Demographics are Important

August 07, 2023 Glenn M. Guard, CFA »
Beam balance scale with older man on the left and a baby on the right. West Financial Services, Inc.

For about a dozen years I've had what I call my "China Speech" which addresses the huge demographic changes in store for China and the rest of the world. Here is the Executive Summary:

In my humble opinion, there is no path for China's economy to eclipse that of the western world - none. Why? Let me count the autocratic inefficient government, negligible property rights, no rule of law, foreign investment dropping off a cliff, and mountains of bad debt to name a few.

But, believe it or not, the main issue is demographics.

Specifically, the percentage of China's population that is of working age is decreasing rapidly, and there is no end in sight to this trend. That's a huge problem which will take a generation or two - at least - to resolve.

Why is this happening?

As a nation transitions from under-developed to developed, children go from being free labor and a retirement plan (help on the farm and a place to live when you can no longer work), to being expensive cost centers (food, clothing, shelter, health, dental, soccer practice, college). In the developed world, children are not expected to contribute (or minimally contribute) to their care, and they are also generally not expected to support their parents in retirement.

As a result, birth rates drop and a country's population ages dramatically the more developed it becomes.

Take the U.S. for example.

  1. In 1900, about 40 percent of the U.S. population lived on farms, and 60 percent lived in rural areas.  Today, these figures are about 1 percent and 20 percent, respectively.1
  2. On average, women had about eight children in 1800. By 1900 the number dropped to about three and-a-half. Today it is 1.7.2

Let's face it — in 2023 kids are expensive! But they are not expensive in the under-developed world. For example, today the average woman in Niger has about 7 babies! Africa is by far the youngest continent. Europe the oldest.

Already, 29 percent of Japan's population is over the age of 65. Japan continues to age, has a shrinking population and essentially zero immigration to help make up for this problem. Italy is not far behind. One in four Italians are over 65. These are all-time world records. Never in the history of the world has a country had such a huge percentage of older people. Older people that are (mostly) not working. Older people that receive social security and free (or almost free) health care. And to top it off, there are less working age folks on the job per older person to help pay for all of this.

In this situation an economy stagnates and can eventually even decline.  Technological advances, improvements in productivity, and immigration from under-developed countries can offset these problems, if managed effectively. That is not happening in China.

The U.S. has a rosier outlook - thanks largely to immigration. Here's the math:

First the bad news:

  1. In the U.S., the fertility rate has been below the level needed for the current generation to replace itself since 2007. In fact, this has been the case in almost all years going back to 1971.4
  2. The result is that today, about 17 percent, or 1 in 6 Americans are over the age of 65. In 1900 that number was 4 percent, or about 1 in 25.5

Now the good news:

  1. In keeping with the country's history since its founding, the United States has more immigrants than any other country in the world — by far.
  2. Immigrants and their descendants are projected to account for 88% of U.S. population growth through 2065, assuming current immigration trends continue.6
  3. U.S. births to immigrant parents will be important to future growth in the country's population. For example, in 2018 the percentage of women giving birth was higher among immigrants (7.5%) than among the U.S. born (5.7%).7

The net result is that in the developed world, the U.S. is projected to have a higher percentage of working age population relative to older population than any other major developed nation. This means that there will be more folks working to help pay for the benefits of each older person.

Add to that a robust framework of property rights, rule of law, abundant natural resources, and cutting-edge technological advances and one can see that that the U.S. economy should be in much better shape than other developed countries going forward.

Feel free to give me a call if you would like to discuss. I'd love to hear from you.

Meet Glenn M. Guard, CFA »

Read the August 2023 Financial Planning Focus:

1 U.S. Census 
2 U.S. Census
3 World Bank
4 Pew Research Center
5 Pew Research Center
6 Pew Research Center,growth%20in%20the%20country's%20population.
7 Pew Research Center,growth%20in%20the%20country's%20population.

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