150 years ago, half the European population were dead by the age of 45. Now, 50% will make it into their 80s. In Japan, the number of over 65s is predicted to increase from 27.0% of the population in 2017 to 36.4% in 2050, with similar increases being seen in the U.S., the UK, India, Germany, Singapore and elsewhere. In addition to the aging population, a rise in ‘dependency ratio’ is also being observed, with fewer working-age people supporting each retiree as time goes on. This sharp increase in longevity is being seen in populations all over the globe, and has a marked impact on a number of sectors and industries, which in turn results in numerous investment opportunities.

One conclusion that many jump to is that an aging population increases health-care costs. However, new research suggests that increased longevity might actually lower health-care costs (although the cost of social care is still predicted to increase) in many countries outside of the U.S. Excluding the U.S. health-care system, the elderly are more likely to be treated outside of the hospital system and are unlikely to receive expensive, complicated treatments. Seshamani and Gray (2004) found that the increased spending at the end of life is attributable mostly to proximity to death, while Dixon et al (2004) found that the average number of bed days in hospital before death does not increase with age. This suggests that the consensus view of the impact of increasing longevity on health-care costs may need to become more nuanced.

Adding to this is research suggesting that the number of ‘disabled years’ does not increase linearly with added life expectancy (i.e. with an extra ten years of life, individuals don’t spend all of those years in extremely poor health). In general, it is an increase in ‘disabled years’ that causes increased health-care spending, rather than merely an aging population. While we know smoking and alcohol consumption both increase disabled years, with a knock-on effect on health-care costs, the effect of obesity on the increase in disabled years is becoming increasingly pronounced. Given that obesity has doubled in the U.S. in the last 30 years, this may become increasingly relevant. 

We can also expect both life expectancy and the quality of extra years to increase along with advancements in science and medicine. With further improvements in healthy living, disease prevention and regenerative medicine, we may see the impact of increased age on health decrease. From an investment perspective, there is a lot of focus on ‘ill-health’ measures, but as life expectancy increases many remain in good health for most or all of their extra time.

Aside from health care, many people will be affected by the increased scale of retirement savings they will need to fund extra years. There is a huge retirement savings gap, which is continuing to widen, and many people are chronically under-saving.

Source: June 2018 Bernstein report – Age of the aged: The implications of an older population for the financial industry

Source: June 2018 Bernstein report – Demographics – Destiny for the market, doom-mongering or a path to a better benchmark?

This may present opportunities for pension providers and other companies tackling the issue of retirement savings and retirement planning. This extends to fintech (financial technology) firms, many of which are developing apps that make saving easier or more effective by following spending patterns or rounding up purchases and putting the extra pennies directly into a savings account.

From a consumer perspective, many current and soon-to-be retirees are clearly enjoying their leisure time, with over 65s having the fastest growing holiday expenditure and spending more on alcohol. The travel industry in particular is likely to benefit, with both package holiday and cruise operators seeing an increase in purchases from their older customers.

Source: June 2018 Bernstein report – Age of the aged: Enjoying your retirement, ageing population a material tailwind to travel stocks

Source: June 2018 Bernstein report – Age of the aged: Enjoying your retirement, ageing population a material tailwind to travel stocks

However, it is worth remembering that many of these retirees are retiring with the backing of significant household wealth and defined benefit pension schemes. While future generations are unlikely to retire in the same financial situation, we see this trend of many retirees having high disposable income continuing for at least 5-10 years.

Two more sectors that are likely to be significantly influenced by this demographic trend are the housing and care sectors. 90% of U.S. seniors plan to stay in their homes (aging in place) indefinitely – in part owing to the extremely high cost of living in a specific elderly care community – meaning that more homes will need to be built as the population expands.

Source: June 2018 Bernstein report – Age of the aged

Aging in place is more economic

Source: June 2018 Bernstein report – Age of the aged

This has clear implications for construction firms, and companies related to creating homes for the elderly specifically. U.S. homeowners aged 65 and over already account for 25% of all home-improvement spending, with this figure expected to rise to 31% by 2025. Given the significant cost advantage to staying where they live, many over 65s upgrade their homes in order to make them more suited to their old age, by raising wall sockets to waist-height and installing rails in bathrooms, for example. Some over-65s choose to move into care facilities, meaning care homes also represent a growing market.

Overall, our aging populations are likely to have a pronounced impact across the economy. Despite there being some disagreement about the effects on health-care spending, it is highly likely that a number of consumer sectors will feel the influence as extra healthy years leave more time for leisure pursuits like travelling, especially on cruises or package holidays. We believe there will also be profound shifts in housing, social care and saving for retirement, which will present a host of investment opportunities and considerations. This is a hugely diverse and dynamic issue, but one that has investment potential in a multitude of different areas. As the years go on, the specific implications of each generation’s retirement will vary, but these major population trends are making waves across the world.

This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.

Important information

This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.

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