Unprecedented Demographic Shift May Create Problems, Opportunities
Business management guru Peter Drucker once remarked that “Demography is the future that already happened.”1 Although Drucker also compared predicting the future to ”trying to drive down a country road at night with no lights while looking out the back window,” U.S. population trends can be a rich source of information about what the future might hold.2
The U.S. economy entered a long-anticipated era in 2008 when the first members of the largest generation in history, the baby boomers, began turning 62, the age of eligibility for early Social Security benefits. The nearly 80 million boomers, who have reinvented so many aspects of American life, appear poised to leave their unique mark on retirement and possibly transform the economy in the process.
You may be well aware that Social Security and Medicare are facing potential insolvency as policymakers grapple with how to pay benefits to the millions of baby boomers who will retire over the next two decades. But there are other aspects to the approaching demographic shift that investors should be aware of.
Aging Population, Shrinking Workforce
By 2010, one out of three Americans will be older than 50, and one out of five will be older than 65.3 This aging of our population is expected to have a profound effect on the workforce.
Between 2007 and 2017, the annual growth rate of the working-age population is expected to dwindle to less than 1% after averaging 2.25% between 1970 and 2006.4 Although fewer workers joining the workforce may sound as though it could drive down the unemployment rate, the opposite might be true.
Economists are speculating that the expected drop in the number of available workers, combined with the possibility that many boomers would consume less in retirement because they have less money than in their working years, could result in a significant economic slowdown.
Of course, the United States has faced and overcome other crises of tremendous magnitude. Although the developments facing us are largely unprecedented, there is plenty of reason to expect that the country will find ways to cope.
From 1964 to 1997, for example, the labor-force participation rate increased, but the higher participation did not produce a corresponding spike in economic growth, largely because labor productivity growth did not keep pace. Conversely, labor-force participation has declined slightly since the late 1990s, yet the decline was more than offset by the tremendous growth in labor productivity since 1995.5
Investors who are looking for opportunities may find fertile ground in the problems facing our economy. The great success stories in American business have typically started with entrepreneurs who turned problems into opportunities.
1)The Wall Street Journal, September 20, 2006
2) BrainyQuote.com, 2007
3) AFP, December 24, 2007
4-5) Federal Reserve, 2007
©2008 Emerald Publications