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Demographics 1095916261

Demographics 1095916261



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 ©2003, AIMR
Demographics and Capital Market Returns
Robert D. Arnott and Anne Casscells
y 2010, longevity in the United States willhave increased by nearly 15 years since1940 but the retirement age for full SocialSecurity and Medicare benefits will haveincreased by only a single year. As those of us in theBaby Boom approach “normal” retirement age, thepopulation will contain nearly twice as many eld-erly people (over 65) relative to “normal” working-age people (age 20–65) as society has ever seen.
The simple fact is that moving from the currentlevel of just under 3 workers per retiree to just over1.5 workers per retiree is a likely formula for inter-class and intergenerational rebellion; therefore,something will have to give.
Demographic Reality
The demographic patterns that have been evolvingover the past 60 years have implications for retire-ment plans and for the financial markets—of notonly today but also the decades ahead. The firstelement of the demographic problem is the increas-ing population over 65. In 1940, there were compar-atively few retirees per worker, largely because mostpeople—particularly, men, who predominated inthe work force in the 1940s—did not even reach age65 as shown in
Figure 1
. In contrast, in 2000, theaverage person lived to age 76.6, some 11 yearslonger than the normal retirement age. The currentgeneration of retirees has been extremely fortunate.For the first time in history, not only do most of themlive long enough to retire, but also, for those whodo, that retirement lasts an average of 17.5 years.
 Because further improvements in medicaltechnology will increase life expectancy, the aver-age person in 2050 should live 16.3 years longerthan the normal retirement age of 65—some 40percent longer than today’s figure of 11.6 years.
Either the average person will be retired for 40percent longer in 2050 than today, meaning a 40percent increase in the dependency ratios fromlongevity alone, or the average person will workseveral years longer than today.
The second element of the demographic prob-lem is the falling number of workers who providethe goods and services for the retirees (and for theirown families). As
Figure 2
indicates, today’s workforce, and tomorrow’s retirees, are the products ofthe fertility levels of decades ago. The aging of theU.S. Baby Boom generation means not only moreelderly people but also fewer people in their primeworking years. Panel A compares the populationdistribution of young people under age 20 with theaverage fertility rate 0–20 years earlier, and Panel Bcompares the population of working-age people of20–65 with the fertility rate 20–65 years earlier. Thefertility ratio is the ratio of children born per womanof childbearing age. Because some children die before they reach adulthood, a ratio of roughly 2:1is the minimum required to sustain the population.The lagged fertility rates show how prolificprior generations were in creating potential work-ers and eventual retirees. As Panel A shows, highfertility from 1946 to 1960 led to plenty of youngpeople in the 1950–80 period as a percentage of thepopulation. Panel B shows that the boom also cre-ated plenty of working-age people for 1980–2015.Low fertility from 1972 to 1988, however, will leadto a nosedive in the number of working-age people just as the boomers are hoping to retire.The proportion of the population over 65 willsoar from 12 percent today to 20 percent in 2030— because of both the Baby Boom of 1946–1958 and,not incidentally, the Baby Bust of 1965–1990. Thenumber of people over 65 will steadily increase between 2011 and 2023, whereas the proportion ofthe population between 20 and 65 will steadilydecrease from 2000 until 2055.Can society tolerate a rise of 60 percent in theproportion of the population that is retired over thenext 30 years? Not likely. As we can infer fromPanel A in
Figure 3
, in 1950, there were 7.3 working-age people for each person over 65; now, the ratiois 4.7 to 1, and it is scheduled to drop to 2.7 to 1 by2035.
The nearly doubling between now and 2035of the over-65 crowd relative to the working-agepopulation is the basis for one often expressedconcern about aging boomers:
Since 1950, Social
Robert D. Arnott is chairman of First Quadrant, LP, andof Research Affiliates, LLC, Pasadena, California. AnneCasscells is a managing director at Aetos Capital, LLC, Menlo Park, California
This article was accepted for publication prior to Mr. Arnott’s appointment as editor of the
FinancialAnalysts Journal.
Demographics and Capital Market Returns
March/April 2003
21Figure 1.Life Expectancy, 1940–2050Figure 2.Fertility Rates vs. Population, 1960–2050
Age (years)WomenTotalMenU.S. Social Security Full-Benefit Age84807672686460194020501950196019701980199020002010202020302040Percent of PopulationFertility RatioAge (0
20)Fertility Ratio(0
20 years ago)
 A. Average Fertility Rate for 0
20 Years Ago vs. Percentage of Population under 20
40383634323028262422203. Percent of PopulationFertility RatioAge (20
65)Fertility Ratio (20
65 years ago)
B. Average Fertility Rate for 20
65 Years Ago vs. Percentage of Population under 20
Financial Analysts Journal
 ©2003, AIMR
Security tax rates have more than doubled. If noth-ing changes, what happens to Social Security taxesif the ratio of people over 65 relative to workersnearly doubles between 2005 and 2035?
The ratio of retirees to workers dramaticallyincreased from 1945 to 2000 with no deleteriouseffects on the economy, although the Social Secu-rity tax burden did rise considerably. Indeed, peo-ple retired younger and younger during this span.Why were no social shocks associated with thisprevious rise in the ratio of retirees to working-agepeople?The answer to this puzzle is surprisingly sim-ple: Workers support not only retirees but alsochildren, which produces a second dependencyratio, the
ratio of how many dependentseach worker must support. A worker can supportmore retirees if there are fewer children to feed, andvice versa. So, although the proportion of retireesin the population has steadily grown over the past40 years, the proportion of the population in theirworking years has also steadily risen because thenumber of children per working-age person fellmore than twice as fast as the number of retireeswas rising. While the elderly were becoming anincreasing portion of the population, the boomersleft childhood and the percentage of children fell,so in the aggregate, the demand from dependents
Figure 3.Dependency Ratios, 1950–2050
 A. Retirees per Working-Age Person (people over 65/people age 20
0.400.350.300. Ratio
B. Adjusted: Dependents per Working-Age Person [(people under 20/3 + people over 65)/people age 20

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