Listen to politicians and the media day in and day out, and you’d think the biggest risk we all face is climate change.
When you’re in the business of solving and reporting problems, it’s easy to focus on the most dramatic.
After all, where else do you find the risks of rising sea levels and storms that could wipe out your Mum’s house?
Years ago, I went to university to learn a trade. I studied finance, accounting, and law. But I didn’t learn to think doing that. At some point, AI could render much training in accounting and law useless.
I did spend a few more years doing another degree in Shakespearian tragedies. There, you learn how easy it is to ignore a worse problem by focusing on a more dramatic one.
King Lear, for example, gave his fortune to the wrong kids and ended up homeless. When the storm came, he’d given up all that could have protected him.
For investors, there are no certainties. Only probabilities. But Lear, without his jealousy and rage, might have worked out that his youngest daughter was a better bet for succession planning.
Well, climate change may be a significant long-run risk. But I see a bigger one that could head it off.
The global population is ageing fast
Source: Foreign Policy / AFP
Consider what is predicted to happen in China alone over coming decades:
- 2030: China’s fertility rate drops to 1.1. (A rate of 2.1 is needed to replace deaths).
- 2040: The country has to figure out how to care for 400 million over-60s. About 30% of the population.
- 2050: Parents and in-laws will outnumber children for middle-aged people.
- 2100: The population of China is predicted to have fallen by 48%.
What’s happening in China and in many other countries could be the real Doomsday Glacier. Falling populations — especially falling working-age populations — would suggest emissions will decline anyway.
The real issue comes down to how we can support so many aging people with a thinner working age cohort.
The old-age dependency ratio
This is the number of people in a society over 64 — divided by those aged 15-64. It has a strong negative correlation with GDP growth.
That’s been demonstrated by two dependency ratio leaders: Japan and Italy.
It’s estimated that China’s dependency ratio will exceed 75% by 2055. That means for every 100 people of working age, 75 seniors will be dependent on them.
This problem creeps across many fronts:
- Investment returns rely on economic growth. Higher dependency ratios slow economic growth and make it harder to sustain superannuation.
- Governments will be called on to fund more healthcare for aged citizens, meaning there is less available to invest in other parts of the economy.
- Borrowing costs could spiral as loans are needed to plug deficits, while interest rates go up.
- Labour shortages become intense. There are simply not enough younger people to fill jobs.
- Retirees typically pay much less income tax. Tax revenues are lower.
- Older populations tend to be less productive and less competitive.
- There is the very real risk of economic collapse, as pension and health systems become unaffordable.
- As deaths exceed births over a long period, demand across the economy falls. Asset and property prices come under pressure.
A few lucky countries are able to attract high rates of net migration. They are able to bring in younger migrants to bolster the working-age population.
Right now, the US, Canada, Australia, and New Zealand are in this group. But migrant flows are slowing while competition for skilled migrants is intensifying.
But immigration is no silver bullet. Migrant flows tend to come in waves. Through Covid, they dried up completely. This creates challenges for planning housing and infrastructure. It needs to be managed.
A solution in Central Europe?
Hungarian family on Mother’s Day. Source: Reporting Democracy
Hungary is one country leading the way on reversing a dangerous demographic tide.
As of January 2023, women in Hungary who become mothers under the age of 30 ‘will be exempt from paying personal income tax’ for the rest of their lives.
But this is just one further addition to Hungary’s suite of family-friendly policies.
It previously eliminated income taxes for workers under 25, and for mothers with at least 4 children.
Larger families can enjoy subsidies when buying cars. Families with at least 2 children have access to special home loans.
Every woman who marries by 40 also receives access to a preferential loan. Grandparents are eligible to receive childcare fees if they look after young children.
Abortion is restricted to the first 12 weeks of pregnancy. Recent law changes require abortion providers to provide mothers with ‘clearly identifiable indication of foetal vital signs’ before they decide whether to terminate the pregnancy.
Content promoting gender reassignment or homosexuality is also prohibited to under-18s.
While some have decried Hungary’s changes, the results — at least from a demographic front — speak for themselves:
- Since 2010, the annual marriage rate is up 102%.
- The divorce rate is down 24%.
- Abortions among married women have fallen from 45% to 23%.
- In Hungary, the fertility rate has increased more than anywhere else in Europe, rising from 1.25 children per woman to 1.59 in 2021.
- The Hungarian government aims to reach a ratio of 2.1 by 2030.
Italy is also offering a series of family supporting policies to try and turn around its very low birth rate. It remains to be seen how these will go.
As for investors considering risks across markets, demographics may play a far greater role than the current media narrative reveals.
Outside of Hungary and a few others, the coming demographic cliff is one risk that is being miscalculated.
And those who continue to miscalculate it — or fail to provide paths to resolve it — will do so at their peril.
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice.)