Episode 4: Your money as the world goes gray

Transcript: Season 1, Episode 4: Your money as the world goes gray

ROB JASMINSKI: The definition of retirement, you know, I'm kind of about 51 now, and that would have been, you know, thinking about retirement. Now, I guess that's technically middle age.

FERNANDA KROUP: You know — learn, work, retire//when people are not living to the age of 70, but instead living to the age of a hundred, that motto is no longer particularly reasonable or useful.

Meredith Sumpter: Welcome to Living Beyond Borders, the podcast from Citi Private Bank and G-Zero media that examines the risks and opportunities in our rapidly changing world — from global politics to economics and what it all means for you. I'm Meredith Sumpter, Head of Research Strategy at Eurasia Group. And today we'll start by looking at a peculiar phenomenon.

Dr. John Westerdoll: Back in November, 2005, National Geographic published a special issue and cover story called the Secrets of Living Longer. And in this issue they featured three blue zone areas of the world where people live to be the healthiest and longest living lives. And that was Okinawa, Japan, Sardinia, Italy, and Loma Linda, California.

Meredith Sumpter: That's Dr. John Westerdoll, a certified nutritionist and dietician who specializes in anti-aging. He practices in Loma Linda, California. It's a town in San Bernardino County with a population of 24,000. And it's a blue zone. Haven't heard of a blue zone? Well...

Dr. John Westerdoll: When I was a graduate student at Loma Linda studying public health nutrition at the University — Loma Linda University — I observed many older people living in the community that were really super healthy and very active. And probably the one person that really stood out to me was an 86 year old woman named Halda Crux. In fact, she climbed to the top of Mount Whitney, 23 times, she became known as Grandma Whitney. And at age 91, she became the oldest person ever to the climb to the top of Mount Fuji in Japan.

Meredith Sumpter: Blue zone locations span different parts of the globe from Okinawa in Japan, to Sardinia in Italy. In zones like these, people are living longer than ever. Their overall health profile can seem almost superhuman compared to other parts of the world.

Phil Duper: And you see people walking, biking, and that's, it's just very common to see that stuff here, whether they're students at the university, or they may be an older retired couple or, or maybe a professional that lives here, but works elsewhere. You see the people around town doing physical activity. You know, just in front of my house, I'd say probably 25 people a day come running and jogging by.

Meredith Sumpter: Lifetime resident and Loma Linda Mayor Phil Duper says it's community influence — where healthier lifestyle choices are the norm. And could possibly be the key to longevity.

Phil Duper: Most of us living here in the community had never, ever thought about this. It was just something, you know, we did. We weren't, we didn't consider ourselves anything special or anything different than anybody else.

Meredith Sumpter: Not everyone lives in a blue zone, or will make it to a hundred and beyond. But in general, the world's population is aging. And in the coming years, the number of people over 80 will triple. With baby boomers settling into the retirement years — this shift means massive changes around the globe, the workforce, the economy, and yes, even the geopolitical landscape is set to be impacted.

Here to talk about the world going gray — and what it all means for us — is Fernanda Kroup, who is Managing Director of Corporate Research and Consulting at Eurasia Group. Welcome Fernanda.

Fernanda Kroup: Thank you, Meredith.

Meredith Sumpter: And Rob Jasminski, Managing Director and Global Head of Citi Investment Management.

Rob Jasminski: Thank you, Meredith.

Meredith Sumpter: So let's jump right in. In just 10 years, the global population of those that are 65 or older will rise by 40% and it's set to double by 2050. So increased longevity around the world. Sounds like a reason to celebrate. I mean, it means something is going right, not wrong. Isn't that right, Fernanda?

Fernanda Kroup: I mean, something's definitely going right when we think about all the medical advancements and, economic advancements that made that possible, but it does pose challenges to the future. At the end of the day, you're going to have a smaller working age population and you're going to have more pressure on retirement systems, on education policy, on healthcare policy. Whether the benefits of those policies will be distributed equally across the population and around the world, those are critical challenges for the future.

Meredith Sumpter: They certainly are. And we'll be digging into those later on in our podcast. But, you know, Rob, I want to turn to you because we're having this conversation because it also means that some careful planning needs to be done on multiple levels. What are the key themes that come to mind for you?

Rob Jasminski: Global life expectancy has increased by, I think, you know, just North of 22 years from average age of 48 in 1955, then kind of north of 70 years in 2015. And you know, we're talking about getting to, you know, 83 by 2100, which seems like a long time away, but it's going to be here before we know it.

And, you know, in some places like Japan, we're talking about that same period of being 95. And, you know, you're hearing average lifespans increased by, you know, an average of four months per year. And so if you think about what this means, you know, take a couple of thematic areas.

First of all, healthcare, you know, people over age 55 today are almost 60% of healthcare spend. You know, those over 65 are almost 35 plus percent of the spend. You think about the impacts of that. The OECD average is about 9% of GDP spent on healthcare. You know, the U.S., we're close to 17%. I mean, even places like China have gone from 3% to kind of north of 6%.

So when you think about this, these growth rates, aren't sustainable, we can't have a hundred percent of GDP just going to healthcare. So, you know, the other part, and I think Fernanda mentioned this is, you know, the concept of maybe peak employment within the next 25 years. The definition of retirement, you know, I'm kind of about 51 now, and that would have been, you know, thinking about retirement. Now, I guess that's technically middle age.

So the definitions, timeframes, funding, and just, if you think about it over the next 20 years, the average European will have spent almost 40 plus percent of their years in retirement. And then I will, I will say there is one kind of silver, or I guess I should say gray lining. But if you think about baby boomers, you know, they're really well positioned. They basically have been significant workers and savers. And so as they kind of come into their retirement, the spend and just the impact positively on the global economy could be extremely large. I think the baby boomer, the 60 plus year olds in the U.S. alone would represent either the third or fourth largest economy, if it was its own standalone economy. So there's going to be, you know, some headwinds and some opportunities, but those are the kind of the areas that we focused in on.

Meredith Sumpter: Right. So let's unpack what this all means from a few different angles, more concretely. Now, we'll talk a bit later about personal finance, but first economics and cost overall. Rob, what does this mean for nations that have increasingly high concentrations of aging citizens?

Rob Jasminski: You know, Meredith, I think it's going to be a really interesting paradigm, and I think there's going to be a pretty wide range between kind of the developed markets and the emerging markets. And so, we’ll maybe draw a little bit of a roadmap and it's not going to be a perfect roadmap, but if we think about Japan, we clearly know for the last probably two decades, we've been accelerating a lot of these aging trends.

And I think the interesting thing is Japan's been able to adapt to many areas. If you think of their use of technology, if you think about kind of their changes in health, in health and lifestyles. So, while there's concern of what this kind of impact will be on governments, global economy, I think there's some bright spots that it can be navigated. And I think the other part that probably stands through is the concept that probably the cliff — even where there are the headwinds - is not right around the corner, that these trends take a lot longer to play through. And I think we find surprising ways to navigate. But I do think, it's an area that when you look across in the developed market space, the pressure’s on governments — we already have large debt to GDP spends — but how do you fund it when you have some of these other headwinds?

And then I think in the emerging markets, you know, it's interesting in many of these markets, you basically have the same similar characteristics of aging populations in some places they’re responding or growing even more rapidly. And so it's in markets that haven't hit, maybe that S curve of consumption or GDP levels — the question is when you can have retirement workers who are no longer able to do manual tasks, or you have areas of robotics, what happens to these economies that haven't made it? So there's definitely going to be, I think, some significant challenges and budget pressure on both developing and emerging market governments.

Meredith Sumpter: Hearing you speak through some of those added pressures, it makes me think slowed growth, but is that inevitable?

Rob Jasminski: Yeah. We're probably due for slow growth for numerous reasons. And I think the longevity extension on savings plans, healthcare costs, are probably just one of the additional factors. I think part of it is we brought a lot of the world pretty quickly into the mix. If you think about it, it wasn't that long ago when I was an analyst and we were talking about the BRICs and building infrastructure, we kind of absorbed that in there. And now you look at kind of a more mature global workplace and clearly the aging populations.

And I do think all things taken kind of without maybe technological changes or some other big paradigm shift probably means slower growth. We clearly have impacts probably more unbalanced across certain regions. And we've seen kind of the growth story as a headwind in Europe. I think the story is slower growth doesn't mean you can't navigate it, but I do think, Meredith, that slow growth is probably there for a while.

Meredith Sumpter: Fernanda turning to you. The impact, as Rob was discussing, the impact will obviously be felt by nations, including those that have the strongest social safety nets — wealthy nations — but also by some middle income countries, such as your home country of Brazil. How should we think about this?

Fernanda Kroup: It's just striking. Right? The world as a whole, we'll see a 10% decline in working age population and that's just within 40 years. All of us usually think of this problem of an aging population as a critical issue in advanced economies, such as the U.S. We think about Japan a lot. We look at numbers in Europe, but it is an issue for every country in the world.

For example, South Korea will have as many older citizens as working age population by 2060. That's just striking. But at the same time, the proportion of say 65 plus citizens to the working age population will more than double in places like China, Brazil, or Turkey. Now you may say, that comes from a low base. Actually that proportion will be very similar to the U.S. by 2060.

So you kind of have to think about these economies — and as Rob was alluding to the BRICS — and in completely different ways. Those governments have much more fiscal challenges coming up ahead. The political capacity of governments in middle income countries to deal with political and demographic shocks is lower. And so at the end of the day, they will have to not just create jobs and reduce informality as they're doing right now. But also ensuring stronger safety nets with a lot fewer resources than Japan, for example, has. I think the issue of slower growth is fairly tangible. If you think about the fact that even Japan with all the economic resources that it has, hasn't been able to completely figure it out.

Meredith Sumpter: Hearing you speak Fernanda — it makes me think of not just the BRICS, but other middle income countries that are dealing already with the pressures of rising protectionism that were there before the global pandemic. Now dealing with sluggish global growth because of the pandemic and facing, you know, graying populations that also have higher expectations of what government should be delivering for them, for increasing quality of life. And I wonder what you think about those governments trying to navigate the creation or renewal of social safety nets that they can afford - and that would be enough to address the needs of their population?

Fernanda Kroup: Yeah, that's absolutely right. And it's not just that they can afford, but that they can also manage. I mean, these are incredibly complex systems. And here you see a stark difference across these countries. We tend to think of emerging markets as this one group, but some countries do have a lot more established systems like Brazil and others don't — such as India, even China is grappling with this issue.

At the end of the day, it will fall a lot on the private sector as well to contribute with solutions in thinking about retirement ages — retooling of populations. It will not just be governments, and not just because of their ability to afford a stronger social safety net, but also their ability to manage something like that. For companies around the world, the question is, can you play a constructive role and think through what you could do ahead of time? And then for investors, can you think about companies that are actually ahead of the curve in this sense, that actually have the ability to manage an aging workforce and their employee base?

Meredith Sumpter: And for many of these societies as they're aging and you have a population that is either getting closer to retirement or in retirement, they'll be watching closely for that balance between government and private contributions, to what a social safety net — a sustainable social safety net might mean — in this post COVID environment.

Rob, let's turn back to you. The conventional thinking would be that aging populations means higher taxes for an already squeezed working in middle class. Is this true?

Rob Jasminski: So I think, the answer is expect higher taxes and probably the aging population is one component of that. But if you look back kind of digging out of the post-COVID world in some of the spend I do think taxes are going to be one lever. I think to look at it in isolation, taxes are not going to be the solution — and just raising taxes, clearly we know people can navigate around taxes. It's an unbalanced kind of allocation.

So I think, more progressive sets of taxes — building on some of the concepts that Fernanda had mentioned — I look back, and looking at private companies being part of the solution, maybe that's one place for some tax relief, incentivization to retrain workers, retool workers.

I think the other interesting thing that will come through is, longevity, ironically is actually fairly income dependent. And by that, I mean, if you think of the U.S. the top 1%, most wealthy Americans outlive the poorest 1% by an average of 12 years. There's a really high correlation clearly from, access to healthcare, high correlation of education levels and longevity success. So, I think this also probably ties in there is some aspect of having a broader base share of the mix.

And then one other area that I think is interesting, and this goes back to some Fernanda's comments is, immigration is a potential solution. We may have some of these markets and countries that didn't make it through that kind of GDP level to kind of navigate properly through this higher demographic trends. And so the question is, can you have a proper balance to get some of the workforce into some of the areas that are needed — and you look at Japan's situation and kind of like, the gaps there, and yet there's a lack of an immigration policy. And we know that hits a political set of sensitivities, the backlash in some markets, but I do think proper immigration policies are going to be essential. So I think there's going to be a mix - taxes will play a role. Private companies are going to have to be an essential aspect of the solution. And then I think of looking at ways of immigration policies, education aspect, are all going to play in there. So taxes probably go up, but hopefully there's some offsetting factors that mean they're not just the only level.

Meredith Sumpter: I want to go back to what you were discussing earlier, which is healthcare expenses and healthcare costs. And while this will no doubt increase, is there an upside for the industry as a whole?

Rob Jasminski: So I think the answer is a profound yes. And some of this is clearly an opportunity set linked to longevity and kind of, we know the curves and the spending on areas like dementia and Alzheimer oncology, which clearly have a high correlation as you get older that dementia rate is I think it's 40% growth over people over the age of 80. So we clearly know that without doing anything in health care, Alzheimer's dementia could be a $2 trillion, costs for the healthcare system without finding solutions.

And I think the interesting thing is post the COVID world on this rush to find a vaccine. It shows you that when the industry is empowered, when areas work together, there's a lot of the same stories we've seen on the technological innovation side. So with the use of AI and big data, we've seen kind of the way people can focus in on getting early compounds into the clinic. If we think about some of the areas like just the whole, sequencing of the genome 15 years ago — I think it was a billion dollar cost with a large room of super computers. And now companies have devices that can sequence for under a hundred dollars.

So I think one part is healthcare being driven by innovation is going to be essential. Hopefully we will find some solutions to these unmet medical areas. I'm optimistic, but I do think that's going to be one part, which is the healthcare lever to be pulled. I think the other part we've seen is the concept of telemedicine. It was a concept before low penetration, and now in almost every situation, your first consultation with your doctor or nurse practitioner is via a telemedicine app application. I think, finding the right blend now of mobile usage, telemedicine, things like wearables and constant monitoring, will also change a constant paradigm.

So I think when you look at the overall area, the model for healthcare to meet the future, the future paradigm of the cost structure is people who can take cost out of the system. So I look at that as the technology side, or can drive innovation and meet an unmet medical need are going to be the areas that will get rewarded and are hopefully part of the solution. So this sub 17% of GDP spent on healthcare in the U.S. either can actually fall, or at least can stabilize with new areas.

And then the last part is we focused a lot of across just the healthcare costs. But the interesting thing is if you think of healthcare as a consumer meets a set of needs for the aging population, 35 plus percent of 65 year olds experienced some form of hearing loss, dental — 25% of the 65 year old population has lost their teeth. You know, you think about vision and incontinence. There's going to be areas that the consumption story is going to be really interesting. Whether it's hearing aids, new technology on glasses or contacts. So products like that are actually going to, I think, be the interesting growth drivers.

I see the opportunity is we've got to take costs out of the healthcare system. They need to innovate, but I think a lot of that will also create a backdrop for future opportunities to invest in, or also change the paradigm for, for healthcare going forward.

Meredith Sumpter: Let's shift now to talk about the politics and geopolitics of an aging population. So take the U.S. We are rapidly approaching perhaps the most contentious presidential election of our lifetimes in the United States. And the difference between the two candidates are stark and all ways but one — Joe Biden is 77 and Donald Trump is 74. And what's more that the demographic with the highest voter turnout in the United States remains people who are 65 and older. Fernanda, what does that tell you about the political power of older people?

Fernanda Kroup: Meredith, I think the numbers speak for themselves. I mean, older citizens constitute a very powerful voting block, and one that may be already developing a common agenda and a shared perception of common interests. We don't see that level of organization yet, but it does not seem unthinkable to consider that they may become associated by identity and by a shared agenda as we move forward.

So for example, one thorny issue for Republicans and Democrats alike is what to do with social security and Medicare, and how to talk about it. I mean, this is a real change - key change from the past. It is no longer a foregone conclusion that it's okay to talk about fiscal policies and being prudent by curtailing benefits or reigning in Medicare.

I mean, everybody's going to have to deal with it because of this powerful voting block that's emerging amongst older citizens. But I would even look at this phenomenon a bit more widely, and we may be as well answering in an era of age politics and age identity since the young population itself is also dissatisfied and concerns about the erosion of safety nets, of employment opportunities and the burden of current pension schemes. I mean, that voting block also has a shared perception of interests and a common perception of challenges coming forward.

Meredith Sumpter: Rob this political generational divide — and its growth as Fernando has discussed — not just in the U.S. but globally, is there also a market impact or financial story there?

Rob Jasminski: I think if you look back to that — let's just call it a distrust factor — I think you look at the market aspect and clearly there's been this view that it was from a younger population, somewhat of a rigged story — the wealthy control;ed more wealth and that no one had a fair shake. I think that's been changed a little bit. There's been a little bit of a democratization on maybe it's the Robin Hood or the fractional shares. So I do think there's a middle ground, which is some aspect of in awareness, and both sides — the aging cohort and this younger cohort probably need to find some common ground to meet in the middle.

And I think we're going to see it across the financial landscape. Some of those concerns from what I just mentioned on the investing side for the young investor millennials today — I think are less than 50% invested in their savings. Um, kind of living a bit paycheck to paycheck. Meanwhile, you have the older cohort who have large cash balances. I think there's over $4 trillion in money markets and savings. And yet you have a little bit of this financial repression where zero interest rates you look at in a lot of the Swiss banks trying to basically charge people to hold their money or disincentivize cash balances.

And so I do think, there will be a hopefully meeting in the middle where you can create an excitement and this offset for the younger part to participate in the markets, to take a larger ownership of their financial kind of views, the same aspect from the older cohort to look for other places to try to drive a return. So I think it's going to be a balancing act, and I think the same thing will play through on taxes, and social programs. The younger generation is dealing with student loans and the big balance of what the cost of an education may or may not be, or looking at many of these jobs that may not be there. Meanwhile, you have a lot of older, the older generation that wants to work longer — A, to stay mentally challenged, but also for the financial impact. And so, what types of jobs, and can you get a little bit of mentoring and reverse mentoring between the generations?

Meredith Sumpter: So how does this all play out geopolitically? Does the politics of aging — does it give any advantage to younger developing nations?

Fernanda Kroup: Yeah, here again, the truth is sort of in the middle with most things. I mean, we were talking about supply chains, localizing and production hubs becoming much more regional in nature because of protectionism. But at the end of the day it pays off to have a large consumer base that can attract investment. So, you think about younger developing nations. That's not necessarily the case. Consumption is tied to income, and here advanced economies have the upper hand. So if they can find the right balance between retooling their workforce and managing the challenges of an aging population, they'll be well positioned. And to Rob's point, I mean, they'll continue to attract investment. But then a lot of those markets are seen as being stable, right? So, almost a no-regrets move to actually produce and sell in the U.S. and in Europe and in Japan. But you also have growth opportunities elsewhere, particularly in India, for example. So there are advantages to large developing markets that are increasing and growing their consumer base. That's very tangible and real. And so those economies, developed, advanced, and emerging — that have access to technology that have invested in innovation to manage the effects of these aging populations. I mean, they will have very critical advantages.

Meredith Sumpter: Lastly, let's turn to the future and the management of money, and a time when we're seeing populations rapidly aged. We've based this conversation on a lot of conventional assumptions about what a rapidly aging world means. Fernanda, we've talked a bit about, you know, the reality that a longer life also brings opportunity for a new chapter for many workers. So the old learn, work, retire model may add a re-skilling phase. What could that look like?

Fernanda Kroup: Yeah, Meredith, it's interesting. I mean, that model emerged more or less after World War II, right? Where people were living to the age of 65 or 70. And the existing thinking about education policy, about employment, about retirement — that's when it began.

And so when people are not living to the age of 70, but instead living to the age of 100, that motto is no longer particularly reasonable or useful. Actually people will be — their long lives will not necessarily be this linear. You know — learn, work, retire — but actually it will happen in cycles. And as you correctly pointed out, it adds a re-skilling phase. Especially if you think about the fact that if you're living to a hundred, you may find that midway through the job that you've always had and the career that you've invested so much on — doesn't exist anymore. It changes completely. It's no longer what you expected.

And so if your job disappears altogether, you feel pressured to start a new career at the age of 50, 55, when you still have 45 years to go. Now, it will mean that, in many ways, people will need to start thinking about saving in completely different ways. And governments will need to think about the policies associated with education, employment, and retirement and healthcare in completely different ways. One of the weaknesses that we're seeing across the world —and even in Japan — is the little attention that's paid to caregivers. That is one of the weakest links in policy designed to deal with longer lifespans, and the burden that, that puts on working age people to care for different relatives. It's playing out in Japan. There are no policy solutions to this. So people will need to start thinking about not just saving for themselves, but also saving for not being able to work as they take care of aging relatives.

Meredith Sumpter: So, Rob, when it does come to money, and the management of money, and from a personal finance and savings perspective, at a time when there may be no guarantee that social safety nets and pensions will be there in several decades — walk us through the planning required for a long, productive life?

Rob Jasminski: I think that's the biggest challenge, which is two parts. So, one is today is, I think the average kind of retiree who will out-live their savings and their retirement plans by eight to 10 years. So one part is people who are already into the later innings and how do they adapt? And so if you think about it, with kind of zero interest rates, look at where kind of fixed income returns are — how do people supplement and have an income that they can live at least a quality retirement?

And so I think some of the focus here is — it's a bit of a mind shift — which was, I remember, going through and it was kind of like — take your years, and subtract it from a hundred, and that's kind of your asset allocation. Well, at the end of the day, if you know, at 50, you're kind of the equivalent of where you were right out of school, kind of higher weights in private equities, in equities as a whole. So the mind shift of kind of that older retired person has to get away where — okay, today, um, I got a short timeframe. If you still might have 20 or 30 years, you have to really think about how you're going to have a good balance of generating the income. And so new investment vehicles or areas that people wouldn’t have traditionally looked at has kind of have gotten into 70. And those asset allocation mixes really needed to be updated.

I think the other part is, on the other end of the curve is the younger population where if you start retirement early and I think they've done some mandatory kind of enrollments and trying to drive people into these automatic investments — into their kind of defined contribution plans — you get people to participate. But the earlier they start can add quickly — 10,000, 12,000 extra dollars in retirement. And so trying to find that blend and getting kind of that younger generation to be a consumer of investments and kind of get away from some of the negative stigma of kind of the views of how you need to invest or how to participate. And I think we've seen improvements there.

I think it's going to be a bit of a barbell where people have to have a realistic assumption that they're going to live longer. They have to have a very realistic assumption on what they need on an income per year to meet the lifestyle they want. I think people are overly optimistic of what where's today's investment yields come through of the types of income and retirement assets that they need. So I think there's a realistic effect.

And then I think there's also probably a little bit of the bubble being burst at the existing kind of private and public pension plans — are probably not going to be the full degree of this safety net and probably more aggressive aspects of means testing in places like social security, etc. So people are going to have to look more aggressively on their timeframes. They're going to have to have much longer term horizons. And I think with that, the ability to have cash earning 0% today means you're going to be pushed out into probably riskier assets, maybe more liquid assets, but it's going to be a blend. And I think the industry as a whole will — I'm optimistic we'll do a good job meeting the needs by coming up with new products, new solutions. I think technology has opened up the investment universe for people. I look at my two daughters and kind of their apps that they have and how they've kind of gotten engaged in investing. And I think embracing technology for the younger generation into investments will also be a big driver.

Meredith Sumpter : Rob Jasminski. Fernando Kroup. Thank you so much for being here with us.

Rob Jasminski: Thanks so much, Meredith.

Fernanda Kroup: Thank you, Meredith.

Meredith Sumpter: That's it for this episode of Living Beyond Borders. Stay with us throughout the fall as we look at the biggest issues impacting your world and your money. Next time we'll look at U.S.-China relations and the state of “decoupling” amid the Covid-19 pandemic. I'm Meredith Sumpter. Thanks for listening.