How the number of retirees compared to workers impacts economic growth, inflation and stock returns.
In this episode you’ll learn:
- How demographics impacts economic growth, stock returns and inflation.
- What is the dependency ratio.
- What causes inflation.
- Why money is infinite, but a nation’s productive capacity is not.
Money Is Infinite; Capacity Is Not
I live in a college town with over 18,000 students. There are a lot of young people. In fact, with a median age of 22.6, the Idaho county where I live is the third youngest county in the United States.
My sister lives in New Jersey near Manchester Township, which has a median age of 65, one of the oldest populace in the country.
Given its young demographic, my town has a lot of inexpensive fast food restaurants whereas Manchester Township is filled with doctor offices, rehab centers, medical transport businesses and sit down restaurants.
My town has an excess of labor with many students unable to find jobs whereas many of the workers in Manchester Township commute from other towns in order to provides services to resident retirees.
My town has more producers than consumers. Manchester Township has more consumers than producers.
The Dependency Ratio
If we divide the number of individuals age 65 and over by the number who are in the traditional working age cohort of 15 to 64, we can calculate a dependency ratio, which measures how many retirees per worker.
The dependency ratio in Manchester Township is high whereas it is very low in my town.
What would happen if for whatever reason healthcare workers in Manchester Township were unable to get to work, and township residents with healthcare issues were unable to leave the township in order to get the needed care.
Under those circumstances, the dependency ratio of retirees to workers would skyrocket. Prices for healthcare and other services in the township would rise and wait times for appointments would lengthen.
A Worried Bill Gross
This is the scenario that bond manager Bill Gross worried about in a recent Investment Outlook piece for Janus. His concern is for the U.S. as a whole rather than specific counties or regions.
He writes, “Future healthcare for Boomer seniors can only be provided by today’s Millennials and even doctors yet to be born. We cannot store their energy today for some future rainy day. Nor can we save food, transportation or entertainment for anything more than a few years forward. Each of those must be provided by a future generation of workers for the use of retired Boomers.”
Notice in this quote Gross is not worried about how seniors will pay for healthcare and other goods and services. Nor is he concerned about how high tax rates will be for Millennials in order for the Federal government to pay social security and Medicare benefits.
Those are bookkeeping / accounting issues. The more fundamental question is will there be sufficient workers to provide needed services and produce goods.
If not, then inflation rates will rise as capacity is constrained just like prices rose in the Manchester Township example.
Rising Dependency Ratios
The U.S. dependency ratio is expected to increase from 0.25 today to 0.35 in 2034. That means going from one retiree for every four workers to approximately one retiree for every three workers.
That is a big jump, but not nearly as large as other developed countries. In Japan, the dependency ratio is expected to climb from 0.43 to over 0.60 by 2034. That’s two retirees for every three workers.
Dependency ratios are also expected to climb significantly in Europe.
What should be done about this potential mismatch between producers and consumers?
Supply-demand mismatches are often solved by the market itself as foreign and domestic businesses and workers adapt in order provide the services consumers want and need.
While dependency ratios are climbing in the developed world, they remain low in emerging and frontier markets. According to the U.S. Census Bureau, the working age population in emerging markets as a percentage of the total developing world population is expected to hold steady at about 67% for the next 15 years before declining to 63% by 2050.
Meanwhile, the working population in the developed world is also 67% of the total population, but it is expected to decline steadily to 58% by 2050.
Trade will allow the U.S. to import goods and services from emerging market countries with a growing or steady working population freeing up workers in the U.S. to provide high value added services.
Additional training for unemployed or underemployed workers in the U.S. can also boost the size and productivity of the U.S. workforce to meet needs. Workers with needed skills could also be allowed to immigrate to the U.S.
Finally, the dependency ratio assumes workers stop working and retire at age 65. Many in the 65+ age cohort will continue to work because there are viable employment opportunities, they enjoy working and/or they want or need the money.
As long as there is sufficient productive capacity to meet demand, then inflation should remain muted.
The Real Constraint
How will seniors pay for healthcare and other goods and services? They will liquidate their savings and receive help from the Federal government in the form of Social Security and Medicare.
Where will the Federal government get the money to pay Social Security and Medicare benefits?
It won’t get the money from anywhere. The Federal government will credit the bank accounts of seniors by effectively changing the digits on those accounts just like it does today.
If the Federal government runs a budget deficit, it will balance its accounting books by issuing Treasury bonds, which will be bought by households and businesses that want to earn interest by investing their excess funds.
Many of those businesses will be overseas companies that exported needed goods and services to the U.S. and now have dollars in their bank accounts they want to invest.
In short, the supply of money is infinite as is the ability to keep track of it through accounting.
What is not infinite is the capacity to produce goods and services in terms of the supply of workers and raw inputs such as natural resources.
Those are the real constraints.