Aging Boomers: A Macro Conundrum and an Investment Opportunity

While analysts focus on the Federal Reserve’s 50 basis-point cut - and the potential signal for an upcoming economic downturn despite the market rally - we decided to take on a longer-term macro theme that, we believe, will have a strong influence on investment decisions long past this cycle.

It is well known in macroeconomics that demographics have a decisive impact on growth, on the sustainability of government welfare policies, and, indirectly on the political landscape of a country. 

In wealthier nations, and lately even in some middle-income countries (such as China, for instance), aging populations are likely to force - they already are forcing, to some extent - a complete rethink of economic models and resource distribution. 

Needless to say, they also have the potential to create new investment opportunities.

In this issue of our newsletter, we’ll develop the aging demographics theme and connect it with investment opportunities.

The Debt Conundrum: Take from The Young to Give to The Old

There is a healthy disagreement among the authors of this newsletter on the importance of taming public debt. Pedram has a more traditional conservative view, whereas Alfonso is more Keynesian and thinks that developed countries’ debt is fundamentally sustainable even at levels much higher than the current ones.

But regardless of where you stand on the issue, it is a fact that national debt is increasing in all developed countries, and that this is mostly due to large social security and public pension programs (in some, healthcare as well plays a role) that cater to the so-called “baby boomers.” 

As the pyramids in the figure above shows, the percentage of population aged 65 or older has grown steadily between 2000 and 2020 even in the US - ironically one of the developed countries with the highest birth rates. 

It is uncontested among economics scholars and government officials that the older swathe of the population is likely to continue to grow in both developed and developing countries, and for the foreseeable future (as Japan shows, the shrinking population trend is a hard one to reverse). 

Currently, there are approximately 90 million people across the EU aged 65 years or older - that’s about 21% of the region's population. In the United States, just over 17% of the population are 65 or older, or about 58 million people. By 2100, the 65+ cohort in both the United States and Europe is expected to reach 30% of the overall population. 

There are heated policy debates about the right age for citizens to be able to enjoy the benefits of public retirement and social security plans, subsidized medical treatment and pharmaceuticals, as well as other perks for seniors. In the United States, proposals to increase the age for social security payments have been often introduced during Barack Obama’s Presidency, only to be shelved by both Democrats and Republicans alike when it became clear elections could be lost over them.

The issue, however, is not going away. The figure below shows current numbers and projections from the Congressional Budget’s Office, which point to a whopping ~30% increase in social security and healthcare spending as a percentage of US GDP by 2034. It’s useful to remember that these are not absolute numbers - they take growth into account.

Europe’s situation is ever worse, if possible, as government spending is a higher percentage of budgets and the senior population - as we highlighted above - is even larger.

According to Deutsche Welle:

“At the beginning of the 1960s, there were still six actively insured workers for every old-age pensioner. Now that ratio is 2:1, and sinking further… 

…A considerable chunk of the federal budget goes into propping up the pension system: €127 billion ($138 billion) will flow into the retirement fund in 2024, a third of all government spending. This sum is estimated to almost double by 2050, which is bad news in times of high expenditure in other areas such as defense.”

Older, Wealthier and More Powerful

The irony is that boomers ended up becoming a strain on developed nation’s budgets, despite having accumulated large amounts of wealth by benefiting from an incredibly favorable combination of conditions.

Their fortunes were made in  the 1970s and 1980s, a period when, in Western nations, housing was reasonably priced, job markets were less competitive - no to little immigration from developing countries or outsourcing -  and global trade had not yet expanded to include China and India as manufacturing powerhouses. 

Most crucially, the size of the boomer cohort guaranteed that governments in democratic countries catered to their needs - something that continues to happen to this day.

Ironically but unsurprisingly, the policies that were then designed to provide security and opportunity for boomers - for example, housing was kept affordable, and college prices were, accounting for inflation, a fraction of what they are today - are not popular with boomers today.

The effects of political pressure by boomers on elected officials is evident if we look at tuition and housing affordability. The graph below, courtesy of the US Bureau of Labor Statistics, shows the growth in college tuition costs vs inflation starting to skyrocket in the 1990s, right when most boomers were done with school.  

The extraordinarily favorable environment of the 70s and 80s allowed boomers not only to enjoy well-paid employment but also to build small businesses, which became strong sources of wealth and employment in both Europe and the US.

Fast forward to 2024, and as boomers retire, their generational fortune has become a macroeconomic conundrum.

In the United States, federal spending has had to increase dramatically, with a focus on programs that benefit older generations, such as Social Security and Medicare. But this happened just as younger Americans and Europeans, who had to face increasing competition from developing countries and the relocation of manufacturing jobs in countries with cheaper labor markets, are left grappling with unprecedented student debt, soaring home prices, and an economic landscape filled with fewer opportunities.

Compounding that, the ratio of workers to retirees is shrinking as birth rates decline, placing a growing strain on the younger workforce. 

Boomer influence over policy remains steadfast. With a shrinking population base and fewer younger voters, politicians - regardless of party affiliation - continue to prioritize older voters’ needs, pushing back against cuts to benefits. 

Going forward, however, decisions to cut some spending will have to be made, as increasing taxation on labor is becoming increasingly unsustainable.

But this is not where the real opportunity lies.

Serving The Boomer Economy: A Contrarian Opportunity

We’ve argued that aging populations constitute a potentially explosive political challenge - and an interesting macroeconomic theme - going forward, in both the US and Europe (not to mention Japan).

But while government spending and intergenerational inequality are monopolizing the attention, there’s one topic that is currently scantily covered, and it may be as well one where the real investment opportunity lies - serving the boomer economy. 

Serving the boomer economy is often an overlooked landscape as the VC-type money is flowing to the newest technology with the goal of capturing the latest trends - how and where the current or next generation will be spending their money. Yet, these 160 million boomers (between the US and Europe) offer an $84 trillion-worth opportunity, as their wealth needs to be transferred to a younger cohort.

As the population in Europe and the U.S. age, numerous investment opportunities are already emerging across various sectors to serve the wealthy boomer economy, driven by changing demographics, shifting consumer behavior, and increasing demand for age-related services and products. Here are some of the opportunities we believe will have the biggest impact:

1. Healthcare and pharmaceuticals

As the population in Europe and the U.S. grows older, demand for healthcare services is expected to rise, particularly for chronic disease management and elder care. Telemedicine and remote healthcare services is also likely to gain traction as older individuals seek convenient and efficient health solutions.

2. Aging-in-place technologies

Many elderly people prefer to remain in their own homes as they age, driving demand for smart home technologies and assistive devices that promote independent living.

3. Retirement communities and senior living

The growing elderly population will require more senior housing and retirement communities, making real estate development in this sector an attractive investment opportunity. Facilities that offer a continuum of care and senior-living REITs are likely be present lucrative opportunities in this space.

4. Entertainment and media

With more leisure time, seniors will drive growth in entertainment options tailored to their preferences. This includes streaming services, gaming, or cultural activities designed for older audiences. As digital literacy among seniors improves, tech companies can capitalize on creating user-friendly platforms that enable seniors.

5. Financial services

As people live longer, the need for robust retirement planning, wealth management, insurance products, and business succession will grow. Companies that offer services across these areas will be critical in helping seniors manage their financial futures. Will writing services is another trend that has already seen an increase in demand.

Conclusion

While the growing fiscal strain on governments due to aging populations is a macroeconomic challenge that cannot be ignored, the shifting demographics also present a range of investment opportunities.

The boomer generation, despite being increasingly reliant on social safety nets, remains a significant force in the economy with substantial wealth.

Businesses and investors willing to cater to their unique needs - whether through healthcare services, technology that supports aging-in-place, senior housing, or leisure and financial services - stand out to benefit from this demographic shift.

As governments grapple with the mounting costs of social programs, the private sector can position itself to serve this wealthy and growing market, potentially unlocking avenues of growth amid the aging population trend.

Good reads:

Is Social Security a Ponzi Scheme? 

Milken Institute: The Great Wealth Transfer

Intergenerational Wealth Distribution in the US

Zoomers and Boomers: Asset Prices and Intergenerational Inequality

How Do Baby Boomers Affect Interest Rates? A Functional Analysis of the Impact of Age Distribution on Macroeconomic Trends