One boring word has generated a great deal of worry lately: demographics.
More specifically, it turns out that our looming fiscal crisis is largely a function of our population’s age, since the majority of fears stem from Medicare and social security.
I’m sure you’ve heard this all before. And it is true that the percentage of Americans over 65 is rising. But that doesn’t mean we’re in for a dystopian future full of low growth – and high ratings for CBS dramas.
There’s more to this demographic puzzle than that.
Here are three statistics involving demographics that paint a prettier picture of the market’s future.
#1: The Dependency Ratio
I wrote about the dependency ratio a while back. But if you’re unfamiliar with the term, it essentially measures the number of people either too young or too old to work, compared to the number of people within working age.
A lower dependency ratio usually indicates stronger economic growth, since more people are in the workforce and contributing to overall growth.
The ratio in the United States is currently around 50, and it’s set to rise to 60 by 2050.
That’s not ideal, for sure. But it’s no higher than it was in 1960, a time when growth in the United States was booming.
#2: No, Retirees Won’t Crash the Markets
But what about the overwhelming number of people reaching retirement age?
Not to worry…
While the total number of Americans over retirement age is certainly troublesome, the amount of people actuallyretiring each year is much less frightening. In other words, since they’re not all retiring at once, the market will have time to adjust accordingly.
More importantly, the prediction that this group of retirees would pull all their money from the stock market never came to pass.
In fact, they’re still piling their money into the market – at least when it comes to dividend stocks.
You see, with interest rates so low, Baby Boomers are scooping up dividend stocks, rather than bonds, to earn a livable yield.
As a result, dividend stocks have outperformed the market recently. Take a look…
Besides, even if retirees were to take all their money out of the market, Generation X could easily pick up the slack…
#3: Generation X Saves the Day
Citigroup (NYSE: C) strategist, Tobias Levkovich, has pointed out that the number of 35 to 39 year olds in the United States will start rising this year for the first time since the late 90s.
Why is that important? That’s the age people start saving the most. And when Generation X puts their savings into stocks, the market will march higher.
Just take a look at the chart below to see what I mean. It clearly shows that a decline in people ages 35 to 39 coincided with the “Lost Decade” of stock market returns between 2000 and 2010.
Bottom line: Instead of seeing the United States’ current demographics as a looming threat to the economy, it could end up serving as a strong tailwind in the coming months and years
Courtesy Matthew Weinschenk at Wall Street Daily (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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