Demographic change - the 4 2 1 problem

We live in an ageing society and demographic change is influencing the global economy. In this piece, Investment Analyst David Gorman looks at the impacts of demographic change and examines some of the sectors that stand to benefit from an ageing population.

Demographic Change - the 4-2-1 Problem

Demographic change is influencing the global economy. We live in an ageing society, with many of us dealing with variations of the 4-2-1 Problem, where one child looks after 2 parents and 4 grandparents. For investors, challenges and opportunities abound.

Before finally being persuaded to step down, former President Joe Biden demonstrated two things, the damaging effects of ageing and our apparent unwillingness to confront this issue. In his case, it might have cost the Democrats the last US election.

As investors, we often talk about the big, global themes influencing how we invest, the companies we invest in and, equally, those we avoid. Climate change and the advance of Artificial Intelligence are certainly two of these themes, but I want to look at demographics in two specific areas – declining population and ageing societies. Both trends influence our investment strategy now and will continue to do so in the future. Let’s start off with some facts and figures.

1. The global population now exceeds eight billion people.[1] It is expected to peak at around 10.4 billion in the 2080s.[2] In 1950 the world’s population was around 2.5 billion.

2. Women aren’t having as many children as they once did.

3. Population growth is slowing and some countries have a stagnant or declining population.

4. People are living longer and working for longer.

5. The global population is ageing.[3]

6. A new demographic has emerged – the affluent retiree.

7. Migration and immigration are significant factors in population change.

8. Pension and care costs are rising.

Let’s look at these points one by one.

1. The global population now exceeds eight billion

Remarkably, it took only twelve years for the world population to increase from seven to eight billion, but the UN expects it to take around fifteen years (to 2037) for the number to reach nine billion.[4]

2. Women aren’t having as many children as they used to

Except in parts of sub-Saharan Africa, women aren’t having as many children as they used to. Reasons for this include better education, more women in work, the high cost of childcare, fewer and later marriages and the pressure of caring for parents. The fertility rate, i.e., the average number of children a woman gives birth to, is falling. The OECD estimates that, assuming no net migration and unchanged mortality, a figure of 2.1 children per woman is necessary to ensure a broadly stable population.[5] By contrast, the latest figure for England & Wales is 1.44,[6] in the US it’s 1.84, India 2.03, South Korea 1.12, Japan 1.4 and China 1.55[7] – all of these figures are below “replacement rate.”

3. Population Growth is Slowing

Although the global population is forecast to peak at around ten billion, it is then expected to start falling. We already see evidence of population decline in major economies like China and Japan. One might assume that population decline is good for the environment – fewer consumers, lower emissions, etc. However, older people tend to use more energy because they stay indoors more and often live alone in large properties, especially in more developed economies. That said, it’s possible a falling global population could cut overall consumption and reduce pressure on the natural environment although this isn’t a given.[8]

4. People are living and working for longer

People are living longer, thanks to better healthcare, modern technologies and rising income levels. For children born in Europe in 2024, the average life expectancy is 76 for men and 82 for women.

As people live longer, they are expected to work for longer, leading to rises in the state pension age. These reforms can attract controversy, as we saw in 2023, when French people took to the streets to protest at the Macron government’s plan to raise the retirement age from 62 to 64.[9]

Although the average British male can now expect to live to almost 80, data from the United Nations and the Office for National Statistics (ONS) suggest the average healthy life expectancy is only 63 years, meaning he will live seventeen years with some form of health condition.[10]

5. Ageing population

We all get older every day and the ageing population is one of those problems we’ve all seen coming for a long time. The trouble with this kind of problem is that it’s easy to ignore today because we don’t see it as an immediate threat, even though it is and we should.

The World Health Organisation estimates that, by 2050, the world’s population of people aged 60 and older will double to 2.1 billion and the number of people aged above 80 is expected to triple between 2020 and 2050, to 426 million. This places a heavy strain on healthcare systems.[11]

An ageing population means a shrinking working population and a shortage of those able to care for the elderly. Ageing populations in major economies are likely to limit how much countries can produce, leaving governments with less tax revenue to support higher retirement and healthcare expenses. Fewer workers could also result in lower corporate profits and higher government debt unless government adapt their economies to meet these challenges.

A shrinking workforce means that an economy can’t grow as rapidly as it did, because expanding output depends on improving productivity or employing more people. Governments can address the problem through immigration, increasing the number of women or other under-represented groups into the labour force or improving productivity per head by investing in technology and automation.

The situations in Japan and China are especially instructive. Japan is leading where other western countries could well follow. By 2050, there are expected to be 80 pensioners for every 100 adults of working age. In China, the one-child policy, in effect from 1979 to 2016, has left an ageing population dependent on fewer and fewer working people.

Employed people are likely to have greater care responsibilities, with many working people also caring for both children and elderly parents. This is sometimes called the 4-2-1 problem, where one child ends up caring for two parents and four grandparents and a married couple might have twice the responsibility.[12] As individuals, many of us now deal with elderly parents who, 30 years ago, would probably already be dead.

6. A new demographic – the affluent retiree

Europeans can expect to have around twelve “healthy” years after retirement, which tends to be around the age of 63. Immediately on retirement, many retirees are still active, relatively well-off and keen to enjoy at least a decade of active life.

Another factor to consider here is the effects of greater longevity on the Great Wealth Transfer. With a projected $18.3 trillion in wealth to be transferred globally by 2030, the Great Wealth Transfer is expected to be the largest intergenerational transfer of assets in history. The longer people live, the longer their children must wait to inherit and the amount they inherit could be eroded by the costs of longevity, especially care costs.[13]

7. Migration and immigration

Without immigration, more countries would already have declining populations. It’s worth noting, though, that while immigrants may contribute to the economy, they too get old and require healthcare, unless they return to the country of their birth

8. Pension and care costs are rising.

Increased life expectancy does not always equal a healthy and autonomous lifespan. Pension and care costs are rising, presenting a challenge for individuals, families and the financial services industry. More broadly, social care costs are rising and a smaller number of taxpayers is having to support a larger number of retirees and other economically inactive people for longer.

The average care home cost in the UK rose by 19% between 2021 and 2023. The average annual cost for a room in a care home can now easily exceed £39,480, a figure which is already double the average pensioner’s income of £18,000. This figure can then easily rise to an average of £49,920 a year if nursing care is also needed.[14] In the US, with its insurance-based healthcare system, the median cost of a private room in a nursing home is $339 per day or $10,326 per month.[15]

What does that mean for investors?

How do we deal with the risks and opportunities of greater longevity, such as potential labour shortages? How do we best allocate capital? Castlefield clients know that we invest in areas where we believe that good financial returns can be made and where these returns are not just financial but also, where possible, societal. Where there are problems to be solved, there are investment opportunities and we position our portfolios accordingly. For us, these opportunities fall into six categories.

Six sectors to benefit from an ageing population

	Sector	Products & Services	Companies we own & what they do
1	Healthcare	Pharmaceuticals, medical devices, implants, mobility aids	AstraZeneca, Sanofi, Hikma (pharmaceuticals); Smith & Nephew (medical devices); Straumann (dental care).
2	Occupational Health	Keeping people safe and fit for work for longer.	Optima Health (Occupational health); Wilmington (safety training).
3	Building & Construction	Healthcare facilities, age-friendly housing, infrastructure and public spaces.	PHP (health centres); Genuit and Alumasc (public realm); Retail Charity Bonds.
4	Transport, travel and leisure	Hotels, airports, ports, leisure facilities.	Whitbread (Premier Inn); Tracsis (rail track management technology); The Gym Group (health & fitness).
5	Retail (online)	Distribution & Logistics, online shopping and price comparison. tech-savvy older people may buy more goods online to avoid going out to the shops.	Tritax Big Box REIT, Urban Logistics REIT (distribution); MONY (MoneySuperMarket); Macfarlane (packaging)
6	Financial services	Insurance, pensions, banking services.	Allianz (insurance & asset mgmt.), Amundi (asset mgmt.) UniCredit (banking) Experian (credit scoring), PayPoint (local banking services).