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(1)

Demographics and

Capital Flows

Prof. Jeremy J. Siegel

The Wharton School

September 7, 2006

(2)

Long Term Demographic Trends

U.S. Life Expectancy and Retirement Age

56

60

64

68

72

76

80

1950-1955

1955-1960

1960-1965

1965-1970

1970-1975

1975-1980

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

Life Expectancy

Retirement Age

Past marked by (1) rising life expectancy

and (2) falling Retirement Age

But this trend

Cannot Continue

1.6 Years

15.9

(3)
(4)
(5)

Big Questions

The Biggest Questions Facing the

Developed World

Who Will Produce the Goods?

Who Will Buy the Assets?

(6)

Retirement Age must rise dramatically

U.S. Life Expectancy and Retirement Age

Life

Expectancy

Retirement

Age

56

60

64

68

72

76

80

84

88

19

50

-1

955

19

55

-1

96

0

19

60-1965

19

65

-1

97

0

19

70

-1

97

5

19

75

-1

98

0

19

80

-1

98

5

19

85

-1

99

0

19

90-1

99

5

19

95-2

000

20

00

-2

00

5

20

05-2

01

0

20

10-2

015

20

15-2

020

20

20-2

02

5

20

25-2

030

20

30-2

035

20

35-2

040

20

40-2

045

20

45-2

050

15.9

Years

11.6

Years

(7)

Improvement in 2004 UN Data

U.S. Life Expectancy and Retirement Age

Life

Expectancy

Retirement

Age

2000 Model

2005 Model

56

60

64

68

72

76

80

84

88

19

50

-1

955

19

55-1

960

19

60-1965

19

65

-1

97

0

19

70-1

975

19

75

-1

98

0

19

80-1

985

19

85-1990

19

90-1

99

5

19

95-2000

20

00

-2

00

5

20

05-2

010

20

10

-2

015

20

15-2

020

20

20-2025

20

25

-2

03

0

2030-2035

20

35

-2

04

0

20

40-2

045

20

45-2050

15.9

Years

11.6

Years

(8)

Population profile in Developing World

„

Outside the developed countries,

the population of the world is much

younger.

(9)
(10)

Exchange of goods for assests

„

Throughout history, the “old” have sold

assets to the young in exchange for

goods.

„

Today in US, Florida’s retirees sell

assets to and import goods from other

49 states.

„

In the future the US will sell its assets

to the rest of the world.

„

Success depends on rapid growth in the

(11)

World GDP 2005

Population 2005

84.8%

15.2%

46.7%

53.3%

Western Europe 6.14% U.S. 4.61% Low Income 13.44% Mid Income 5.61% Eastern Europe 4.60% Latin Am/Carib 8.68% India 17.07% China 20.35% Hi Inc. nonOECD 1.57% Canada 0.50% Aus / NZ 0.37% Japan 1.98% Sub-Saharan Africa 11.62% Indonesia 3.45% Western Europe 19% U.S. 21% Low Income 5% Mid Income 5% Eastern Europe 5% Latin Am/Carib 8% India 6% China 14% Hi Inc. nonOECD 3% Canada 2% Aus / NZ 1% Japan 7% Sub-Saharan Africa 2% Indonesia 2%

(12)

22.9%

77.1%

Population 2050

World GDP 2050

12.3%

87.7%

Western Europe 4.41% U.S. 4.35% Low Income 16.48% Mid Income 5.43% Eastern Europe 2.46% Latin Am/Carib 8.63% India 17.55% China 15.34% Hi Inc. nonOECD 1.51% Canada 0.47% Aus / NZ 0.36% Japan 1.24% Sub-Saharan Africa 18.64% Indonesia 3.14% Western Europe 7% U.S. 10% Low Income 9% Mid Income 7% Eastern Europe 4% Latin Am/Carib 10% India 18% China 19% Hi Inc. nonOECD 2% Canada 1% Aus / NZ 1% Japan 2% Sub-Saharan Africa 7% Indonesia 3%

(13)

Retirement Age with high growth in LDCs

U.S. Life Expectancy and Retirement Age

Life

Expectancy

Retirement

Age

0%

2%

4%

6%

8%

56

60

64

68

72

76

80

84

88

19

50

-19

55

19

55

-19

60

19

60

-1

96

5

19

65

-1

97

0

19

70

-1

97

5

19

75

-19

80

19

80

-1

98

5

19

85

-1

99

0

19

90

-1

99

5

199

5-

20

00

20

00

-20

05

20

05

-2

01

0

20

10

-2

01

5

20

15

-2

02

0

20

20-20

25

20

25

-2

03

0

20

30

-2

03

5

20

35

-2

04

0

204

0-

20

45

20

45

-20

50

(14)

Retirement Age with high growth in LDCs

U.S. Life Expectancy and Retirement Age

Life

Expectancy

Retirement

Age

Developing

Countries High

Growth

56

60

64

68

72

76

80

84

88

50

-1

95

5

55

-1

96

0

60

-1

96

5

65

-1

970

70

-1

975

75

-1

98

0

0-

19

85

85

-1

990

90

-1

99

5

95

-2

00

0

00

-2

00

5

05

-2

01

0

10

-2

01

5

15

-2

02

0

0-

20

25

25

-2

030

30

-2

03

5

5-

20

40

40

-2

04

5

45

-2

05

0

15.9

Years

11.6

Years

15.4

Years

(15)

The Global Solution

The answer to our question:

Who will produce our goods?

Who will buy our assets?

Is the same:

The Developing Countries

By the middle of this century Developing

Countries will

(16)

Stock Market

Capitalization 2006

7.3%

92.7%

33.0%

67.0%

Stock Market

Capitalization 2050

Western Europe U.S. 46.00% Emerging Eastern Europe / Asia 4.70% Emerging Latin Amer 1.50% India 0.40% China 0.70% Canada 3.50% Developed Asia Ex-Japan 3.50% Japan 10.30% Western Europe 8.8% U.S. 16.6% Low Income 6.4% Mid Income 5.6% Eastern Europe 3.4% Latin Am/Carib 10.6% India 14.1% China 20.3% Hi Inc. nonOECD 3.1% Canada 1.1% Aus / NZ 0.7% Japan 2.6% Sub-Saharan Africa 4.2% Indonesia 2.4%

(17)

Conclusions

„

Developed economies by themselves will

suffer lack of asset demand

„

Studies of asset holdings in 1980s and

1990s distorted by high returns. There

will be much more net selling in 2010s

through 2030s.

„

I believe that growth in developing world

will offset slowing in aging economies

and support future equity prices. But that

support is essential.

„

Asset prices will be the signal to boomers

References

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