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Last week I spoke at the Retirement Industry Income Association (RIIA) Fall Conference on the topic Dynamics of the New Normal. Several of the slides in my PowerPoint presentation featured subjects that I routinely address: secular market trends, consumer confidence, employment levels, household incomes, etc. But the content that has generated the most feedback from attendees was my illustrated discussion of demographics. I looked first at developments in U.S. demographics from 1980 to the present with a focus on the Boomer bulge. Then I examined current day demographics for several major countries around the globe.

Encouraged by the feedback, I've undertaken a deeper analysis using data available on the Census Bureau website. Specifically I've dug into the International Data Base, which contains population statistics from 1950 to the near present with projections to 2050.

Using that data, I've developed a set of population pyramids for the U.S. that start with 1981 and span seven decades at 10-year intervals. My pyramids differ from the ones available at the Census Bureau website in one key respect. The CB pyramids are based on population numbers by gender for each five-year cohort whereas mine are based on percentages. Why? Because, in the absence of an overpopulation problem, the shifting ratios over time are more important than the actual numbers. By using percentages on the horizontal axis, all pyramids add up to 100%.

(Click charts to enlarge)

Click to View

The chart above is a snapshot of the U.S. population 30 years ago in 1981. I've highlighted the top of the Boomer cohort, generally defined as those born during the inclusive 19-year period from 1946 to 1964. By selecting 1981 as our start date, the oldest Boomers have filled the age 30-34 bar in our chart and occupy the three bars below, with Generation X beginning to slip into the bottom of the age 15-19 cohort.

If you click on the chart, you will see a set of links to seven pyramids at decade intervals: 1981, 1991, 2001, 2011, 2021, 2031 and 2041. I've also included a link to an animation that loops through the seven charts at 3-second intervals.

The movement of the Boomer bulge up the pyramid is obvious, as is the fact that it diminishes in size as mortality rates increase. The pyramid goes from a significantly lateral shape in 1981 to an increasingly vertical arch six decades later. At present and for the next decade, our pyramid is more of a "house" shape. The greater female longevity is readily apparent. Less immediately conspicuous is the growth in height of the pyramid as the increasing longevity of both sexes is factored into the estimates.

But enough of the vague shape metaphors. Let's look at some comparative numbers for these seven snapshots. I've calculated the Elderly Dependency Ratios for each using the standard formula: The percentage of the population age 65 and over divided by the percentage age 15-64 multiplied by 100 (see note at bottom).

The elderly dependency ratio has major significance for U.S. budget planning. As this ratio shifts higher, the productive population is increasingly burdened by the cost of entitlement programs for the elderly. Has the U.S. government been ahead of the Boomer curve in this dependency ratio? The next graphic is a slide I presented earlier this year at the RIIA Conference in Chicago.

From the mid-1950s to the mid-1970s, entitlements increased dramatically: early retirement options, the advent of Medicare, and cost-of-living adjustments. But in the early 1980s, in the aftermath of a fierce secular bear market and several years of runaway inflation, the entitlements trend began reversing.

Interestingly enough, it was 1981, the very year of our first pyramid chart, that President Reagan appointed the National Commission on Social Security Reform (aka the Greenspan Commission after its Chairman) to address the mounting financial problems of the Social Security system. The outcome included the gradual increase in the normal retirement age and taxation of benefits.

My annotations on the dependency ratios chart above suggest that we are approaching a threshold of increasing demographic burden on the financial system. The ratio has only increased 14.5% in the three decades from 1981 to 2011. But the rise from 19.8 to 26.1 over the next ten years is a 32% increase followed by a 24% increase over the following ten years.

Generational Distrust, Generational Accommodation, or Something Between the Two?

How will this shift in the elderly dependency ratio play out? Another presentation at the RIIA, Future of Retirement: 2020, by Anand Rao and Jamie Yoder of PwC, included a fascinating slide on the range of intergenerational scenarios in response to the ratio shift.

Click to View

Currently those of us who follow the economy and financial markets are looking for evidence that European sovereign debt issues won't trigger another international financial crisis. How that plays out in the short term remains an uncertainty. In contrast, we can be very certain that our accelerating demographic shift will continue to increase the political debate on entitlement expenditures, especially on the eve of a presidential election year.

The U.S. faces demographic changes that will ultimately impact the financial planning of federal, state and local governments. The process will also affect individuals as we adjust our retirement expectations and strategies for insuring income during our elder years.

Note: The Elderly Dependency Ratio is a internationally used "rule of thumb" approximation that is useful for a comparative analyses of multiple countries and for analyses of individual across time frames. The percentage age 15-64 is the productive population, and the percentage age 65 and over is a population that draws heavily on the social capital of the country.

Of course the boundaries of the productive population are crude generalities. In developed countries, productive employment generally starts later as teenagers continue their formal education. At the other end of the 15-64 cohort, many adults continue employment beyond age 64.

The Total Dependency Ratio is an alternative way to capture the broader demographic burden on the productive years. The formula is the percentage of the age 65 and older cohort plus the percentage of the age 0 to 14 cohort divided by the percentage age 15-64 multiplied by 100.

Source: Boomer Demographics: The Shift Ahead