Dirt Demographics: Demographics Matter!
by Shane Shepherd, Research Affiliates LLC
My maternal grandparents grew up on Midwestern farms. As was typical in those days, they came from large families with seven children each. I like to think that my great-grandparents were motivated by a hard-earned grasp of “Dirt Economics”: knowing the benefits of cheap (and even free!) farm labor, they chose to have large families to help work the farm. And, given the economic realities facing a poor South Dakotan farming community, they certainly weren’t relying on their tiny savings to provide a comfortable retirement. Just as they had done for their parents, my great-grandparents hoped their children would run the family farm, put food on the table, and pay the doctor and the dry goods store bills once they were too old to work the land.
My great-grandparents intuitively understood the concept of support ratios: having just one or two children wouldn’t guarantee the retirement security they needed. Despite the economic devastation wrought by the Great Depression and the Dust Bowl of the 1930s, the underlying economic potential for their generation remained quite strong, especially following the Second World War. A growing workforce promised increasing demands for goods and services, and the production capacity to meet that demand. But a problem was forming on the horizon: Americans—my grandparents among them—stopped having so many kids, with long-term implications for the economy and investments. In this issue, we will examine how demographic changes affect portfolios in different economic environments.
The Demographic Bust
If only we found ourselves in such a fortunate situation today as prior generations did. Soaring deficits, massive debt, and worsening demographics—our frequently mentioned “3-D Hurricane”1—leave my generation in a far more dire situation than my grandparents faced. Exceedingly high debt levels and growing deficits across the developed world have attracted much attention, and rightfully so. Deficit spending is by nature a transfer of future consumption to the present. Particularly when built up across generations, excessive deficits can powerfully reduce future economic growth when those bills come due. The economic prosperity of Generation X will certainly be reduced by the need to pay back the heavy borrowing of the Baby Boomers.
Even if we could clean up our current fiscal mess with a wave of Ben Bernanke’s magic wand, our future prosperity still would decline for an even more powerful and fundamental reason. Simply put, I don’t have enough siblings. In addition to running large deficits and spending my generation’s income ahead of time, my parents’ generation forgot about Dirt Economics—they didn’t have enough children to support them in their retirement. As we moved from a predominantly single family support system to a national system anchored on Social Security, the incentives to directly replace one’s labor value vanished; instead, we shifted the burden to society as a whole. Therefore, if the Boomers begin to retire as anticipated, we won’t be able to produce enough goods and services to meet their demand! The core problem faced by the developed world today is not just the disastrous fiscal situation we see headlining the newspapers every day, but—lurking beneath the surface—our impending demographic bust.
Examining the deteriorating support ratios for the developed world puts the magnitude of this problem in context. In 1970, there were five working adults for every retiree. Today, that ratio is 3.5:1 and if the retirement age remains constant, that ratio is projected to drop below 2:1 by 2050.2 The demographics trends in Figure 1 show that, in the early 2000s, there were 10 new entrants into the workforce for every retiree; by 2020, that ratio will invert and show one new worker for every 10 retirees.
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