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Investor’s CornerBy John Gudritz CFA
Principal
Front Street Investment Management LLC
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As the political silly season heats up in the United States this summer and the Republican Party presidential candidates become known to us, I am truly hoping that one issue will finally be dropped from the conservative platform… immigration. While the problems of illegal immigration are well known, they don’t compare in significance to the benefits that this country receives by having a welcome sign outside its door. Immigration will continue to play a vital role in the decades to come in keeping the U.S. economy competitive and in a position to regain its economic leadership role in the world.
You may have heard that the world population is getting older. That is, the average age in the U.S., Europe and Japan is rising. We see this in the U.S. as medical advances and better living have helped us live longer while younger generations have fewer children than their parents did.
The obvious near-term consequences of this trend include such concerns as the future funding of government retirement programs like Social Security and Medicare. The imbalance of a shrinking number of working people supporting a growing number of retired people presents obvious fiscal challenges for a society that believes in taking care of the older generation. It is unfortunate that our political leaders failed to do the right thing over the past 30 years to ensure these programs were adequately funded.
While the U.S. will have its political will tested over the next year or so to get us back on a more sustainable economic path, there are also longer-term challenges for us and other developed countries as well as for some developing countries like China.
According to the article, Global Aging and the Crises of the 2020s, written by Neil Howe and Richard Jackson and published in the January 2011 issue of Current History, “For the world’s wealthy nations, the 2020s are set to be a decade of rapid population aging and population decline.” The authors cite the United Nations population division whose projections show that “the median ages of Western Europe and Japan, which were 34 and 33, respectively, as recently as 1980, will soar to 47 and 52 by 2030, assuming no increase in fertility. In Italy, Spain and Japan, more than half of all adults will be older than the official retirement age and there will be more people in their 70s than in their 20s.”
It is not only Europe and Japan that have this demographic challenge ahead. Some of the faster growing, developing countries like China also have a “massive age wave” approaching in the 2020s. As the authors put it, “China may be the first country to grow old before it grows rich.” The country’s one-child-per-couple policy has created a situation where in the decade of the 2020s, when China’s economy is expected to surpass the U.S. economy, the huge generation born before that policy will be retiring as China’s workforce stops growing.
There are many ramifications of an aging society that can inhibit the economic and social welfare of a country. It is especially difficult when the workforce of the country is actually declining, like it is already in Germany and Japan but will be in China as well.
The easy-to-see consequences are the increasing pension and healthcare costs that must be funded by government budgets when money is needed for other important things like defense and investing in new technologies and industries. However, there are other effects that you might not have thought of.
For instance, younger people tend to be more entrepreneurial while older people tend to become much more conservative with their money and lives. An aging society will have less money to invest as the retired population begins to live off their savings. This would obviously dampen economic growth, especially when more of a country’s financial resources have to support the older generations.
The good news for Americans is that the U.S. is not expected to age much at all over the next 20 years. By 2030, the U.S. median age is expected to rise to only 39 from its current median age of 37. According to UN projections as well as those from the U.S. Census bureau, the U.S. working-age population will continue to grow because of its higher fertility rate and, more importantly, its substantial net immigration.
So while the United States economy is not getting the respect it once did in the world and is currently being upstaged by China’s rapid growth, the current demographic trends show that China will face its own serious problems in only 20 years from now. Assuming that the U.S. will get its finances back on a sustainable path and that political forces don’t close the immigration door, I believe that its economy and investment opportunities will once again be among the best in the world.