1. How Global Aging Will Reshape the Economy and Financial Markets Richard Jackson Center for Strategic and International Studies Exchange Traded Forum 2011 Toronto May 11, 2011

2. Part I The Global Demographic Transformation

3. Behind the developed-world age wave: Falling fertility and rising longevity. Total Fertility Rate and Life Expectancy: G-7 Countries Total Fertility Rate Life Expectancy at Birth 1960-651980-852005-101960-651980-852005-10 Canada 3.71.6 71.475.980.7 France 2.91.9 70.774.781.2 Germany 2.51.51.370.373.879.9 Italy 2.51.51.469.674.781.2 Japan 2.01.81.368.976.982.7 UK 2.81.8 70.874.079.4 US 3.31.82.170.074.379.2 Source: UN (2009)

4. The developed countries are entering an unprecedented era of “hyperaging.”

5. Along with aging populations, most developed countries will have stagnant or contracting ones.

6. The developing world is still much younger, but it too is in the midst of the “demographic transition.” Source: UN (2009) Demographic Indicators for the Developing World Fertility Rate Life ExpectancyMedian AgeElderly Share Total Pop. Change 1975201019752010 203020502010203020502010-50 Developing World5.12.757.267.027.531.634.66.2%9.8%13.7%48.7% Sub-Saharan Africa6.75.245.551.718.520.624.63.1%3.6%5.2%131.2% Muslim World6.22.952.268.224.729.432.84.6%7.4%12.2%69.5% China & East Asia4.71.763.273.234.441.646.48.4%16.3%24.2%1.8% India & South Asia5.42.751.464.925.430.334.05.1%8.4%12.4%52.6% Russian Sphere2.11.469.367.338.244.548.613.5%20.1%26.3%-26.7% Eastern Europe2.41.470.074.938.946.051.214.9%21.6%30.0%-17.6% Latin America5.12.361.373.527.733.537.56.9%11.7%17.4%38.8%

7. Part II Challenges for the Developed World

8.  Falling fertility and rising longevity translate directly into a falling support ratio of workers to retirees.  A falling support ratio in turn translates into a rising cost rate for PAYGO retirement systems. Rising Retirement Costs

9. CSIS “Current Deal” Projection: Government Old-Age Benefits, as a Percent of GDP, 2007–2050 Public PensionsHealth BenefitsTotal 200720302050200720302050200720302050 Canada 3.9%7.0%8.4% 3.6%6.1%8.9%7.5%13.1%17.3% France 11.2%17.8%19.6% 4.5%7.8%10.2%15.6%25.6%29.8% Germany 10.0%17.0%20.4% 4.1%6.3%8.5%14.1%23.3%28.9% Italy 12.3%18.9%24.6% 3.4%5.5%7.5%15.7%24.4%32.1% Japan 9.1%13.9%19.3% 4.0%6.0%8.0%13.2%19.9%27.3% UK 5.8%7.9%8.5% 4.0%6.3%8.8%9.8%14.2%17.3% United States 4.1%6.6%7.0% 4.2%8.0%10.2%8.3%14.6%17.2% Developed World 8.8%13.7%16.6% 3.8%6.3%8.6%11.2%17.9%22.5% Note: Data refer to benefits to persons aged 60 and over. Pension projections assume retirement ages remain unchanged and benefits continue to replace the same share of wages they do today. Source: The Global Aging Preparedness Index (CSIS, 2010) Rising Retirement Costs

10.  Few countries will be able to raise taxes enough to cover more than a fraction of the age wave’s cost.  Most will have to cut benefits—but the required adjustments are large and are likely to meet growing political resistance from aging electorates.  The likely alternatives: crowd out other spending or let deficits grow— undermining national savings and growth. Public Benefits in 2007, as a Percent of Total Elderly Cash Income Average 3rd Quintile Canada31%47% France59%72% Germany47%76% Italy55%77% Japan39%61% UK42%69% US22%38% Source: The Global Aging Preparedness Index (CSIS, 2010) Rising Retirement Costs

11.  The slowdown in workforce growth in the developed world will translate into slower growth in GDP.  Japan and some faster-aging European countries face a future of secular stagnation.  Productivity and living standard growth may also slow as rates of saving and investment decline.  Aging workforces may be less flexible, less mobile, and less entrepreneurial—putting a further drag on economic growth. Average Annual Growth Rate in the Working-Age Population (Aged 20-64), by Decade 1980s1990s2000s2010s2020s2030s2040s Canada1.7%1.1%1.2%0.5%0.0%0.2% 0.1% France1.0%0.4%0.6%-0.2%-0.1%-0.2% 0.0% Germany1.1%0.2%-0.2%-0.3%-1.2% -0.9% Italy0.9%0.2%0.3%-0.3%-0.6%-1.2% -0.9% Japan0.7%0.4%-0.4%-1.0%-0.7%-1.5% UK0.6%0.4%0.6%0.3%0.0%0.1% 0.3% US1.4%1.2%1.1%0.6%0.3%0.6% Source: UN (2009) Slower Economic Growth

12.  As more of the population enters its harvest years, consumption rates will rise and savings rates will fall.  Growing fiscal deficits may exacerbate the decline in household savings rates.  The danger of a “Great Depreciation” in financial markets as postwar baby booms retire is overstated.  Instead, aging developed countries are likely to become even more dependent on capital imports from a younger and faster- growing developing world. Adults Aged 20 & Over by Age Group, as a Percent of All Adults 2010202020302040 US Age 20-3428% 26% Age 35-5947%42%41% Age 60 & Over25%30%33% Canada Age 20-34 20% 17% 18% Age 35-59 37% 34% 32% 31% Age 60 & Over 20% 25% 29% 31% EU15 Age 20-3424%22%20%19% Age 35-5946%44%40%38% Age 60 & Over31%34%40%43% Japan Age 20-3422%18% 16% Age 35-5941% 38%34% Age 60 & Over37%41%45%50% Source: UN (2009) Emerging Capital Shortages

13.  The secular economic shift from manufacturing to services will accelerate.  The “youth demographic” will give way to a new “silver demographic.”  Business growth will come to depend more on market deepening than on market broadening.  Adjustment costs in both product markets and labor markets will rise.  Stagnant or contracting markets will increase the risk of “beggar-thy- neighbor” protectionism. Shifts in Economic Structure and Business Psychology Cumulative Percentage Change in the Canadian Population, by Age Group and Time Period Source: UN (2009)

14.  As societies age, the overall social mood may become more risk averse and “small c” conservative.  Smaller families may find it more difficult to socialize the young—and care for the old.  Elder-dominated electorates may lock in current public spending commitments at the expense of new priorities.  As the developed countries age, they will also grow more diverse—challenging social cohesion in some countries. The Impact on Social Mood Share of Population with Less than 20 Years of Life Remaining, by Country, 1950-2050 Source: CSIS calculations based on UN (2007) and Human Mortality Database, University of California, Berkeley and Max Planck Institute for Demographic Research

15. Part III Global Aging and Emerging Markets

16.  The demographic transition opens up a window of opportunity for economic growth and development.  Falling dependency burdens and larger shares of the population in the working years boost per capita GDP.  Over time, this demographic shift may also encourage higher labor-force participation rates, higher saving rates, and greater investment in human capital.  The dynamic is called the “demographic dividend”— and it explains as much as two-fifths of the growth in living standards in East Asia since the mid-1970s. The Promise of the “Demographic Dividend” Working-Age Population (Aged 20–64), as a Percent of the Total Population, 1975–2050 19751990200020102020203020402050 East Asia46.855.759.664.163.961.557.856.5 Eastern Europe56.858.360.463.862.160.558.954.6 Latin America43.848.552.356.358.057.356.555.3 Muslim World42.645.149.154.356.156.356.855.9 Russian Sphere 57.759.660.865.663.561.161.357.3 South Asia45.248.150.854.856.957.258.157.6 Sub-Saharan Africa 42.041.142.143.544.947.250.653.0 Note: Highest share is highlighted. Source: UN (2009)

17. Risks to Growth and Stability: Squandered Dividends  The demographic dividend creates an economic opportunity, but does not guarantee economic success.  Large parts of the developing world are nearly as far through the demographic transition as East Asia, yet have not come close to matching its stellar growth performance.  Over the past 10 to 15 years, economic growth has finally begun to accelerate in a large number of emerging markets.  Whether the recent boom represents a long-term shift toward higher growth rates remains to be seen.

18.  The demographic dividend is already ending in some of today’s fastest-growing emerging markets.  As in the developed world, rapid population aging may soon become a drag on economic growth.  China faces a massive age wave that is due to arrive while it is still in the midst of development.  Russia’s economy has been riding high on the commodity boom, but its ruinous demographics are undermining its long-term growth potential.  By the 2030s, India will be one of the few of today’s leading emerging markets whose demographics will still be favorable to growth. Risks to Growth and Stability: The Second Wave of Global Aging Elderly Share and Average Annual Growth Rate in the Working-Age Population, by Decade 1980s1990s2000s2010s2020s2030s2040s Elderly (65+), % of Population Brazil 4.3%5.0%6.2%8.1%11.2%14.7%18.4% China 5.1%6.1%7.5%10.0%13.9%19.1%23.0% India 3.7%4.0%4.6%5.5%7.1%8.8%10.8% Russia 10.2%11.2%12.6%14.3%17.8%20.8%23.7% S. Korea 4.4%6.2%9.2%13.3%19.5%27.3%33.6% Average Annual Growth Rate in the Working-Age Population (Age 20-64) Brazil 2.9%2.3%2.0%1.2%0.5%0.2%-0.2% China 2.8%1.7%1.4%0.5%-0.2%-0.7%-0.6% India 2.5%2.4%2.3%1.9%1.3%1.1%0.7% Russia 0.7%0.1%0.4%-0.9%-1.0%-0.7%-1.6% S. Korea 2.9%1.6%0.7%0.3%-1.1%-1.5%-1.6% Source: UN (2009)

19. WomenMen WomenMen Population Pyramids of China and India in 2010, 2030, and 2050 Source: UN (2009)

20. Risks to Growth and Stability: Journeys can be more dangerous than destinations.  Societies undergo tremendous stress as they move from the traditional to the modern. When plotted against development, most of the stressors describe an inverted-U—meaning that they become most dangerous midway through the transition.  These stressors include:  Contact with the global marketplace and culture  Urbanization  Environmental degradation  Growing income inequality  Growing ethnic competition  Religious extremism

21. Part IV The Shape of the Global Economy

22. The Developed World: A Shrinking Share of Global Population

23. 12 Largest Countries Ranked by Population Ranking 195020102050 1 2 3 4 5 6 7 8 9 10 11 12 Source: UN (2009) Note: Rankings for developed countries that have fallen below 12 are in parentheses. China India US Russian Federation Japan Indonesia Germany Brazil UK Italy Bangladesh France China India US Indonesia Brazil Pakistan Bangladesh Nigeria Russian Federation Japan Mexico Philippines Germany (16) France (21) UK (22) Italy (23) India China US Pakistan Nigeria Indonesia Bangladesh Brazil Ethiopia Philippines Dem. Rep. Congo Egypt Russian Federation (16) Japan (19) UK (27) France (29) Germany (30) Italy (37)

24. The Developed World: A Shrinking Share of Global GDP

25. The Composition of G-20 GDP: From Majority to Minority Partners

26. Some Bottom Lines  Long-term decline of the developed world and rise of emerging markets, especially in East and South Asia.  The United States is a partial but important exception to hyperaging and population decline.  Economic success will depend on leveraging differentials in population and economic growth rates across different regions of the world.  Yet aging societies with stagnant or contracting domestic markets may face increasing political pressure to roll back globalization.  Likely global slowdown starting in the mid-2020s as “second wave” of global aging sweeps the developing world.  Question: Who can replace East Asia as the engine of global growth? Population by Region as a Percent of World Total, 2005-2050 200520302050 East Asia21.5%17.5%14.0% Latin America8.6%8.8% Muslim World17.2%19.6%21.1% Russia & Eastern Europe5.4%3.5%2.5% South Asia22.9%24.5%25.2% Sub-Saharan Africa11.1%15.1%18.8% United States4.6%4.3%4.1% Rest of the Developed World8.8%6.8%5.5% GDP (in 2005 PPP Dollars) by Region as a Percent of World Total, 2005-2050 200520302050 East Asia13.3%26.0%29.3% Latin America8.3%6.6%6.3% Muslim World9.2%9.6%10.3% Russia & Eastern Europe7.1%6.7%5.1% South Asia6.4%10.3%13.5% Sub-Saharan Africa2.2%3.1%4.5% United States22.3%18.6%16.9% Rest of the Developed World31.4%19.1%14.1% Source: The Graying of the Great Powers (CSIS, 2008)

27. We live in an era defined by many challenges, from global warming to global terrorism. None is as certain as global aging. And none is likely to have such a large and enduring effect on the shape of national economies and the world order. CSIS/GAI.ORG GAPINDEX.CSIS.ORG

29. Source: UN (2009)