Healthy longevity: What will happen when the ‘baby boomers’ retire?

Chi Tran-Brändli, the baby boomers are retiring. This generation is now tapping into its savings. Does this mark a turning point for investments?

The baby boomer generation was born between 1946 and 1964, during the post-World War II recovery and the economic boom of the 1950s through the early 1960s. The oldest of them will soon be turning 80, and the youngest are just now heading into retirement. As a group, their investment needs are therefore quite diverse.

What does that mean?

The majority of household wealth is now in the hands of people aged 60 and over. This demographic group has benefited from decades of economic growth, rising stock markets and higher social benefits for the elderly. In the US, for example, the Federal Reserve noted in 2022 that 73% of wealth is held by people aged 55 and over. This is similar in most industrialised countries and in larger emerging markets. Of course, there are older people who do not have much savings. However, it is the above-mentioned influences on the distribution of wealth that determine broader investment patterns.

The wealth evaporation hypothesis posits that as baby boomers retire, they will need to sell their wealth holdings – primarily equities and real estate – to finance their cost of living in retirement. Furthermore, they would favour safe, income-generating assets such as bonds. Will this come to pass?

I think that this wealth erosion has not happened so far for a number of reasons. Most baby boomers receive a regular income from their pension funds in addition to their Social Security benefits. In addition, many countries largely cover the medical costs of senior citizens. In the US, many seniors have paid off their houses. As a result, they have been able to live quite comfortably without having to sell their assets, including their homes. Baby boomers also benefited from several decades of rising stock prices. The environment of falling interest rates after the 2008 financial crisis also provided their pension fund assets with attractive returns. Finally, there was rising demand for equities from a growing middle class in emerging markets and from the millennial generation, i.e. those born between 1980 and 1995.

And what will the next few years bring?

Looking ahead, we could perhaps still see an asset meltdown as older baby boomers sell their homes to move into retirement homes. However, given the high demand for housing from the younger generations of millennials and Generation Z (those born between 1996 and 2012), house prices could remain nevertheless stable.

Which sectors will benefit most from this demographic shift?

We believe the healthcare sector will benefit the most, thanks to companies that produce unique and innovative drugs and medical technology to promote healthy longevity, as well as companies that provide applicable solutions to reduce healthcare costs, such as diagnostic and generic drug manufacturers.

Where else are there opportunities?

Sectors with companies that cater to the needs and consumption patterns of older people, the so-called silver economy, could also offer potential. These include spa operators, hotels and restaurants, as well as manufacturers of consumer medical equipment and consumables, insurance companies and financial planning services. There are also providers of retirement homes, sportswear and other products for active older people. Technology could also benefit: it is likely to be needed to meet the challenges of a shrinking workforce and to make care for the elderly more efficiently.

Are these opportunities being seized - or are investors still not taking enough account of demographic change in their investment decisions?

Unfortunately, many investors have a short-term time horizon, whereas we believe that the impact of an ageing population on the economy is a long-term structural issue. Unlike thematic investments, which are specifically designed to benefit from this issue over the long term, most investors tend to be guided by tactical macroeconomic considerations such as interest rates and company-specific fundamentals. We believe that thematic investing in demographic change can offer investors attractive opportunities.

Should investors put more money into countries with favourable demographics, such as India or African countries?

India has been a target for foreign investment for years because of its emerging economy, driven by a young population and a growing middle class. However, the valuation of Indian companies is already strongly reflecting this demographic premium in the short term. Nevertheless, India could remain an important market in the long term. The young economies of Africa could also prove attractive from a demographic perspective. However, political stability and governance in each country must also be considered.

In their groundbreaking book 'The Great Demographic Reversal', economists Charles Goodhart and Manoj Pradhan suggest that demographics may be inflationary rather than deflationary. Are they right?

In our view, the impact of demographic change, whether deflationary or inflationary, depends on how societies respond to the challenges it poses. The experience of societies that faced it earlier than we in the West, such as Japan and now China, suggests that deflationary pressures will prevail.

So, contrary to what Goodhart and Padhan write?

Goodhart and Padhan base their inflationary arguments on the falling labor force and on the necessarily higher debt to fund healthcare costs for the elderly, while having a lower tax base. We believe that for an inflationary effect to dominate, private consumption would have to remain strong. But older people tend to consume less overall, which means that fewer workers are needed. Fewer people working in turn leads to less consumption. Rising healthcare costs in Japan and China have been countered by government savings on drugs and medical technology. Although healthcare has been an inflationary part of these economies, it has not been enough to overcome deflation in the rest of the economy. In addition, both countries are heavily indebted, but so far this has not led to inflationary pressures.

So we don't need to worry about inflation?

While it may be tempting to attribute the inflation of recent years to the ageing of the baby boomers, it is more likely to be due to the impact of the coronavirus crisis. In the foreseeable future, the new US administration's policies on tariffs and the deportation of undocumented immigrants, as well as geopolitical unrest, could be the main drivers of inflation, not the ageing of the baby boomers.

This interview contains questions from an exchange with the NZZ. Individual excerpts from the conversation were published in the 30 November 2024 edition (paywall, in German). 

Investment theme «Healthy Longevity»: Insights