What an Aging Population Means for Retirement

Longer life spans have ramifications for both the amount of money and the kinds of work skills you will need to accumulate as you approach traditional retirement years, says author Ted Fishman

Christine Benz 17 September, 2012 | 12:27PM
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Christine Benz: Hi. I'm Christine Benz for Morningstar.com.

The global population is aging rapidly, which is apt to have lasting repercussions for all of our lives. Here to discuss this topic is author Ted Fishman. He is the author of a new book called Shock of Gray.

Ted, thanks so much for being here.

Ted Fishman: Thank you.

Benz: So, Ted, this is a fascinating book. You weaved together a lot of interesting anecdotes; geographically very diverse. But let's start with this fundamental question: Why is it that the world's population is aging so rapidly?

Fishman: One obvious reason is that we have this great gift of longer life. Human beings have lived for 7,000 generations. The last 10 generations are the only ones that have lived longer than any of the others. It's because of science--mostly because of public health and because of literacy.

A bigger driver is smaller families. As our wealth has improved, as women can achieve their aspirations, family sizes dropped dramatically nearly everywhere in the world, most especially in the developed world.

Benz: So, you lay out a fundamental thesis in this book, which is that longer life spans are driving globalisation. Can you connect the dots there for viewers?

Fishman: Sure. So, we know that the oldest places in the world right now are the advanced economies of the world. Japan is the oldest place, Southern Europe is quite old. The United States has an aging workforce. Our population is a little younger than the rest because of immigration.

If you look at how people are handling longer life, they are handling it in a variety of ways, primarily as individuals but also as employers. So, the most expensive workers in the world are the oldest workers. The people who are in their mid-50s and on up. It's expensive to insure them. They have benefits built into their packages. They don’t just make the workforce expensive, they make the whole ecology of the economy around them expensive. So, there has been a shedding of older workers from the former workplace in the world.

As the rest of the world, as most of the world is pushing the official retirement ages up, people are being pushed out of their regular employment--the one that has full health care, full benefits--younger and younger. At the very same time, the world is shopping for younger workers. So, enormous amounts of capital between $1 trillion and $2 trillion is going to China alone. Huge urban industrial infrastructure is being built there, and young people have been lured out of the countryside, a 100 to 200 million of them have come into urban industrial China as older workers and the advanced economies are getting displaced.

Benz: You were saying, too, that as that starts to happen, then China’s population will age and things will just move around in a similar fashion?  

Fishman: Well, it’s fascinating. China has the one child policy, right? So, we think the one child policy is driving aging in China, but China actually has a higher fertility rate than the rest of aging Asia. Everywhere in East Asia has a lower fertility rate than China.

So, what happens is that when economies urbanised, which is what happens when you sent lots of capital there and you build urban industrial centers, family size shrinks, families devote more to the education of their children, those children become inveterate urbanites, they have smaller and smaller families.

Shanghai will be the oldest city in the world in 2012. It doesn’t even have one-child per two families. And not coincidentally, it’s also the best educated city in China.

Benz: So, let’s talk about some of the other economic repercussions of this trend toward longer life spans?

Fishman: Well, they are vast. One thing is that people really have arrived at this moment that we have now without knowing how long they will have lived. So, in Japan, people are living 30 years past traditional retirement. Japanese don’t have a pension system that will support them for that, and it’s at the vanguard every other country will fall in line. So what happens in Japan, for instance, is that people retire. They get their Thank Yous at age 60, three days later they get a call from their former employer says how would like to come back to work for us? You can have your old job, you old responsibilities, we like you, by the way we’ll pay you half as much.

That’s the extreme example of what’s happening to older workers everywhere in the world. They are being pushed into a contingent workforce, which is the fastest-growing workforce in the world. It means temp work, part-time work, contract work, people who become entrepreneurs by choice or necessity, and their work is being devalued. Most people who re-enter the workforce after they exit in late life are coming back at between 20% and 50% less than they were paid before.

Benz: So we know too from this recession here in the US that older workers have been hurt disproportionately. You have some thoughts on how older workers can make sure that they are as relevant and as worthy of employment as younger workers. Let’s talk about some of those.

Fishman: It’s very important to think about what kind of worker you are going to be when you arrive at late stage in life. If you have cookie cutter skills, you are very vulnerable to having your work devalued. You are going to be competing with low-value workers everywhere in the world; younger workers in our country, younger workers abroad.

Your goal has to be, to be the most valuable person you can be in the workforce at age 55, 62, 65. So you have to invest in your own skills and what you can offer uniquely when you get to those ages. So, that nobody can shove you into the low-value workforce.

Benz: So make sure that your training is up-to-date, take additional courses or gain additional degrees.

Fishman: Make it part of your life plan to do exactly that. We know you should save for your children’s education; we know you should save for your retirement. But if you are not investing in yourself over the course of your working life, you won’t be able to afford any retirement that you've saved for.

Benz: Right. So Ted, one last thing I want to touch on is for investors, what are the portfolio ramifications of this macro trend? How can you think about sort of transporting some of these ideas to how you manage your own money?

Fishman: Well, for individual investors who are part of the mainstream of investors and savers, you have to reckon with the fact that you might be living for decades past when you thought you'd retire. You might be in decline. You might need more money than you thought. You might be forced to work. You might be responsible for a person who is dependent.

What happens when the population ages is there are far more older people who need to work and will work, but there are also so far more older people who are dependent. This is a reality. You have to save for both of these contingencies by accumulating skills on one hand and make sure you have enough money on the other.

But for longer-term investors, people who are concerned about portfolios that relate to their children or to institutions that they're on the board for, an aging world changes how you might think of developing markets. If the aging of the world is propelling globalisation, you will see a rolling of developments. So, China is aging far faster than anybody imagined. It is shopping for younger workers around the world.

One of the dynamics of an aging world is that the next young place that's identified for development always ages faster than the place before. So, developing markets change very fast, and you need to think about a rolling dynamic, so that you capture the dynamics of these markets as they unfold in an aging globalising world.

Benz: So, there's been interest in so-called frontier emerging markets recently. It sounds like maybe that sort of idea. Well, to me it's something that you'd want to invest a very small part of your portfolio in, but may be something to at least start thinking about?

Fishman: Well, of course in any of these markets you have to be very skilful; that's where Morningstar comes in. I wrote China Inc. Everybody asked me should I invest in China? Well, it's like you should find somebody who can help you invest in China. You have to be so smart about these markets, but it is a very rapidly changing world where today's developing economy is tomorrow's developed economy, and it happens far faster than people think because the world is aging.

Benz: Well, thanks so much, Ted, for sharing your insights. It's really a fascinating book. And we really appreciate you coming in here to talk about it with us.

Fishman: Glad to talk about it with you. Thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.