The global pension crisis is possibly the biggest issue facing policymakers and CEO’s alike today. Earlier this year research showed that US cities and states face a $3.9 trillion gap in their pension funding obligations — an entirely unsustainable funding shortfall. In Chicago, for example, it’s estimated that the pension deficit is equal to 19 years of the city’s tax revenues. However, while under funded pension plans have become a thorn in the side for policymakers, there’s often little thought given to the other aspect of the equation: the size of the sliver economy.
“Baby boomers” now entering retirement age have experienced steady and long-term employment and rising asset prices, allowing them to accumulate substantial savings. As this generation begins to retire, these savings will make their way into the economy.
Euromonitor, a London-based market research firm, estimates that by 2020 global private spending by the over-60s will reach $15 trillion, up from $8 trillion in 2010. In many regions within Europe, the spending power of the over-60s is greater than that of younger generations.
In France, the median disposable income of seniors is higher than the median disposable income of the under-65s, and spending by French over-65s has increased faster in the last 30 years than for any other age group.
Profiting from the silver economy is one of the key global thematic investment themes Bank of America highlights in its third quarter Thematic Investing update.
Investing in the silver economy
According to Bank of America's report, the global population of over 60s is expected to hit 2.1 billion by 2050, up from 901 million today as the average global life expectancy rises to 77.1 from 48 in 1950. This is not a phenomenon that's limited to just developed markets. By 2050, 80% of older people will live in emerging markets according to the bank.
This will pose a huge challenge to governments. Around the world, the current annuity and pension-related longevity risk exposure today is already up to $25 trillion. Age related spending makes up 40% of government budgets in developed markets, and rising age-related costs are likely to push 60% of sovereigns into speculative grade according to Bank of America's assessment of the situation.
From an investment perspective, four sectors are set to benefit the most from the world's ageing population: Healthcare, Financials, Aged-Care and Consumer goods. Ageing could provide these industries with a multi-trillion dollar economic opportunity as Bank of America notes:
"We believe the private sector will play a pivotal role in addressing longevity challenges, while catering to the unmet needs of an older population. From an investment perspective, we see multiple entry points to access the silver economy theme: 1) Pharma & Healthcare (80% of older adults have at least one chronic condition, elderly account for c75% of healthcare spending, up to US$3tn of spending is wasted each year, focus shift to better and smarter solutions); 2) Financials (ushering in the age of saving: growing importance of asset income in retirement, and role of insurers and wealth managers in accumulation/decumulation phases, a tailwind for asset management); 3) Aged-Care (87% of Boomers want to age in place, US$500bn senior living market); and 4) Consumer (Boomers account for 50-60% of DM consumer spending, and 60+ spending will reach US$15tn by 2020E)."<