Op-Ed By Hugo Scott-Gall, Global Investment Research: 'Grey Anatomy'

Hugo Scott-Gall of the GS SUSTAIN team in our Global Investment Research Division recently authored an op-ed which appeared in a number of publications in Europe, including Gazeta Wyborcza's in Poland.

A translation of the op-ed in English is provided below:

Grey Anatomy

by Hugo Scott-Gall, Global Investment Research, Goldman Sachs

Ageing populations are set to be one of the defining developments of the coming decades, a trend already taking shape in most advanced economies. Japan, Germany and Italy are among the oldest nations in terms of the proportion of population above 55, and S.Korea, Switzerland, Brazil and China will see a sharp growth in the older cohort over the next decade or so. The growth in the older sections of population is being driven by the twin forces of ageing baby boomers and increasing life expectancy. Greater longevity, better health and less physically demanding jobs has also meant that people are working longer – a trend that has gained further momentum due to policy shifts towards higher retirement ages and less generous pension plans. With people working longer, the need for re-training should also rise going forward, especially as technology changes the nature of many jobs.

Across most developed markets, spending on a per capita basis peaks when a person is in his or her late 40s. The absolute level of spending depends heavily on household structures; the average number of people in homes headed by someone in their 50s ranges from 2.0 in the US to 2.75 in Japan. And this dictates how the wallet is split between different goods and services, e.g. education and transportation. Older people spend differently as well -spending on discretionary items like apparel and restaurants falls with age, and a bigger share moving towards staples and leisure. Breadth of the social welfare system also influences spending behaviour, which is why, those in their 60s spend 3% - 5% of household expenditure on healthcare in UK and Japan, versus 9% in the US. Transposing current consumption breakdown of different age groups onto population forecasts shows that growth in total education and housing expenditures is likely to lag that in healthcare, personal care and utilities both in US and UK. But spending patterns wont remain the same. Healthcare expenses have risen in real terms in almost every OECD nation over the past decade, and should continue to rise as treatments become more personalised, and hence expensive. As rising welfare costs eats into state budgets allocated to productivity enhancing investments in infrastructure, R&D and education, the debate around what treatments governments should pay for is set to become louder.

While ageing demographics acts as a headwind for housing demand, all else equal, home prices/demand tend to be correlated with changes in the size of prime home-buying age cohort (20-44 years), rather than being negatively correlated with changes in older age groups. Some behavioural shifts in narrower consumer categories can also be attributed to older demographics. For instance, ageing has been a key facet of the growing awareness of and spending on health and wellness, and the decline in soft drink consumption per capita, particularly in the US, is a stark indicator of evolving preferences in this respect. In terms of choosing where to buy, convenience becomes more important as consumers age; which is why, large out-of-town stores lose some of their appeal vs. smaller, end-of-the-road outlets.

People above 55 are also more likely to be homeowners than those in their prime working age, and tend to have paid off their mortgages by the time they retire. The risk that a greater portion of older people’s wealth is concentrated in housing, which leaves them disproportionately exposed to housing downturns, is further exacerbated by the fact that very few of them have regular income streams apart from property rents. And so, products like reverse mortgages which help households monitise housing assets, and hence solve the asset-rich, income-poor conundrum, are likely to be in demand. Rising life post pensionable age, and the increasing cost of being old, similarly calls for more diversification in the way older people invest. If the above-60s don’t delay decumulation, then some ageing countries will inevitably face depleting domestic savings. Japan, where savings fell from c.14% of disposable income two decades ago, to below 1% in 2013, provides a case in point. 

It’s well known that taxpayers have been on the hook for increases in life expectancy, even as retirement ages haven’t moved much. Most ageing, advanced economies have raised pensionable ages in the past decade, but very few have done so meaningfully (Czech Republic, which announced an open-ended increase of the pension age by two months each year, is an exception). It is understandably hard to legislate sharper hikes to pensionable ages without distorting labour markets and making retirement planning harder for those immediately impacted, but increasingly, policy makers and voters are coming to terms with the reality that working lives must be extended to ease future budget pressures. The effective retirement age for men has increased by 12 months over the last decade for OECD nations, indicating that people are willing to work longer. But where these measures aren’t sufficient to fund the rising cost of ageing, governments will find it harder to serve current voters and future tax payers simultaneously.