Sunday, November 13, 2016

Demographics: The Boomers Have Already Been Overtaken By The Millennials

Summary: Demographics is a key driver of economic growth. Most people focus on the aging of the Boomer generation. But the working-age population in the US has been growing almost as fast as the retirement of Boomers. Millennials are now the largest living generation and will be in the working-age population until well past 2050. "By 2030 the top 11 birth cohorts will be the youngest 11 cohorts. The movement of these younger cohorts into the prime working age is a key economic story in coming years."

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Nearly 20 years ago, investors started becoming concerned about the aging demographic profile in the United States. The concern was understandable: the largest birth cohort in the nation's history was close to entering retirement. Between 1940 and 1950, the number of births per year in the US increased by a massive 45%, and that group would begin retiring in 2005. Enlarge any chart by clicking on it (data from Doug Short).

An aging population consumes and produces less, draws down savings and equity holdings and requires greater publicly-funded services. Japan had already started feeling the ill affects of a rapidly aging population and the fear was that the US was destined to be next.

What happened instead was this: an average of 3 million Boomers entered retirement every year starting in 2005, but the population of the country grew by nearly the same amount. Between 2005 and 2015, the total population of the US increased by more than 25 million.

As a proportion of the total, retired Americans has increased. That should surprise no one. Not only are Boomers reaching retirement, but successive birth cohorts are living longer. But the impact has been relatively minor. Retirement-age Americans have increased from 12.3% of the population in 2005 to 14.8% in 2015.

Importantly, the working-age population in the US increased by 7% (15 million workers) during the past decade. In Japan, the working-age population declined by 10%.  The two countries had the same dependency ratio (proportion of retirement age to working age populations) in 1991. By 2015, the dependency ratio had more than doubled in Japan, to 43%; in the US, it barely increased, from 19% to just 22%.

Immigration accounts for some of the differences. The more important aspect is this: the Millennial and Gen Z birth cohorts (those born after 1980 through early 2000s; definitions are not universally agreed on) are as large as the Boomers. About 4 million were born in each cohort each year. Starting this year, Millennials are the largest living cohort in America, overtaking the remaining Boomers (data from Pew).

Consequently, as late Boomers enter retirement-age over the next decade (left-side in chart below), nearly the same number of Millennials and Gen Z'ers will be entering the working-age population (right-side). These will not be perfectly offsetting (again, successive generations are living longer), but the burden of supporting an aging population will fall on a working population that is also growing (data from Doug Short).

None of is to say that the US will not become older. It will. But the US is not like many other advanced economies and the impact will likely be far less. The cohort following the Boomers (Gen X) is a much smaller group than that following the Millennials (the appropriately named "Post-Millennials"). Gen Xers start to retire in 2030 but Post-Millennials already begin to reach working age in the next few years (data from Pew; article here).

American's aged 20 to 39 declined in the mid-1990s until about 2010. Since then, that age group has been growing strongly. Based on the birth cohorts presented above, the 20 to 39 age group will continue growing strongly past 2060. Not only is this a prime working age group but one which heavily consumes housing and other goods as they pass through their reproductive and household formation years (data from Calculated Risk, here).

The upshot, to paraphrase Bill McBride, is this: "Demographics is a key driver of economic growth. Most people focus on the aging of the baby boomer generation.  But by 2020, eight of the top ten largest cohorts (five year age groups) will be under 40, and by 2030 the top 11 cohorts will be the youngest 11 cohorts. The movement of these younger cohorts into the prime working age is a key economic story in coming years."

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