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BOOK REVIEW: What happens to wealth as populations age?

Aug 16 2018 05:45
Ian Mann

Ageing wealth: An unequal problem, by John Kinsley

Kinsley discusses two economic challenges: the ageing demographic and financial inequality. His book argues that the link between these two apparently unrelated issues is causal – the former will affect the latter.

"Economies move through major economic cycles and shift slowly over time," Kinsley notes, "[and] try as they might, unhappy politicians and regulators will not succeed in stopping these long-term shifts." The mega-trends always have their way, and effective remedies always require a deep understanding of issues.

An ageing demographic is slow and structural, the result of decisions and events that are not easily or quickly reversible, if they are reversible at all.

In 1950, there were just over 2.5 billion people in the world. A hundred years later, it is expected that there will be 9.5 billion. In 1950, only 5% were over 65, and 100 years later, it will be 15%, a 300% rise.

In 40 African countries, by contrast, over 50% of the population is under 20 years old, but in 30 developed world countries, less than 20% of the population is under 20 years old.

Fair warning

For South Africa, this book provides a useful forewarning. Understanding the factors at play in developed economies is instructive, but not in that we are, or hope to be, like them some day.

We are affected by what happens to our trading partners: and understanding the levers of the problems will clarify our thinking about our situation.

Inequality is not only the problem of the developed nations of North America or Europe. Extreme inequality in terms of earnings and assets exists in both China and Russia, for example, where the differences between the top 10% and the bottom 50% are extreme.

Economic growth of both the poorest decile and the top 1% has been lifted, almost at the same rate. What has not happened is a similar level of growth in the middle class. In fact, it has been dangerously weak.

Some even argue that both the disastrous decisions regarding Brexit and the election of Trump are directly related to the middle-class’ aspirations that have not been realised. Their growth has been negligible from 1980 – 2016, according to the World Inequality Report.

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While the world is definitely better off, on average, it is nevertheless more unequal than it was throughout most of the 1900s.

So, what are the implications of an ageing demographic in developed nations? The Baby Boomers (people born in the 1950s) are now reaching retirement, and that brings with it very different needs and results.

Instead of contributing to the overall savings pool of the country, they are now drawing down on those savings. What they spent their earnings on in their earlier years is significantly different. Boomers leaving the workforce will cause a decline in the working population.

When we spend our savings

Kinsley raises four economic challenges that flow from the ageing demographic, but consider just these two.

The first that Kinsley cites, is economic growth. GDP is commonly accepted as a good measure of economic growth in a country.

It is driven by two factors – population growth and productivity. When the one slows, the other must increase to sustain economic growth. However, over time a declining population cannot be compensated for by productivity, because productivity cannot increase continuously.

The second challenge is pension schemes. In developed countries such as Australia and the Netherlands, total pension fund assets are 126% and 168% of GDP respectively. In China, Malaysia, South Africa and South Korea, by contrast, it is 62% of GDP.

As the population ages the size of the pension fund ‘pot’ becomes increasingly important. Those who work, contribute, and those who retire draw down.

America’s shortfall in 2050 will be an eye-watering $138 trillion, and China’s, $119 trillion. The era of employers looking after people after their employment is ending. The need for the individual to take responsibility is becoming urgent.

The wealth gap

Wealth inequality is the other half of the problem Kinsley highlights. In the US the wealthiest 5% hold about 67% of all financial assets. In the average society anywhere in the world, the richest 10% over time will own about 60% of the to wealth available. This gap, many believe, will not be closed through improved skill levels or education in a reasonable span of time.

Consider that the Baby Boomers will transfer some $30 trillion to the next generation in the next 30-40 years. This is an example of how wealth is strongly determined by the fortunes of the family through generations – for a while. Research indicates wealth seldom increases in every generation. This points in the opposite direction, too. Inequality is likely to get worse before it gets better.

There have been numerous interventions that have attempted to address these large trends and reduce the inequality gaps. Some have failed; some have succeeded.

Zimbabwe took the view that since land was taken from people it must be returned, forcibly if necessary. Their experience has been well documented – Zimbabwe was the largest exporter of agricultural product in Africa, Kinsley explains, and today five out of the 12 million Zimbabweans who remain in the country go to bed hungry. The "land grab" approach (for many reasons), was a failure.

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Venezuela, at the same time, began the process of "oil grabs". As the economy declined in the face of anti-free market policies, so the government began to grab more private assets to fund its spending. Seventeen years later the economy has collapsed. No one is richer, everyone is poorer.

Thailand, in 1963, had an economy the size of Ghana. That is where the similarity ends. Thailand invited and encouraged foreign industrial investment, with the result that the local workforce learned new skills and the economy boomed. Ghana did not encourage outsiders to enter the economy. Today Thailand’s economy is 10 times that of Ghana.

Singapore actively encouraged major international companies to invest in their capitalist, free-market state. Their labour laws and economic policy were made investor-friendly. In 1965, the per capita GDP was $500 – similar to South Africa’s at the time. By 2015 it had grown to $50 000 in line with Germany and the US, and 10 times that of South Africa.

The frightening inequality in South Africa has no quick fix. Asset grabs have not proved to be effective anywhere, and have at best made all but a tiny elite poorer.

"The state can act as a stabiliser in times of financial difficulty, but to expect it to be the driver of economic growth is simply wrong," Kinsley asserts. The only fix is increased productivity enabled by government policy interventions.

This is a well-reasoned and easily accessible book. It offers many insights and the promise not of quick solutions, but of possible, slow ones.

Readability       Light ---+- Serious

Insights                      High -+--- Low

Practical           High ----+ Low


  • Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Executive Update. Views expressed are his own.

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ian mann  |  wealth  |  ageing  |  book review  |  retirement


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