45.1 49.1 54.3 56.1 56.3 56.8 55.9

Russian Sphere 57.7 59.6 60.8 65.6 63.5 61.1 61.3 57.3

South Asia 45.2 48.1 50.8 54.8 56.9 57.2 58.1 57.6

Sub-Saharan Africa 42.0 41.1 42.1 43.5 44.9 47.2 50.6 53.0

Note: Highest share is highlighted.Source: UN (2009)

Risks to Growth and Stability: Squandered Dividends

The demographic dividend creates an economic opportunity , but does not guarantee economic success.

Large parts of the developing world are nearly as far through the demographic transition as East Asia, yet have not come close to matching its stellar growth performance.

Over the past 10 to 15 years, economic growth has finally begun to accelerate in a large number of emerging markets.

Whether the recent boom represents a long-term shift toward higher growth rates remains to be seen.

East Asia

South Asia

Eastern Europe

Latin America

Muslim World

Russian Sphere

Sub-Saharan Africa

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

6.9%

3.5%

1.5%1.2% 1.1%

0.8%

0.2%

7.1%

4.5%

3.7%

1.7%

2.5%

4.1%

1.8%

1975-09 1995-09

Average Annual Growth Rate in Real GDP Per Capita (in 2005 PPP Dollars) by Period, 1975–2009

Source: World Bank (2010); Angus Maddison (2010); and UN (2009).

1975-95 1995-09 1975-09

BrazilChinaIndiaRussia

1975-95 1995-09 1975-09

BrazilChinaIndiaRussia

Average Annual Growth Rate in Real GDP Per Capita

1.1% 1.5% 1.3%7.8% 9.0% 8.3%2.6% 5.1% 3.6%

-0.8% 4.0% 1.1%

The demographic dividend is already ending in some of today’s fastest-growing emerging markets.

As in the developed world, rapid population aging may soon become a drag on economic growth.

China faces a massive age wave that is due to arrive while it is still in the midst of development.

Russia’s economy has been riding high on the commodity boom, but its ruinous demographics are undermining its long-term growth potential.

By the 2030s, India will be one of the few of today’s leading emerging markets whose demographics will still be favorable to growth.

Risks to Growth and Stability:The Second Wave of Global Aging

Elderly Share and Average Annual Growth Rate in the Working-Age Population, by Decade

  1980s 1990s 2000s 2010s 2020s 2030s 2040s

Elderly (65+), % of Population

Brazil 4.3% 5.0% 6.2% 8.1% 11.2% 14.7% 18.4%

China 5.1% 6.1% 7.5% 10.0% 13.9% 19.1% 23.0%

India 3.7% 4.0% 4.6% 5.5% 7.1% 8.8% 10.8%

Russia 10.2% 11.2% 12.6% 14.3% 17.8% 20.8% 23.7%

S. Korea 4.4% 6.2% 9.2% 13.3% 19.5% 27.3% 33.6%

Average Annual Growth Rate in the Working-Age Population (Age 20-64)

Brazil 2.9% 2.3% 2.0% 1.2% 0.5% 0.2% -0.2%

China 2.8% 1.7% 1.4% 0.5% -0.2% -0.7% -0.6%

India 2.5% 2.4% 2.3% 1.9% 1.3% 1.1% 0.7%

Russia 0.7% 0.1% 0.4% -0.9% -1.0% -0.7% -1.6%

S. Korea 2.9% 1.6% 0.7% 0.3% -1.1% -1.5% -1.6%

Source: UN (2009)

0%

5%

10%

15%

20%

25%

30%

China

US

China vs. the United States: Elderly (Aged 65 & Over), as a Percent of the Population, 1970-2050

Source: UN (2009)

2010-30 2010-50

-50%

-40%

-30%

-20%

-10%

0%

-11%

-25%

-18%

-35%Total Population

Working-Age (Age 20-64)

Cumulative Percentage Change in the Russian Population, 2010-2050

Source: UN (2009)

WomenMen

WomenMen

Population Pyramids of China and India in 2010, 2030, and 2050

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

80000 40000 0 40000 80000

India 2010

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

80000 40000 0 40000 80000

India 2030

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

80000 40000 0 40000 80000

India 2050

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

80000 40000 0 40000 80000

China 2010

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

80000 40000 0 40000 80000

China 2030

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+

80000 40000 0 40000 80000

China 2050

Source: UN (2009)

Risks to Growth and Stability: Journeys can be more dangerous than destinations.

Societies undergo tremendous stress as they move from the traditional to the modern. When plotted against development, most of the stressors describe an inverted-U—meaning that they become most dangerous midway through the transition.

These stressors include:

Contact with the global marketplace and culture

Urbanization Environmental degradation Growing income inequality Growing ethnic competition Religious extremism

The "Inverted U" Relationship

Stage of Demographic Transition & Devel-opment

Leve

l of

Str

ess

& R

isk

of V

iole

nce

Part IV

The Shape of the Global Economy

The Developed World:A Shrinking Share of Global Population

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

0%

5%

10%

15%

20%

25%

Japan

Other English-Speaking Countries

Western Europe

US

Developed World Population by Region, as a Share of World Total, 1950-2050

1950 2005 2030 2050USWestern EuropeJapanOther English-Speaking Countries

Population as a Share of World Total

6% 5% 4% 4%10% 5% 4% 3% 3% 2% 1% 1% 3% 2% 2% 1%

Source: The Graying of the Great Powers (CSIS, 2008)

12 Largest Countries Ranked by Population

Ranking 1950 2010 2050

12345678

9101112

Source: UN (2009)Note: Rankings for developed countries that have fallen below 12 are in parentheses.

ChinaIndiaUSRussian FederationJapanIndonesiaGermanyBrazilUKItalyBangladeshFrance

ChinaIndiaUSIndonesiaBrazilPakistanBangladeshNigeriaRussian FederationJapanMexicoPhilippines

Germany (16)France (21)UK (22)Italy (23)

IndiaChinaUSPakistanNigeriaIndonesiaBangladeshBrazilEthiopiaPhilippinesDem. Rep. CongoEgypt

Russian Federation (16)Japan (19)UK (27)France (29)Germany (30)Italy (37)

The Developed World:A Shrinking Share of Global GDP

1950195519601965197019751980198519901995200020052010201520202025203020352040204520500%

10%

20%

30%

40%

50%

60%

70%

Japan

Other English-Speaking Countries

Western Europe

US

Source: The Graying of the Great Powers (CSIS, 2008)

Developed World GDP (in 2005 PPP Dollars), as a Percent of World Total, 1950-2050

1950 2005 2030 2050

USWestern EuropeJapanOther English-Speaking Countries

GDP as a Share of World Total

29% 22% 19% 17%23% 17% 10% 7% 3% 7% 4% 3% 9% 7% 5% 4%

2009 2030 20500%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

34%26% 24%

38%

24%16%

28%

50%59%

Emerging Markets

Other G-7

US

Source: Carnegie Endowment for International Peace (2010)

GDP (in 2005 US Dollars) by Country or Country Group, as a Percent of G-20 Total, 2009-2050

72%

50%41%

The Composition of G-20 GDP:From Majority to Minority Partners

Some Bottom Lines

Long-term decline of the developed world and rise of emerging markets, especially in East and South Asia.

The United States is a partial but important exception to hyperaging and population decline.

Economic success will depend on leveraging differentials in population and economic growth rates across different regions of the world.

Yet aging societies with stagnant or contracting domestic markets may face increasing political pressure to roll back globalization.

Likely global slowdown starting in the mid-2020s as “second wave” of global aging sweeps the developing world.

Question: Who can replace East Asia as the engine of global growth?

Population by Region as a Percent of World Total, 2005-2050

2005 2030 2050East Asia 21.5% 17.5% 14.0%

Latin America 8.6% 8.8% 8.8%

Muslim World 17.2% 19.6% 21.1%

Russia & Eastern Europe 5.4% 3.5% 2.5%

South Asia 22.9% 24.5% 25.2%

Sub-Saharan Africa 11.1% 15.1% 18.8%

United States 4.6% 4.3% 4.1%

Rest of the Developed World 8.8% 6.8% 5.5%

GDP (in 2005 PPP Dollars) by Region as a Percent of World Total, 2005-2050

  2005 2030 2050

East Asia 13.3% 26.0% 29.3%

Latin America 8.3% 6.6% 6.3%

Muslim World 9.2% 9.6% 10.3%

Russia & Eastern Europe 7.1% 6.7% 5.1%

South Asia 6.4% 10.3% 13.5%

Sub-Saharan Africa 2.2% 3.1% 4.5%

United States 22.3% 18.6% 16.9%

Rest of the Developed World 31.4% 19.1% 14.1%

Source: The Graying of the Great Powers (CSIS, 2008)

We live in an era defined by many challenges, from global warming to global terrorism.

None is as certain as global aging.

And none is likely to have such a large and enduring effect on the shape of national economies and the world order.

CSIS/GAI.ORG GAPINDEX.CSIS.ORG

0%

5%

10%

15%

20%

25%

30%

China US

China vs. the United States: Elderly (Aged 65 & Over), as a Percent of the Population, 1970-2050

Source: UN (2009)

2010-30 2010-50

-50%

-40%

-30%

-20%

-10%

0%

-11%

-25%

-18%

-35%

Total Population Working-Age (Age 20-64)

Cumulative Percentage Change in the Russian Population, 2010-2050

Source: UN (2009)