Investor Behavior of Capital Flow Analysis: Population cohorts and Aging
Investment Theory: Population and Aging
Old and Young
The American population can be divided into three age cohorts:
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those of working age (20 to 65);
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the young ( under 20); and
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the old (over 65).
Most societies have customs of generational cooperation.
Those of working age raise and sustain children who, in turn, sustain their parents when they become too old to support themselves.
Less Dependents Than Before
In the United States, since 1929, the population cohort over 65 more than doubled relative to the rest of the population.
This 'aging' is given as the reason for the expected collapse of the social security system.
While the older cohort has grown, the younger cohort has shrunk.
However, while the older cohort has expanded, the cohort of the young has shrunk.
- In 1929, there were 1.2 working age people for every person in the dependent population (old and young).
- By 2002, the ratio of those of working age to dependents increased to 1.5.
In other words, the burden of caring for the young and old, in 2002 was less than in 1929.
Breakdown of Families
What is different and the cause of today's concern about the future, is the breakdown in family ties, the decline in the sense of duty, escalating costs of medical care and education, and the rise of self-indulgence and selfishness.
Perhaps in some parts of the world, there may still be enough respect for the elderly for an aging population to be easily accommodated, but in the United States the changing culture may be breaking down intergenerational cooperation.
The elderly are expected to provide for themselves, rather than be dependent on their children.
The elderly are expected to provide for themselves.
Since people are living longer, the savings required to sustain a certain standard of living in old age has increased.
- In 1900, the average life expectancy at 65 was 11.8 years.
- By 2000, the average 65-year-old had a life expectancy of 17.9 years.
Whereas in 1900, the 65-year-old might expect to reside with a son or daughter, in 2000 this was no longer the case.
In 1900 there was no income tax, the dollar was protected by gold, and living costs were modest compared to 2000.
Changes in society, economics, and tax laws work against the elderly.
Forecasts for an Aging Population
The official forecasts for social security may be pessimistic, since positive effects of immigration are not fully considered, probably because so much of immigration to the U.S. is illegal.
The Social Security Administration assumes that life expectancy at 65 will continue to increase:
The ratio of older folks to the working population is expected to double by 2075:
If these projections hold true, there will be selling pressure on the securities market as the elderly seek to raise cash for living expenses during retirement.
However, immigration of younger people and social security reform measures, such as President Bush's retirement accounts, might increase investment demand enough to keep the market in equilibrium.
In any case, it seems certain that the sociopolitical composition of the American population in the 21st century will be as different from that of the 20th century, as the 20th century was from the 19th.
Predicting the Birth Rate
Another parameter that influences the ratio between the young and the old is the birth rate.
The following graph shows average births per woman in her life-time, since 1940:
The chart shows the 'Baby Boom' followed by the 'Baby Trough'.
The Social Security Administration's long-term projection of a birth rate sufficient to sustain the population may be optimistic.
Judging from the last half of the 20th century, the U.S. birth rate seems anything but stable.
Social and Political Trends
There are a number of social and political trends that may reduce the birth rate further:
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Homosexuality: The Democratic Party, liberal universities, and the media promote homosexuality, and this campaign is moving into the public schools.
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Clearly, homosexuality does not have a positive effect on the birth rate.
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Abortion and Birth Control: A large part of the population, supported by organized and well-financed political groups, encourages abortion and birth control, including promotion in elementary schools.
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Rising Costs of Education: With the decline in quality of public schools and with costs of college increasing faster than inflation, and with a society intent on accumulating credentials that guarantee a good job, the economic pressure to keep the birth rate down is intense, at least among responsible parents.
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Rising Costs of Retirement: With medical costs increasing faster than inflation, extended life expectancy, and with a scarcity of guaranteed high-yield, inflation-protected savings instruments, the wise parent may decide that the cost of rearing children will be contrary to his or her interests in old age.
Homosexuality and abortion do not increase the birth rate.
Whereas the intellectual community of the 20th century pushed hard for policies lowering the birth rate, the world may find in the 21st century that it got what it wished for.
Empty cradles are not conducive to a healthy investment market.
Because saving for retirement is a major motivation for investment in securities, the demographics of the young and old must be followed closely in Capital Flow Analysis.
Before proceeding, check your progress:
Self-Test
In 2002, compared to 1929, the number of Americans between 20 and 65, compared to those under 20 or over 65 was:
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Which of the following trends favor an increase in the American population in the 21st century:
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The Baby Boom was caused by:
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Demographics return to lesson 12 >
