Economist and author Linda Nazareth is the senior fellow for economics and population change at the Macdonald-Laurier Institute. Her fourth book, Work Is Not a Place: Reimagining Our Lives and Our Organizations in the Post-Jobs Economy, will be published in 2018.
Policy is a powerful thing but its clout pales to that of demographics. This month, the Bank of England raised rates for the first time in a decade, following moves from the U.S. Federal Reserve, the Bank of Canada and a clutch of other central banks. At the same time that central banks are sending interest rates higher, aging populations around the globe are creating a glut of savings that are influencing rates to move lower. It is a tug of war with some interesting implications.
Central banks arguably control short-term interest rates while having a lot less control over longer-term ones. It is a supply-and-demand thing, as it always is in economics: The higher the supply of capital (savings) the lower the price of it (interest rates). You can complicate things and talk about how inflation comes into the mix, but it comes down to the fact that an aging world is going to have more savings, which will drive rates lower.
You really do not need fancy economic studies to show you that younger populations consume while older ones save. Instead, just go to IKEA any weekend and you will see that those in their 20s and 30s are loading up on Billy bookcases and cool throws for their Kivik sofas. In contrast, those a couple of decades older are holding garage sales to get rid of decades worth of junk accumulated from IKEA and everywhere else. They then squirrel away their garage-sale money and any other they can get and put it into retirement savings while worriedly using online calculators to figure out whether it is going to be enough.
We can put some numbers to the whole thing. According to Statistics Canada, in 1987, the proportion of the population between the ages of 25 and 44 was 33 per cent, compared with 19 per cent that were 45 to 64. As of 2017, those proportions were about equal at 27 per cent and 27.5 per cent, respectively. Looking at projected population demographics, 10 years from now the shares of population in the two groups will remain roughly equal – a long way from what we had 30 years ago.
To be sure, eventually much of the population will get old enough to draw down on those savings, but that seems to be a way off. Although we are seeing huge growth in the number of people older than 65, we are also seeing increasing numbers of them choosing to work longer rather than retire and live off savings. As of October, the number of employed people 65 and older in Canada had grown 8.7 per cent over the previous year, a rate more than twice as quick as their rate of population growth.
The demographic push toward savings is a global one, encompassing countries from the United States through Japan. Most importantly, China is aging rapidly, a consequence of the one-child policy in existence from 1979 to 2015. As a result, Chinese households have been saving frantically against a day when they have neither enough government support or enough children to support their retirements, and are flooding the world with capital as a result.
In a paper published in September, the San Francisco Federal Reserve became the latest to emphasize the demographic reasons for lower rates, lamenting that the trend could limit the power of central banks to use policy to offset future recessions. There are plenty of other implications as well. With low rates, savers are going to be challenged to take more risk to get decent returns. More risk is going to be the order of the day in general, since low rates always fuel speculation. In a speech this week, International Monetary Fund first deputy managing director David Lipton noted that trend, in turn urging that financial-sector regulations be tightened as a way to mitigate the worst of it.
In the best case, demographically-driven low interest rates fuel a boom in prudent risk-taking, entrepreneurship and innovation. For those things to happen though, we will need a whole new set of policies, ones more sophisticated than merely adjusting interest rates up or down.