Demographic Changes Looming (Part One)

10.17.13_BlogRyan Dressel, Investment Analyst, Brinker Capital

This is part one in a two-part blog series.

In 2013, it seems the financial headlines have been dominated lately by policy changes of the Federal Reserve, dysfunction in Washington, China’s threat of a hard economic landing, or Europe’s ongoing sovereign debt crisis.  Lost in these headlines are some major demographic trends that are already under way, or are looming on the horizon over the next decade.  Many of these changes will have a profound impact on investors, governments and societies in the United States and abroad.

Aging Population

The world’s developed countries are aging quite quickly.  As of the most recent 2010 census, the median age in the U.S. is 37.1, compared to 28.2 in 1970.  This is actually fairly low in comparison to some of the world’s other developed nations.

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This is not a huge surprise as the baby boomer generation is reaching middle age.  It does, however, have some large implications that need to be watched closely by investors, companies and governments over the next decade.

What implications does this trend have for the U.S. and abroad?  For starters, an aging population will put a large strain on healthcare costs as the number of people who need access Medicare increases.  A study by Health Affairs cites aging population as a main driver of rising health care cost forecasts.  It projects national health care spending to grow at an average annual rate of 5.8% over the 2012 – 2022 period (currently near 4% in 2013).  By 2022 health care spending financed by federal, state, and local governments is projected to account for 49% of total national health expenditures and to reach a total of $2.4 trillion.[1]

Second, smaller subsequent generations (Gen X, Gen Y) will have to increase productivity to maintain the current low, single-digit GDP growth in the United States.  The responsibilities of the baby boomer generation upon retirement will naturally have to be absorbed by younger generations.  A 2013 study released by the Georgetown Center on Education and the Workforce (CEW) indicates that this trend is already occurring. It cites that there are more job openings created as a result of retirements today than in the 1990s.[2] The U.S. can fuel this productivity by increasing competitiveness in manufacturing, and using competitive advantages such as low energy costs and technological advancements.

Third, an increased focus will be put on fixed income and absolute return investment strategies, especially if the U.S is entering a rising interest-rate environment as many economists believe.  As populations age, their risk tolerance will naturally decrease as people need to plan for their years in retirement.  In 2012, only 7% of households aged 65 or older were willing to take above-average or substantial investment risk, compared to 25% of households in which the household head was between 35-49 years old.  Despite a growing life expectancy, the retirement age is still 65. This has major causes for concern for social security, capital gains tax policies, and corporate pension plans.  Subsequent generations will need to place an increased importance on individual retirement saving should the program terms change, or disappear altogether.

Part two of this blog will look at two additional trends of urbanization and wealth inequality.


[1] Health Affairs.  National Health Expenditure Projections, 2012 – 22: Slow Growth Until Coverage Expands and Economy Improves. September 18, 2013.

[2] Georgetown Center on Education and the Workforce.
http://cew.georgetown.edu/failuretolaunch/. September 30, 2013.

The Name is Bond, Muncipal Bond

Magnotta@AmyMagnotta, CFA, Senior Investment Manager, Brinker Capital

As interest rates have moved higher over the last six weeks, municipal bonds have sold off along with other fixed income sectors, but to a slightly greater degree. From May 1 through June 17, the Barclays Municipal Bond Index declined -2.25%, compared to -1.98% for the Barclays Aggregate Index and -1.72% for the Barclays Treasury Index. While municipals are still in negative territory year to date, they are slightly ahead of taxable bonds.

6.19.13_Magnotta_InterestRatesBoth the technicals and the fundamentals in the municipal bond market remain on solid footing. From a technical perspective, supply and demand dynamics are favorable. New issuance isn’t keeping up with maturing debt, resulting in a reduction in total outstanding supply. With 10-year municipal bonds now yielding 2.4% and 30-year maturities yielding above 4%, we will likely see buyers step back into the market. The muni/Treasury ratio is north of 100%. In addition, June and July are typically large months for reinvestments, potentially creating more demand for municipals.

On the fundamental side, state and local government finances have improved. State revenues are back to pre-2008 levels across the board and are expected to increase. Local governments, which source their revenues primarily from property tax receipts, have received a boost from stabilizing home prices. Most states have taken steps to address their longer-term entitlement program and pension issues in some form. While credit is improving generally, there are still areas of concern. Headlines surrounding Detroit, MI, Stockton, CA and Puerto Rico could negatively impact the municipal bond market, but we do not see a concern regarding widespread municipal defaults.

The backup in interest rates has resulted in significant outflows from both taxable and municipal bond mutual funds over the last two weeks. ICI reports that municipal bond funds experienced $2.2 billion in outflows the week ending June 5 and $3.2 billion in outflows the week ending June 12. The recent sell-off could provide an opportunity for municipal bond investors, especially those focused on higher quality intermediate and longer-term bonds where valuations are attractive.

How 401(k)s are failing millions of Americans

Recently, some startling facts have surfaced that hint at a looming widespread retirement crisis.

Consider these statistics:

  • According to the Employee Benefit Research Institute (EBRI), there are 50 million 401(k) participants in the U.S.
  • The average 401(k) balance of those is slightly over $60,000
  • The average 401(k) balance of those within 10 years of retirement is $78,000—a third of them actually have less than $25,000 saved.
  • 43% of workers ages 45-54 are not currently saving for retirement at all.
  • In 1980, 60% of private sector workers had access to a lifetime income in the form of a corporate pension. As of 2006, only 10% still have access to a pension.
  • It is estimated that a middle-class lifestyle will require a nest egg of $900,000 at retirement.
  • Social Security only pays $14,780 per year for individuals and $22,000 per year to couples.

To read the entire article on How 401(k)s are failing millions of Americans, click here.

[1] “How 401(k)s are failing millions of Americans. The Week. April 20, 2012. <http://theweek.com/article/index/226886/how-401ks-are-failing-millions-of-americans>