Ageing population: financing longer lives
Living longer also means longer consumption lifespans. But this consumption also needs to be funded. So where will the extra funding come from?
Previously we considered investment ideas to capitalise on the consumption power of the expanding number of older people, so-called ”silver spenders”, notably in the leisure and tourism and healthy living industries. With greater longevity, and longer retirement periods without income from work, financing longer lifespans becomes critical. We now examine investment opportunities in the wealth and asset management and the life insurance sectors.
In the future, we expect individuals will increasingly need to finance the later stages of life by themselves instead of relying on government benefit programmes.
Against a backdrop of increasingly strained public finances, demographic shifts are set to place a further burden on public retirement systems. The primary indicator of this liability is the old-age dependency ratio, which is the proportion of older dependents (over 65s) to the working-age population (those aged 20-64).
A rising dependency ratio
Globally, the old-age dependency ratio has risen. In 1950, there were 10 people over 65 for every 100 persons of working age (ages 20 to 64). By 2010 there were about 13 people.
Since then, the change in the ratio has rapidly accelerated. The ratio is likely to climb further. In Europe, North America, Latin America and Asia, the old-age dependency ratio is expected to approximately double between 2010 and 2035. This means for every 100 working-age adults, they, and the state benefit systems, will have to support the costs of twice as many older people.
Given the uncertainty on how public finances will cope, older generations are starting to look more to themselves. However, a lack of retirement savings is a concern that will only get worse over time. In fact, AIG found that 59% of Americans surveyed said they feared running out of money more than death1.
The retirement savings gap – the difference between what is and what should be saved to fund retirement – was €2tn in 2016 in Europe, equivalent to 13% of EU GDP that year2. The World Economic Forum projects the gap will grow to $400tn globally by 20503.
Wealth and asset management
To both build up sufficient wealth and manage it effectively during retirement, older populations will turn increasingly to wealth and asset managers to support them. This positions successful firms in the sectors to benefit from an ageing population. Furthermore, providers with strength in retirement services and estate planning will profit as the need to manage and administer assets and plan for the future of beneficiaries increases.
The opportunities for asset management and wealth are particularly pronounced in Asia, with its rising middle class and numbers of high-net-worth individuals (HNWI). As the next two charts show, Asia has overtaken North America and Europe on both metrics.
Companies with a significant presence in Asia may reward investors looking for exposure to this shift in demographics. Though, the region has been more exposed to the risk of economic slowdowns – for instance, Asia led the decline in the global wealth of HNWIs in 2018.
Life insurers and pension providers are also set to profit from increased demand from older people by offering them protection against outliving their retirement savings, through products like annuities.
Historically, retirees would only expect to live a few years beyond 65. Improvements in longevity mean that this period can now span decades. This makes protection particularly important, particularly in regions such as Asia with smaller social safety nets.
Companies that employ longer-living workers can generate more demand for insurance solutions. Having promised generous retirement benefits to their workers, many are looking to manage the risk of workers living far longer than had been expected.
Investors looking for opportunities around ageing populations can find a range of industries set to be significantly altered by the scale and influence of this demographic. But we also favour looking beyond consumption patterns to see how the lifestyles and lifespans of older people will be funded.
Financial services companies have an important role to help this ageing population grow, protect and manage their wealth. So the sector has much to offer investors seeking investment opportunities likely to profit from the rising power of silver spenders.
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