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Battle of the Ages: What Young vs. Old Could Mean for Investors

Battle of the Ages: What Young vs. Old Could Mean for Investors

Posted March 2, 2023 at 10:15 am
Michael Arone
State Street Global Advisors

If you listen closely, just below the buzz of today’s headlines, there’s a burgeoning topic that’s about to explode on the scene. It’s been ringing in my ears for a couple of months. The next battle in the global populist war won’t be socio-economic, it’ll erupt from the growing friction between young and old.

The relentless murmuring started with a business trip to London and Tel Aviv. In London, I attended a panel discussion with two former prime ministers of the United Kingdom (UK), Tony Blair and David Cameron. The conversation naturally addressed the challenges the UK faces in the post-Brexit world. Sadly, the UK has suffered through at least three major disasters in the past 15 years — the Global Financial Crisis (GFC), Brexit, and the pandemic. As a result, there’s been some long-term scarring to the UK economy, politics, and society. Chatting with clients and colleagues following the panel, it became clear that as the UK attempts to find solutions to its problems, tensions between the young and old are rising.

Later, I met one of my closest friends for lunch. We were neighbors growing up and he now lives in London with his family. It didn’t take long for our conversation to turn to his 90-year-old mother and my 83-year-old father, both physically fit as fiddles but experiencing cognitive decline. So many people in my age group are wrestling with long-term care options for aging parents. A challenge that is only going to multiply for future generations.

Having lived in London for three years from 2008 to 2011, my visit felt like a homecoming of sorts, one that coincided with China’s lunar new year. Finally free of COVID-19 travel restrictions, more than 200 million unmarried Chinese had returned home to celebrate, only to be peppered with questions from parents and relatives about when they planned to marry and start a family. At the same time, Chinese authorities announced that in 2022, for the first time in 60 years, China’s population had declined.1 With fewer taxpaying workers to fund an already strained social welfare and healthcare system, China faces the frightening possibility of growing old before growing rich.

In Tel Aviv, the seemingly independent notes in my head started to form a more audible tune. I had been to Tel Aviv once before, more than a decade ago. Today, the horizon was filled with new skyscrapers and cranes developing more commercial and residential properties. On the drive from the airport to my hotel, the construction of the Tel Aviv Light Rail, a mass transit system for central Israel, caught my attention.

I couldn’t help but contrast the energetic vibe in Tel Aviv with the tension in London. My Israeli colleague reminded me that Israel is about the size of New Jersey and has its fair share of challenges too. But despite the daily disruption and considerable expense, Israel has committed to making the necessary investments to materially improve its infrastructure. And no surprise, almost a third of Israel’s population is under the age of 17 and the median age is about 30, nearly a decade younger than most developed market countries.2

That nagging ringing in my head didn’t go away when I returned home. In early January, it took 15 ballots to elect Kevin McCarthy as the Speaker of the House of Representatives — the most since before the Civil War. On January 19, the US breached the debt ceiling again, forcing the Treasury Department to start taking extraordinary measures to keep the government afloat and setting up another showdown between Republicans and Democrats this summer.

In mid-February, the nonpartisan Congressional Budget Office (CBO) released “The Budget and Economic Outlook: 2023-2033,” which warned that the Treasury Department would exhaust its ability to pay all its bills sometime between July and September. The report also forecast that US budget deficits will average $2 trillion between 2024 and 2033, approaching pandemic-era records by the end of the decade3 — which will likely fuel Republican demands for spending cuts.

On February 15, former South Carolina governor and United States ambassador to the United Nations, Nikki Haley formerly announced her candidacy for president. The Republican candidate immediately tried to drive home a major difference between herself and her two major competitors — President Biden and former President Trump — by controversially suggesting that politicians over 75 years old should be required to take a mental acuity test. Nikki Haley is 51 years old. In one fell swoop, Haley purposefully made age a major issue in US politics.

Finally, like a thunderbolt it struck me. That constant annoying humming in my head was the unsettling realization that the battle lines between young and old were being drawn.

I turn 50 years old later this year. That milestone — not quite young but not too old — places me almost perfectly to objectively explore the young vs. old dynamics and the potential implications for investors.

Aging Population Creates Fiscal Fissures

Americans are getting older. The statistics are staggering. In less than two decades older Americans will outnumber children for the first time in US history. According to the US Census Bureau, by 2060, nearly one in four Americans will be 65 years and older, the number of 85-plus will triple, and the country will add a half million centenarians.

The bigger challenge may be that there will be far fewer younger Americans to care for and support the elderly. For almost three decades, from 1980 to 2007, the US birth rate was stable at about 65-70 births per 1,000 women between the ages of 15 and 44. But, since the GFC, the US birth rate has fallen by 20%.4

Businesses are struggling to find qualified, skilled workers in today’s already tight labor market. Despite the demand for skilled workers, the supply of labor remains constrained with the unemployment rate at 3.4%, a 54-year low, and the labor force participation rate stuck in neutral.

US Population Differences between 2022 and 1979

As a result, there are far fewer younger workers contributing to ballooning entitlement programs like Social Security, Medicare, and Medicaid. These cracks in the foundation may lead to a Grand Canyon sized disaster in the future.

Meanwhile, the CBO’s report on the budget and economic outlook for the next ten years paints an equally bleak portrait of the US fiscal position. In the short-term, declining year-over-year government tax receipts combined with skyrocketing interest costs are further complicating an already difficult fiscal situation.

Generous fiscal policies from both Republicans and Democrats have left government spending above its long-term average. When this has happened before — mid-1980s, mid-1990s, and early 2010s — negotiations to raise the debt ceiling became a catalyst for deficit reduction.

It’s difficult enough to raise the debt ceiling in divided government. Adding in deficit reduction discussions makes the process more challenging and the potential impacts more significant for financial markets.

CBO Projection of Mandatory US Government Spending

Click here to read the full article

Footnotes

1 Eleanor Olcott, “China’s singles fight family pressure to get married as population declines,” Financial Times, January 26, 2023.
2 “Over 3 million Israelis are younger than 17 – study,” I24 News, November 16, 2022.
3 David Lawder and Richard Cowan, :U.S. could face debt-ceiling crisis this summer without deal, CBO warns,” Reuters, February 15, 2023. Congressional Budget Office’s “The Budget and Economic Outlook: 2023-2033.”
4 Melissa Kearney, Phillip Levine and Luke Pardue, “The Mystery of the Declining US Birthrate,” Econofact, February 5, 2022.
5 Emily Brandon, Why Older Citizens Are More Likely to Vote, US News and World Report, October 20, 2020.
6 “Faith in democracy: millennials are the most disillusioned generation in living memory,”Bennett Institute for Public Policy, Centre for the Future of Democracy at the University of Cambridge, October 2020.

Originally Posted February 28, 2023 – Battle of the Ages: What Young vs. Old Could Mean for Investors

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