The Investment Implications of Demographic Changes and Population Aging

Investing involves purchasing financial or physical assets with the aim of earning income or appreciating in value over time. People typically invest to help meet medium to long-term financial goals like funding their child’s college education or purchasing a house.

Population aging has resulted in projected shortfalls to the finances of Social Security and Medicare, increasing debt levels and pushing up interest rates, but what are its other investment ramifications?

Demand for Savings

The demand for savings depends on a variety of factors. One such influencer is risk-adjusted returns on savings and investments. Firms will invest capital if they anticipate earning positive returns from investing, otherwise they save it and return it to shareholders as dividends. When savings exceed investment levels, extra money will lead to growth in aggregate demand and an economic expansion; but excessive savings without commensurate increases in investments can cause excess accumulation, leading to economic recession.

Demand for savings also reflects several demographic trends. Increases in life expectancy lead people to save more while lower fertility rates reduce labor supply, pushing down the neutral rate of interest.

Demand for Investments

As part of a demographic shift toward older adult Americans in the U.S., baby boomers could sell-off stocks and other risky investments they own by selling. While this would likely have an adverse impact on capital markets in general and U.S. equities specifically, this demographic trend may present opportunities in sectors that cater to elderly customers who use goods and services purchased on an increasing scale.

One such area is healthcare: scientific advances relating to genomics are incentivizing pharmaceutical companies to create new diagnostic tests and therapies to better address patients suffering from complex illnesses like diabetes and heart disease.

Thorburn emphasizes the significance of considering demographic trends at a localized level when investing. Investors should keep an eye out to see whether emerging economies with younger populations offer greater investment opportunities than their more mature developed counterparts–something which may alter cross-border capital flows by shifting away from mature developed nations like Japan and Germany towards younger emerging ones like China, India and Brazil.

Changes in Savings Rates

As investors save for retirement, their investments must decrease to accommodate a lower demand for corporate stocks and mutual funds. This shift could cause prices to decrease and lead to sell-offs of stocks and mutual funds; however, as the population of older adults increases there may be new investment opportunities as they purchase more products and services which create markets.

Demographic changes related to aging could also have an effect on the transmission of monetary policy, such as changing ratios between creditors and debtors as a share of elderly population increases; this would increase wealth effects on interest rates and make lowering them using monetary policies more challenging.

Countries facing the demographic challenge of aging should undertake various responses. These could include financial and social reforms to ensure sustainable health and pension systems; increased investments in education and infrastructure; careful macroeconomic management and pronatalist tax incentives (IMF, 2019). Such measures would mitigate any detrimental effects caused by age on per capita income growth while realizing its “demographic dividend.” However, taking no responsibility when responding to this challenge would be irresponsible.

Changes in Investment Demand

Investors must consider the implications of demographic trends when making investment decisions, particularly their effect on investment demand — the need by businesses for physical capital goods like office and factory space, computers and desks which they require in order to operate or expand operations.

Historically, investors were generally willing to fund physical capital investments needed by firms because they expected high rates of return from them. Unfortunately, that hasn’t always been the case recently.

Since 2019, more individuals under 40 years old are investing their after-tax discretionary funds than those aged 40 years and above, reflecting an increased trust that investing can yield high returns.

Investment managers must monitor trends in investment behavior and identify opportunities for their clients, perhaps investing more in dynamic economies with young populations.