Population change and capital markets should we be worried

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Population ageing and capital market
performance: Should we be worried?
March 2014

Global Financial Institute

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knowledge in finance

Dr. Paul Kielstra


2 Population Ageing and Capital Market Performance

Global Financial Institute

Introduction to “Global Capital Markets in 2030“
Deutsche Asset & Wealth Management’s Global Finan-

component of government debt; and stock markets face

cial Institute asked the Economist Intelligence Unit to

weakening demand in many mature markets.

produce a series of white papers, custom articles, and
info-graphics focused specifically on global capital

In short, while the world’s stock of financial assets (e.g.

market trends in 2030.

stocks, bonds, currency and commodity futures) is growing, the pattern of that growth suggests that major shifts

While overall growth has resumed, and the value

lie ahead in the shape of capital markets.

traded on capital markets is astoundingly large (the
world’s financial stock grew to $212 trillion by the end

This series of studies by Global Financial Institute and the

of 2010, according to McKinsey & Company) since

Economist Intelligence Unit aims to offer deep insights

the global financial crisis of 2008, the new growth

into the long term future of capital markets. It will employ

has been driven mainly by expansion in developing

both secondary and primary research, based on surveys

economies, and by a $4.4 trillion increase in sovereign

and interviews with leading institutional investors, corpo-

debt in 2010. The trends are clear: Emerging mar-

rate executives, bankers, academics, regulators, and others

kets, particularly in Asia, are driving capital-raising; in

who will influence the future of capital markets.

many places debt markets are fragile due to the large


3 Population Ageing and Capital Market Performance

Global Financial Institute

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About the Economist Intelligence Unit
The Economist Intelligence Unit (EIU) is the world’s lead-

has included a variety of pieces covering the financial

ing resource for economic and business research, fore-

services industry including the changing role relation-

casting and analysis. It provides accurate and impartial

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cial institutions and academic organisations around the

ance in the financial services industry, and the future of

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insurance. A published historian, Dr. Kielstra has degrees

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in history from the Universities of Toronto and Oxford,

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undertakes bespoke research and analysis projects on
individual markets and business sectors. The EIU is head-

Brian Gardner is a Senior Editor with the EIU’s Thought

quartered in London, UK, with offices in more than 40

Leadership Team. His work has covered a breadth of

cities and a network of some 650 country experts and

business strategy issues across industries ranging from

analysts worldwide. It operates independently as the

energy and information technology to manufacturing

business-to-business arm of The Economist Group, the

and financial services. In this role, he provides analysis as

leading source of analysis on international business and

well as editing, project management and the occasional

world affairs.

speaking role. Prior work included leading investigations into energy systems, governance and regulatory

This article was written by Dr. Paul Kielstra and edited by

regimes. Before that he consulted for the Committee

Brian Gardner.

on Global Thought and the Joint US-China Collaboration on Clean Energy. He holds a master’s degree from

Dr. Paul Kielstra is a Contributing Editor at the Economist

Columbia University in New York City and a bachelor’s

Intelligence Unit. He has written on a wide range of top-

degree from American University in Washington, DC. He

ics, from the implications of political violence for busi-

also contributes to The Economist Group’s management

ness, through the economic costs of diabetes. HIs work

thinking portal.


4 Population Ageing and Capital Market Performance

Global Financial Institute

Population ageing and capital
market performance

Written by

A collaboration between Deutsche Asset & Wealth Managment‘s
Global Financial Institute and Economist Intelligence Unit
March 2014

Ageing: A developed- and emerging-market trend

equivalent figures are 15% and 20%. As the Chinese

Rapid streams of numbers flashing across electronic

example suggests, one way to reduce the impact of these

screens in trading rooms and brokerage offices worldwide

changes could be to increase the age at which employment

seem to reflect the deeply impersonal nature of the world’s

typically ends. The political difficulties of doing so, however,

capital markets.

raise questions about whether increases in the retirement

Ultimately, though, these exchanges

are driven by the decisions of individuals – whether

age will keep up with advances in life expectancy.

executed as one-off trades or adopted as strategies
programmed into machines. Therefore, the attributes of

A policy challenge

the people buying and selling assets, as well as of the wider

Older populations will require societies to make a wide

populations in which they live, are intrinsically linked to

range of adjustments, many with direct impacts on

how markets perform. This is most evident during a bubble

national economies and, indirectly, on capital markets.

or an ensuing panic, where emotions can quickly inflate or

According to respondents to a survey conducted by the

destroy the value of any number of securities overnight.

Economist Intelligence Unit of 353 senior executives of

More generally, though, any widespread changes to the

companies actively involved in capital markets, one of

prevailing needs, wants, productive capacity or views on

the biggest predicted impacts of population ageing will

risk in a society are likely to feed through, sooner or later,

come from increased government spending to cover the

to asset prices on capital markets.

associated costs in areas such as healthcare and pensions
(cited by 41% of respondents).

Several such shifts may be driven by societies’ ageing.
One economically important result of this demographic

James Poterba, Mitsui professor of economics at the

change is the increase in the proportion of people who are

Massachusetts Institute of Technology, believes that

retired and a reduction in their working-age populations.

“the greying of the population in the United States is an

In 2010 in the developed world, according to data from

important driver of long-term [government] spending to

the United Nations Population Division, 16% were already

GDP. We are seeing that today.” America is far from alone.

65 – a common retirement age – or older. In the oldest

This spending in turn presents societies with a fundamental

societies, such as Japan, Germany and Italy, the figure was

choice. Alexander Ludwig, professor of macroeconomics at

over 20%. In the years ahead, for the developing world as

the University of Cologne and an expert on the economics

a whole, the total number of the over 65s is expected to

of ageing, explains that governments can choose debt or

rise by about 2% annually, so that it reaches 22% of the

taxes to fund the coming spending needs for the elderly.

population by 2030.

Too high a tax burden, though, will reduce savings by
those in their middle years, and therefore investment in

This issue also has particular resonance in Asia. Because

capital markets. Too high a level of government debt, on

China’s retirement age is 60, the proportion of people

the other hand, may crowd out demand for other relatively

beyond normal working years is 15% and is expected

risk-free assets. Furthermore, if households foresee that

to reach 24% by 2030. This makes the issue much more

higher debt today will have to be financed by increased

immediate there than in the United States, where the

taxes in the future, private spending will also go down.

5 Population Ageing and Capital Market Performance

Global Financial Institute

According to Professor Ludwig, “it is certainly true that

impact, though, will depend on the specifics – and the

increased government spending will have an impact on

success or failure – of the policies chosen to address the

capital markets one way or the other”. The shape of that

changing needs of ageing societies.


6 Population Ageing and Capital Market Performance

Global Financial Institute

A people challenge?

ages – and therefore the time when retirement-related

The difficulty in predicting what capital markets will

expenditures begin – are not as solid as they seem, in part

look like in a world where investors, like the population

because people are, on average, healthier and therefore

in general, are older is that the world has never seen

able to work longer. For example, in the United States

population ageing on the current and predicted scale.

between 2003 and 2013, even without pension reform, the

Hard data about what will happen do not exist. Expressions

Bureau of Labour Statistics reports that the labour market

of concern tend to begin with references to the life-

participation rate of those aged between 65 and 69 rose

cycle hypothesis. This holds that, as individuals attempt

from 27% to 33%. Indeed, of those Americans still working

to smooth out consumption over the years, they save

at 65, the majority do not retire. And according to Statistics

during their working lives and spend those savings in

New Zealand, the labour market participation rate in that

retirement to cover living expenses. A higher proportion

country for those over 65 doubled between 2002 and

of retirees in the population therefore means that there

2012, from just under 10% to 20%. Cultural differences

are more people selling off accumulated capital assets

may slow change. International Labour Organisation (ILO)

and fewer interested in buying, leading to a general drop

data show that European countries, although they too

in asset values. Another issue – which survey respondents

have seen some increase over the last decade, still have

identified – is a shift by older, more risk-averse individuals

very small labour market participation rates among the

into traditionally safer investments, such as government

elderly. Nevertheless, as Professor Ludwig notes, even

bonds, from more volatile ones such as equities. Done en

there, “if you live longer, and need higher savings, the

masse, this would reduce share prices and lower interest

average retirement age will probably increase without

rates, as more retirees seek security in debt instruments.

regulatory reforms”.

This theory, however, is far from airtight. While it has

Looking for evidence

substantial predictive value, this hypothesis ignores two

These problems with the theory may explain why it has

important investor motives: precautionary savings by the

been difficult for researchers to find conclusive evidence

elderly, who know neither how long they will live nor all

– although population ageing has been taking place for

the expenses they might face; and the bequest motive.

some time – of an impact on capital markets. A study by

As Professor Poterba notes: “Research of the last decade

Professor Poterba, for example, found very little, if any, sign

has shown that late life behaviour isn’t driven only by

of a link between the changing age structure of the US

drawing down capital. A simple life cycle model is an

population over several decades and the value of equities

oversimplification.”

or government debt in the United States. It also found
that, although household asset holdings do rise when

Similarly, any movement away from risk may be more

people are in their 30s and 40s, they remain largely stable

apparent than real. For many individuals, pensions and

throughout retirement except for defined benefit pensions

annuities form a significant proportion of personal assets

- which decline by design.1

in retirement. Increasingly, however, the pension fund
managers and insurance firms which oversee the assets

The best evidence so far of a link between ageing and

used to fund private pension payments are finding that

equity values relates not to asset prices specifically, but to

traditionally safe government bonds – long a default

the price/earnings (P/E) ratios of equity assets. Research

asset for the industry – now pay far too little to meet their

carried out by economists at the Federal Reserve Bank

obligations to pension and annuity holders. Therefore,

of San Francisco found a surprisingly tight positive

managers are buying a wider range of assets, including

correlation between average US P/E ratios and the ratio

alternative investments, in the search for yield.

of middle-aged people – which the study defines as those
aged between 40 and 49 – and the old-age cohort likely to

Furthermore, underlying assumptions about retirement

be selling off shares – those aged 60 to 69.2 Presumably,

James Poterba, “The Impact of Population Aging on Financial Markets in Developed Countries”, in Gordon H Sellor Jr, ed., Global Demographic Change: Economic
Impact and Policy Challenges, Federal Reserve Bank of Kansas City, 2005, pp. 163-216.
2
Zheng Liu and Mark M Spiegel, “Boomer Retirement: Headwinds for U.S. Equity Markets?”, FRBSF Economic Letter, August 2011.
1


7 Population Ageing and Capital Market Performance

Global Financial Institute

where the number of middle-aged people is higher, their

go beyond demographics to include areas such as pension

greater interest in shares compared with other securities

and labour market reform. To address how this range

drives up prices.

of issues might interact with ageing to affect capital
markets in an internationally open economy, Professor

Even with such an apparently good data fit, however, the

Ludwig and his colleagues have put together a complex

study warns that many other factors could obliterate this

model.4 Its projections, though, vary dramatically based

effect. Moreover, Mark Spiegel, vice president, economic

on government policy and individual lifestyle choices. In

research at the Federal Reserve Bank of San Francisco

scenarios in which people take advantage of opportunities

and one of the study’s authors, explains: “It is correct that

to work later in life and where governments do not reduce

a lot of people hold a lot of scepticism. The study works

spending on pay-as-you-go pensions, the model suggests

off very clear patterns in historical data, but you can tell a

that asset returns will drop by about 5% between 2015 and

special story for the sub-periods going back to the 1950s

2030, but then rise by the same amount again by 2050.

for each of the big swings in the trends. The ultimate test

However, without a change in labour regulations and

[of whether there is a link] is if it shows up in data [in the

working habits but with a shift to funded pensions, which

coming years].”

increases the capital available, asset returns could drop by
over one-quarter. Put simply, the policy response is likely

Examinations of other types of assets yield a similar

to define how asset returns, and therefore capital markets,

combination of possible pressure on asset prices owing to

react to ageing.

ageing, alongside high levels of uncertainty about what
might actually happen. Real estate is one of the more

Like most experts, Professor Ludwig advises caution. The

studied, as housing, along with pensions, is among the

study itself suggests that continued high growth in Asia

most widely held assets for retirees. A Bank of International

would counteract any downward pressure and more than

Settlements (BIS) working paper which looked at house

compensate for reductions in asset returns in several

prices over 40 years in 22 countries found a link between

scenarios. Moreover, he warns that the available data

ageing and lower prices. It therefore predicted downward

are based on the “baby boom” and “baby bust” years in

pressure on prices resulting from older populations.

developed countries, which are insufficient to draw firm

The paper stressed, however, that projected house price

conclusions. “This is why we have to work with simulation

“headwinds” would be insufficient to produce an asset

models grounded in economic theory,” he adds.

meltdown and offered the well-deserved caveat: “Longrun projections and estimates should be treated very

Whatever the other uncertainties, Professor Ludwig, citing

cautiously as their track record is dismal.”

existing, separate research, feels confident that differential

3

ageing patterns promote the flow of capital from older,
The international dimension

wealthier countries to younger, emerging markets.5 Others,

Capital markets are not just about long-term assets, but also

though, are less certain. If this were the case, says Professor

about flows of money. International differences in the rate

Poterba, “you would have expected North America and

of ageing might affect these transfers and, indirectly, asset

Europe to be large saving countries, to be lending to other

values in different markets. In particular, economic theory

parts of world. That is not what we see. This reminds us that

would suggest that investment should flow from wealthier,

many other factors also affect capital flows – demography

older countries with surplus capital and restricted labour

is not everything.”

supply towards developing, younger ones, where capital
will be more productive and yield a higher return.

The most relevant economic theory, however, raises red
flags about population ageing. It could place some pressure

Questions of international labour and capital availability

on asset prices in the coming decades, and while the full

Előd Takáts, “Ageing and asset prices”, BIS Working Papers No 318, August 2010.
Axel Börsch-Supan and Alexander Ludwig, “Aging, Asset Markets, and Asset Returns: A View From Europe to Asia”, Asian Economic Policy Review, 2009.
See, for example, Melanie Lührmann, “Demographic change, foresight and international capital flows”, Mannheim Research Institute for the Economics of Ageing,
Discussion Paper 38-03, 2003.
3
4
5


8 Population Ageing and Capital Market Performance

Global Financial Institute

scope is unclear, the extent does not seem likely to cause a

What applies to rational markets hopefully applies to

crisis. Moreover, such evidence as exists does not provide

rational policymakers. Capital markets are not facing an

solid support for strong predictions. It may be unlikely ever

unavoidable “silver tsunami”. Population ageing may well

to do so: demographic changes are highly predictable. A

affect asset values, just as it will affect society in general,

market made up of rational actors should foresee them

but the way it does will be shaped largely by choices

and may have already priced in any relevant risk. Similarly,

those societies make addressing the new demographic

companies facing a reduction in labour capacity can alter

environment.

their production models to ones that optimise the likely

future mix of labour and capital.


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