Who Wears the Diapers? A discussion implications …...Who Wears the Diapers? A discussion about the economic implications of global demographic trends Andrea Urban, CFA, CAIA [email protected]

Who Wears the Diapers? A discussion about the economic implications of global demographic trends

Andrea Urban, CFA, CAIA [email protected] kpmg.com

© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 209292

1

Pro-Cyclical nature of fiscal balances wildly underestimated

“The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-

budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past

2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.”

Alan Greenspan, Outlook for the federal budget and implications for fiscal policy Before the Committee on the Budget, U.S. Senate

January 25, 2001


2

Who wears the diapers?

-600

-400

-200

0

200

400

600

800

2008 2009 2010 2011 2012

North American Diaper Consumption (Index 2008=100)

Adult Incontinence

Products +20% y/y

Demographic shifts are an opportunity for some and a challenge for others

Demographics ■ Increasing life

expectancy, declining fertility rates and in some countries a post-war baby boom

■ A growing aging population changes the denominator for home ownership rates, labor force participation rates and support ratios

■ A smaller working age population decreases the household formation rate and changes consumption patterns Source: Global Diaper Market Report 2013 edition, Koncept Analytics

Baby Diapers -8% y/y

Presenter

Presentation Notes


3

Demographics are destiny

A falling working age population in the OECD means lower potential GDP

Demographics Fewer households

formed

Fewer contributors to pensions

Fewer new tax payers & workers each year

Potential for labor shortages

Gradual shift to portfolio de-risking and greater bond allocation

Developed Country Working Age Population as a Percent of Total Pop...

009080706050403020100090807060Source: Haver Analytics

70.0

67.5

65.0

62.5

60.0

57.5

55.0

70.0

67.5

65.0

62.5

60.0

57.5

55.0


4

Demographics are Destiny

The percentage of those over age 65 in OECD projected to grow

Demographics Downward pressure on

inflation

Pressure on pensions to pay out for longer than planned– assets need to last longer

Pressure on governments that have yet to reform old-age benefits

Large voting block

OECD Age 65+ (% of total)

353025201510050095908580757065Source: Haver Analytics

28

24

20

16

12

8

28

24

20

16

12

8


5

Demographics

The U.S. is already on the upward slope of the increasing population of people aged 65+

1980 11.28%

2014 14.31%

Demographics Percent of population

over the age of 65 doubles from 1980 to 2030

Greater retired population with fixed incomes reduces potential GDP forecasts

Lower potential GDP coupled with lower CPI and lower rates creates vicious circle on retiree incomes

2030 20.15% 10

12

14

16

18

20

22

1980 1986 1992 1998 2004 2010 2016 2022 2028

Percent of U.S. Population over the Age of 65

Source: Haver Analytics


6

The U.S. is in a relatively strong position

Census data from 2000 to 2050 suggests that the U.S. working age population is expected to grow 31%

Due to falling fertility rates, Asia and Europe are going to experience a major decline in their working age populations

In Korea, the ratio of 20-64 year-olds to those over 65 is forecast to plummet to 1.4 in 2050 from 8.7 today

Demographics

Source: U.S. Census and U.N. Population Statistics


7

The ratio of working age to retired workers is shifting

Little fundamental change to pensions over the last 30 years

Need to improve levels of advice individuals receive

Need to improve risk management within the product to increase certainty

Need to enhance the current decumulation product offering to improve the simplicity and transparency of current offerings

Demographics

Source: Adair Turner, Impact of Population Aging on Financial Markets; UN Data November 2014

Ratio of 20-64 year olds to

65+ by country

2000 2025 2050

UK 3.7 2.8 2.1

Italy 3.4 2.3 1.4

U.S. 4.8 3.0 2.8

China 8.8 4.6 2.4

South Korea 8.7 3.2 1.4

World 7.7 5.5 3.6


8

U.S. working age population is growing at a slower rate

The “Latino Lift” begins to increase the growth rate of the working age population in 2025

Demographics Working age population

contribution to potential output begins rising in 2025

Shifts in preferences for Millennials also drives changing demand and growth prospects

U.S. growth will increasingly need to come from productivity gains and/or positive shocks such as the oil/gas boom

U.S.: Working Age Population 15-64

Change - Period to Period Thous

454035302520151005009590Source: United Nations/Haver Analytics

000

500

000

500

000

500

0

3000

2500

2000

1500

1000

500

0


9

The UK is in one of the strongest demographic positions

Steady immigration helps the UK demographic picture

Demographics The UK, like the U.S.,

sees some benefits from immigrants having more children than native born

Potential output is still reduced due to slower growth of the working age population

Shifts in retirement age and participation are needed

U.K.: Working Age Population 15-64

Change - Year to Year Thous


375

300

225

150

75

0

-75

375

300

225

150

75

0

-75


10

Declining working age population comes at a bad time

Working age population began falling in 2010 just as Europe’s debt crisis peaked

Demographics The bursting of the debt

bubble combined with a falling working age population is a tough recipe for policy makers as seen in Japan circa 1995-2005

The fine balance between austerity and growth is especially critical in Europe

Western Europe: Working Age Population 15-64



500

250

0

-250

-500

-750

00

500

250

0

-250

-500

-750

-1000


11

Japan has seen two decades of working age population fall

The debt bubble burst at the same time as the working age population declined

Demographics Japan started its crisis

with a fiscal surplus but high debt to GDP ratios

Persistent slow growth finally led to fiscal stimulus

Increasing the participation rate amongst women will help temporarily

Raising the retirement age is important but will only postpone the problem

Japan: Working Age Population 15-64



800

400

0

-400

-800

00

800

400

0

-400

-800

-1200


12

IMF Report on Women in the Workforce

•Would raise GDP and living standards

•Higher FLFP would reduce budget deficits

•Gender gap large even in OECD economies

•Japan gender gap similar to South America at 25 percentage points

•Middle East is the highest gender gap at 50 percentage points

•Literacy rates for women continue to lag those for men

•Wag gaps persist even when controlling for occupation/education

Source: IMF, Women, Work and the Economy: Macroeconomic Gains from Gender Equity, September 2013, KPMG analysis


13

Japan GDP if female participation equaled male participation

By 2019 Japan’s GDP could be 1.6% higher than the IMF’s baseline if there were G7 FLFP

Growth Prospects Japan’s FLFP is 66.6%

vs 85.2% for men

The annual potential growth rate could rise by about ¼ percentage point if the female labor participation rate were to reach the average for the G7 countries

Japan is a prime example of a country that suffers from a falling working age population

©2014 KPMG LLP, a Delaware limited liability partnership and a U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved. NDPPS29292

520000

525000

530000

535000

540000

545000

550000

555000

560000

565000

570000

13 14 15 16 17 18 19

Japa

nese

Yen

(Bill

ions

)

Year

Japan GDP: IMF baseline vs. FLFP

Source: IMF, Women, Work and the Economy: Macroeconomic Gains from Gender Equity, September 2013, KPMG analysis


14

55

60

65

70

75

80

1980 1986 1992 1998 2004 2010 2016 2022 2028

UK Working Age Population (15-74) & (15-64)

82

50

55

60

65

70

75

80

1980 1986 1992 1998 2004 2010 2016 2022 2028

Japan Working Age Population (15-74) & (15-64)

83

60

65

70

75

80

1980 1986 1992 1998 2004 2010 2016 2022 2028

Europe Working Age Population (15-74) & (15-64)

82

60

65

70

75

80

1980 1986 1992 1998 2004 2010 2016 2022 2028

U.S. Working Age Population (15-74) & (15-64)

79

Raising the retirement age to 74 helps

Source: Bloomberg


15

As each generation retires they will see a greater percent of those over age 65

Younger generations will be supporting more older people

Greater dependency ratios over the next century

Fiscal Balances

Generation Born Building Assets

Drawing Down Assets

% of U.S. Population 65+ in start year

Baby Boomers

1945–1965 1965-2035 2015 - 2055

13.6%

Generation X

1960s-1980s

1980s-2050s

2030 - 2070

19.9%

Generation Y/ Millennial Generation

1980s-2000s

2000-2070 2050 - 2090

27.6%

Generation Z/ Digital Natives

1995-2010 2015-2085 2065 - 2100

29%

Generation Alpha/ Google Kids

2010 + Starting in 2030

Starting in 2080

33.3%

Source: KPMG Investing in the Future, U.N. Population Statistics, Haver Analytics


16

Living longer, while great, is not free

All countries are forecast to have a greater percentage of elderly people in 2050 vs. 2000.

Concerns about future fixed costs due to population living longer in retirement

Increased fixed costs reduce or limit governments’ ability to respond to new shocks

Fiscal Balances

Source: Congressional Budget Office Projections 2014-2024

Percentage of GDP 2013 2024

Social Security 4.9% 5.6%

Medicare 3.0% 3.2%

Total: 7.9% 8.8%


17

Tax payers and transfer recipients shift due to aging

U.S. wages and salary are no longer the dominant source of personal income

12.10%

7.40% 0.90%

10.90%

16.70%

59.30%

Personal Income Sources in 1980

Transfers Proprietors Income Rental Income Supplements to Wages Receipts on Assets Wages and Salary

17.30%

9.50%

4.20%

12.10%

14.20%

50.50%

Personal Income Sources 2013

Source: CBO Budget Projections 2014 - 2024


18

Government debt expanding

Can GDP grow faster than costs of supporting the elderly?

Fiscal Balances Aging population means

action must be taken on

Participation rate

Retirement age

Productivity

Only 3 ways out of debt

Growth

Inflation

Default/restructure

Germany: General Government Debt as a Percentage of GDP(%)U.S.: General Government Debt as a Percentage of GDP (%)

Japan: General Government Debt as a Percentage of GDP (%)

1312111009080706050403020100Sources: Bbk/H, FRB/H, BoJ/H /Haver

240

200

160

120

80

40

240

200

160

120

80

40


19

Government bond yields falling for 30+ years

Lower yields due to multiple factors

Fiscal Balances Increasing “Real

Money” holders

The decline in long-term U.S. rates in 2004-05, despite rising policy rates, was driven by a rising preferred-habitat demand linked to foreign official holdings

A 10 percentage point change in foreign ownership equates to a yield change of 32-43bp

Sources: Kaminska, Vayanos and Zinna (2011), IMF working Papers: WP/12/158, WP/ 13/254

Japan: 10-Year Benchmark Government Bond Yield (AVG, % p.a.) (LHS)U.S.: 10-Year Treasury Note Yield at Constant Maturity (Avg, % p.a.) (RHS)

Italy: 10-Year Benchmark Government Bond Yield (% p.a.) (RHS)

1005009590Sources: MoFJ, FRB, BdIt /Haver

10

8

6

4

2

0

15.0

12.5

10.0

7.5

5.0

2.5

0.0


20

Unfavorable demographics not aligned with asset allocation

Compared to U.S. and European investors most of the world is already “derisked”

Scope for even greater bond market allocation from emerging markets

Japanese pension fund recently announced greater diversification into foreign bonds and other risk assets

Fiscal Balances

47% 34%

52%

32% 18% 14% 14% 10%

30%

23%

29%

13%

14% 24%

5% 13%

90%

18%

39%

15%

54% 54%

54% 81% 77%

10% 5% 5% 6% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

U.S.households

andpensions

WesternEurope

householdsand

pensions

Sovereignwealthfunds

DevelopedAsian

households

MENAhouseholds

LatinAmerican

households

Chinesehouseholds

EmergingAsian

households

Emergingmarketcentralbanks

Asset Allocation by Investor (2010)

Equities Fixed Income Cash and Deposits Other

Source: McKinsey, The Impact of Demographic Shifts on Financial Markets, June 2012; Note: excludes retirement assets


21

Ultimately Debt Sustainability is the ability to sell debt – now and in the future

Fiscal Balances

Growth Prospects

Ability to Raise Taxes

Who Holds Debt

Deb

t Sus

tain

abili

ty

What is Debt Sustainability?


22

Several IMF studies shed light on the importance of “real money” investors

So-called “real money” investors are unleveraged holders of government debt such as pensions, retail and central banks

Liability and maturity matching tend to drive allocation as much as returns accounting for stability of “real money”

The growth of emerging market savings since the 1990s has helped pushed down developed markets debt

Demographics and macro-prudential regulation have contributed to increasing real money demand

Who

hol

ds th

e de

bt

Are factors other than fiscal soundness important?

Source: IMF working papers : WP/12/158, WP/13/254, KPMG Economics – Hunter


23

Negative feedback loops develop quickly if debt becomes too high

Debt service costs cannot be so high that fiscal adjustment is only obtainable via restructuring or default – a la Greece

Interest rates higher than the nominal growth rate by two percentage points or more are, ultimately, unsustainable

When greater resources go to debt service potential output is reduced. (Reinhart and Rogoff 90% tipping point)

Higher dependency ratios due to lower births and longer lives put strain on growth and fiscal revenue collection

Deb

t Sus

tain

abili

ty

Few countries well prepared for future shocks



24

High domestic demand from real money allowed Japan to amass significant debt– despite austerity & growth it may be too late

Europe is not out of the woods and problem countries face issues of growth, dependency ratios and debt ownership

The UK’s austerity has put the fiscal picture on track. The key to maintaining sustainability comes down to growth.

Good demographics and recent austerity has helped the U.S.. High real money holders and oil/gas growth may save the day

The global challenge of an aging population & falling birth rates is the economic and social conundrum that needs solving

Deb

t Sus

tain

abili

ty

Fiscal agility tied to growth prospects and demand for debt


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG LLP does not provide legal services.


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Documents

Who Wears the Diapers? A discussion implications …...Who Wears the Diapers? A discussion about the economic implications of global demographic trends Andrea Urban, CFA, CAIA [email protected]