Demographics and Dividends: How An Aging Population Could Drive Demand for Income-Generating Assets
by Byron Boston, Chairman and CEO, Dynex Capital, Inc.
As we get older, people tend to work less, save less, and need more income from our financial assets to maintain our well-being. In examining current trends among aging households in the US, many of us are not prepared for a new financial reality beyond the workforce, making assets that produce regular income a critically important topic for Dynex to focus on.
As The Global Population Shrinks, The Need for More Income Will Increase
Early in my career, I stood alongside prominent macroeconomists in focusing on how population growth serves as a critical pulse point for economic development.
40 years ago, populations of upper-middle-income countries were growing 1-1.5% per year, highlighted by regions like China and India which grew nearly 2% per year, or the US which growing around 1.2% per year, stats that signaled positive global economic trends.
But the demographic tide has shifted since then, as noted by United Nations demographic data that shows over the next 40 years, upper-middle-income countries will see a downward slope in population growth and thus a subsequent negative impact on economic growth patterns.
The shift and impact might be felt rapidly, as China’s population will begin shrinking as soon as the next ten years and populations in Europe and North America will peak in the next 15 years.
Highlighting the issue of an aging population, David Bloom and Leo Zucker of the International Monetary Fund, put it simply:
“What is fast becoming universal is that population aging is the most pervasive and dominant global demographic trend, owing to declining fertility, increasing longevity, and the progression of large cohorts into older ages.”
This trend has profound implications for the United States' economic and social development and its fiscal and political sustainability.
Baby Boomers: A Case Study In Aging Populace and Its Economic Impact
The “Baby Boomer” generation was a massive part of the American demographic story as 79 million people born during a 19-year span was an enormous shock to the US population of just 140 million in 1945.
The “boomers” were a massive bulge as their numbers dominated the broader population. By the mid-1980s, they accounted for most of the working-age population.
Today, many have already retired, and millions more will do so in the coming years, without a similar population bulge behind them. Where boomers were once able to support the older generations, it will be more difficult for the economy to provide boomers with the same kind of social safety network they built for previous generations.
Lack of Population Growth Makes Income Generating Assets More Important than Ever
Aging populations with more assets can provide the economy with a short-term boost, as The Federal Reserve Bank of Richmond noted late last year, “As households age, they repay education loans and other debt and accumulate real estate and (to a lesser extent) financial assets.”
Still, even with asset accumulation more likely in aging households, the data shows that older Americans will need to rely on savings today more than previous generations. That savings will increasingly need to be held in financial assets that produce regular, steady income.
Homeownership and Real-estate Asset Accrual Anchoring Wealth Accrual for Aging Population
Most American households can count their primary residence as their most valuable accumulated real estate, making homeownership a critical wealth driver for many.
In fact, The Federal Reserve’s Survey of Consumer Finances shows that the equity in their primary residence amounts to over 50% of the average balance sheet of households over 54 years old.
But while homes offer shelter, even those without a mortgage incur regular costs like maintenance, property taxes, and insurance. The baby boomer generation will need to rely on their financial assets to generate income to supplement their social security income and support the largest portion of their net worth, their primary residence.
As noted in the graph, Financial assets are just 20% of the net worth of most households over age 54.
And their financial assets are heavily skewed towards equities. The share of US household assets in equities is near a record high (as seen in the chart below).
And while a 20% investment in equities won't necessarily alarm most financial advisors, equities like stocks only pay a modest dividend, making those equities less valuable to Americans aging out of the workforce and a subsequent decrease in income.
The dividend yield on the exchange-traded fund (ETF) of the Dow Jones Industrial Average, was less than 2% in the last year. The S&P 500 ETF offered just slightly over 1.3%, while the Vanguard Total Stock Market ETF saw a dividend of just 1.4% in the last year. The dividends paid on the average US stock are simply too small to support the needs of the aging population.
Today’s Boomers Will Need to Convert More of Their Assets to Income-Producing Financial Assets.
As the leader of Dynex, a public company that has paid a substantial dividend for well over a decade, I always consider how our business contributes to the average person's need for income-generating assets as they age.
I'm fortunate to head a company that supports the growth and revitalization of communities in the United States through our approach to offering attractive and consistent risk-adjusted returns over the long term.
Contributions from Dynex Head of Strategy and Research Terrence (“T.J.”) Connelly