Lasting Situations of Wealth

DEMOGRAPHIC TREND #2:
Rectangular Longevity
Notwithstanding the current depopulation trends in some developed countries, the world’s population has increased dramatically in the past century and is continuing to grow. In the 20^th century, the global population nearly quadrupled, with annual growth rates peaking in the mid-1960s. The key factors: Advances in hygiene, medicine and living conditions dramatically reduced infant mortality and increased life expectancy. More babies survive, and everyone is living longer.

And the demographic trend toward greater longevity shows no signs of slowing. Matt Ridley, an English writer on genetics, economics and human behavior writes “experts have been predicting for decades that average life expectancy will level out, but it stubbornly keeps rising. Others have predicted a growing burden of ill health among the elderly. Yet old people are healthier than ever, much of their illness compressed into shorter periods at the end of life.”

Some researchers call this phenomenon of living longer and healthier the “rectangularization of the survivorship curve.” Instead of deaths being distributed across a broad spectrum of ages from childhood to old age in some sort of statistical curve, in rectangularization “almost everybody lives to their full potential age, then dies,” says Ridley.

In this world of rectangular longevity, there are many guesses as to how far lifespan can extend. Some project to age 150, or even 200 within the next century. Science writer Greg Critser, author of Eternity Soup: Inside the Quest to End Aging, suggests that even now living to 115 is realistic. Already, many life insurance companies have recalibrated the pricing and benefits of some of their policies with a “whole life” lasting until age 120.

Applications and X Factors
What to make of these demographic trends? More to the point, how might these demographic trends affect your financial programs? Here are several observations:

Anticipate an extended lifespan. Thirty years ago, a financial professional might offer this paradigm: “You’ll work for 40 years (from 25 to 65), to save enough to live another 20 years (from 65-85) in retirement.” At that time, planning to live to 85 was considered a “top-end” projection of life expectancy. A generation later, it is reasonable to believe most of us will outlive our parents. It may seem outrageous, but a prudent plan should at least touch on the possibility of retirement calculations that run to age 100.   

Prepare to work longer. If you are going to live longer, it may be necessary to continue working later in life. Furthermore, in aging or depopulating conditions, working longer may be both inevitable and desirable.

As a way to offset decreased revenues available for social programs, governments may raise the minimum age for receiving retirement benefits, as is gradually occurring with Social Security in the U.S. Similarly, the age 59½ condition for accessing qualified plan assets without penalty could change. Beyond regulatory incentives, depopulation often improves employment prospects – there are fewer workers to fill positions, and it becomes an employees’ market. This means if you want to work, it’s likely that someone will want to hire you.

Self-employment and phased retirement are likely possibilities. A February 8, 2010 Wall Street Journal Small Business Report begins with this statement: “Welcome to the age of going solo.” Some additional comments:

“More Americans are working as consultants or freelancers, either having given up or been forced out of the salaried world of 9 to 5…Evidence now suggest this is our new economic condition. Today, in fact, 20% to 23% of US workers are operating as consultants, freelancers, free agents, contractors or micropreneurs.” Without a surge of younger, cheaper employees to support pensions and long-term employment, self-employment is a logical business move. In a slower-growing or depopulating economy, contract and consultant work is the most efficient way for employers to harness the job skills of aging baby boomers.

A variation on self-employment is phased retirement. The phrase “phased retirement” encompasses a broad range of formal and informal employment arrangements to allow employees to continue working, usually with reduced workloads, as a transition from full-time work to full-time retirement. These arrangements may include allowing employees to draw partial retirement benefits while remaining employed.

Phased retirement is seen as a win-win for both older workers and employers. Workers can gradually ease into retirement while maintaining a higher income than they would receive if they quit work entirely. Employers retain skilled older employees who would otherwise retire, leaving the company to replace and retrain the retiree, often at higher cost.  

Under current tax laws, a phased retirement that includes partial withdrawals from retirement accounts while still employed faces some hurdles in the way of age and income thresholds. But changes seem likely. An August 2008 AARP bulletin noted that the 2006 Pension Protection Act for the first time allowed employers to let workers 62 and older to take distributions from traditional pensions and to continue working.

New forms of retirement saving will be needed. The IRA started as a supplemental retirement plan, then spawned the 401(k) as corporate pensions declined. Similarly, intermittent self-employment and phased retirements will necessitate other formats for long-term saving. The account will probably include some tax incentives for saving, yet allow access under a broader range of circumstances. 

Insurance rates will change, for both public and private programs. It doesn’t matter how strenuously politicians avoid the issue, depopulation means government-sponsored insurance and pension plans must change. For old-age programs like Social Security, the options are to increase taxes on a proportionately smaller working population or decrease benefits. Eventually, a threshold for taxation will be reached and the only choice will be to cut benefits. This is already happening in some formerly communist, low-TFR countries in Eastern Europe.

As mentioned earlier, life insurance premiums for some products have been adjusted for longer life expectancies. This may result in lower annual premiums because the insurer believes it will receive payments for a longer time before incurring a claim.

On the other hand, monthly pension and annuity payments may decline as well. Instead of longer periods to collect premiums/deposits, pension funds and insurance companies now face the prospect of making payments to retirees for longer periods. 

Current demographic trends favor the United States. In general, growing populations fuel economic opportunities; more people make for larger markets – for goods, services, housing, etc. Since the beginning of recorded time, people have migrated to places where prospects for a better life existed. It is accurate to state that population demographics have a big impact on long-term financial well-being.

But other variables can play a part as well. Repressive political regimes, punitive taxation, wars, disease and natural disasters can diminish or destroy prosperity. Even the strongest demographic tracks can be derailed.

In many ways, the issues reported every day on cable news channels are evidence of the demographic changes moving across the globe. The United States is certainly not immune to the long-term impact of depopulation, immigration and aging society. Many of the political arguments in the United States have their roots in these demographic trends.

Still, in spite of the noisy political squabbles, the demographics say the United States remains a land of opportunity, and has a good chance to continue to be one in the future.

Skipping to the End: From the Macro to You
Here’s a summary for those who blew by the first four pages:

Demographic trends, i.e., the analysis of population statistics to identify markets, can uncover significant, large-scale, long-term economic movements that are already in place. Once in place, demographic trends may take a long time to play out, so understanding these trends may be valuable in shaping future financial plans.

Among the most significant trends currently affecting the industrialized world: Depopulation of developed countries, particularly in Europe and East Asia, coupled with more people living to the limits of extended life expectancies. The result: decreasing populations with an increased percentage of older people, a format that will be unable to sustain social and economic models started in the post-World War II era.

As a consequence of these changing demographic trends, many of the paradigms and products related to personal finance may need to be adjusted. This includes length and type of employment, retirement and accumulation planning, self-employment and insurance programs (both public and private).

In light of these conclusions, think of your own financial programs. The following questions might be relevant:

• Are your retirement plans designed to provide income and security to age 100 and beyond?
• Does your career path include working, in some capacity, well into your 70s (or 80s)?
• Are your savings and retirement programs structured to accommodate self-employment or phased retirement?

On reflection, a lot of financial information is just trivia that takes up space and is quickly forgotten. But historically, economic demographics seem to have staying power. The last great demographic trend began after World War II. More than sixty years later, the Post-War demographics are finally winding down, and in developed countries, the rising demographics of depopulation and rectangular longevity are already in place. Do your financial programs account for the possibilities – and perils – of these new trends? Remember, the impact of demographics can span decades, even centuries.