The influence of an aging population to the financial industry

In a world of lower growth and lower returns, capital will still reliably flow from savers to users. Few of the industry’s other dynamics will remain untouched, according to Credit Suisse Group AG Vice Chairman Neal Soss, who expects the creeping advance of these phenomena to upend financial markets. All major industrial countries will experience significant population aging over the next several decades. In both academic circles and the business press, it is widely believed that population aging will have important effects on financial markets because of its expected impact on saving rates and the demand for investment funds.

A lot of things in the finance industry depend on the age of the population. Aging populations are associated with the slower growth that monetary policy is trying (and in many cases, failing) to tackle, and therefore responsible for suppressing the interest rates that have sent almost half of the G-10 sovereign bonds into negative territory.

Within 25 years, the percent of the world’s population over age 60 will nearly double and aging is advancing particularly fast in developing countries. While older people at the base of the pyramid have varied and unpredictable incomes, financial services can facilitate their income strategies. Some financial services providers, however, are cautious about their engagement with older people because of concerns about financial capability, income instability, and physiological issues. At the same time, social pensions, while quickly growing in reach, are currently inadequate to meet the needs of older people in emerging markets. The report encourages policymakers and providers to consider older people as an increasingly important market segment whose needs are differentiated from those of younger adults and to seek solutions to meet their financial needs.

Population aging may affect financial markets if individuals tend to amass assets during their working years and spend them during retirement. When there is a large cohort such as the baby boom, there may be more demand than usual for corporate stock and other assets while the cohort saves for retirement. This demand may abate after the cohort retires. Some analysts believe that the rise in stock prices in the 1990s can be partially attributed to this, and have forecast sharp declines in asset prices in coming decades as boomers sell their assets to the smaller baby bust generation that follows them.
Studies show that saving rates rise over a worker’s active career and then decline in retirement. The magnitude of implied effects across the two kinds of study are not consistent, however. Compared with macroeconomic analyses, microeconomic studies tend to show smaller variation in saving rates over the life cycle.

Slower labor force growth associated with population aging should reduce the demand for domestic investment, offsetting part or all of the expected decline in domestic saving. Empirical studies of the implications of demographic change for investment expenditures have largely been based on aggregate data. A critical question for future investment returns and cross-border capital flows is whether population aging in the high-income countries will reduce the rate of domestic investment by more than it reduces saving.

Yet the economist’s research note extends demography’s implications beyond securities that track economic growth into corners of the market as specific as equity-trading patterns, and as broad as increasing societal equality.

Longer lifespans are associated with the cognitive decline of portfolio managers’ clients, something is already resulting in increased regulation and fewer risks. That helps money migrate towards passive investments and exchange-traded funds where the potential for losses is lower (so too, the potential of market-beating returns) — accelerating the focus on sectors rather than individual companies. That in turn, means markets that feature a handful of behemoth investment firms dealing through a reduced pool of brokers.

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Cover photo credit: Jeff Sheldon/ Unsplash

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