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While U.S. Ages, World Ages Faster

Pat Dorsey, CFA

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar. The health-care bill it seems is finally out there and becoming law, and Social Security reform is possibly on the table. We've seen a few news reports about that.

I thought it might be time to kind of pull back and take an 80,000-foot view of things and look at some demographic issues in terms of how much older the U.S. is getting and, importantly though, how much older the rest of world is getting at a faster pace than us.

If you look at the U.S., the numbers are a little bit scary. There's a ratio called the "dependency ratio," which is basically the number of dependents--folks under 15, over 65--per 100 working-age individuals.

For the purposes of thinking about supporting older individuals, which is more expensive than supporting young folks, and it also gets more expensive over time--as life expectancies go up, medical treatments cost more and more.

The cost of formula doesn't really change over long periods of time; the cost of health care does, so it's really that number of older people, the number of over-65s per 100 working-age individuals, that we want to pay attention to.

In the U.S. right now, this is about 19. We have about 19 individuals over 65 per 100 people between the ages of 15 and 65--per working-age adults. And over the next 40 years, that's going to go to about 35 folks over 65 per 100 working adults.

Now that sounds pretty scary, and indeed it's a pretty rapid increase in the number of folks needing more medical care, fewer of them working, that the working-age population will need to support.

The silver lining is, the rest of the world has it much worse. If you look at the number in Japan, Germany, France, many other parts of the world, these trends are there in spades.

In Japan right now you have 35 over 65s, and that's going to 75 per 100 working adults over the next 40 years. Germany, almost as bad. Currently 30 over-65s per 100 working adults, going to 59. And France, 26 going to 47.

Now again, people are working longer as we move more and more toward a knowledge-based economy. It's feasible for people to be productive later in life in a way that it wasn't when work consisted of toiling in the fields or working in a steel mill.

But the thing to remember is that net/net, more folks in that over-65 bucket relative to other countries--say, Russia, Europe, relative to the U.S.--means the U.S. has, frankly, more productive people being used per capita. And so our GDP growth is probably going to be significantly higher, because we have fewer folks in the over-65 area to support.

It's a fascinating thing to think about because, in a lot of ways, these are the countries we're competing with right now. Certainly over longer periods of time as countries like Brazil and India and Indonesia move further up the economic value chain and are able to export and compete in more advanced markets with the U.S. and German and Japanese goods, they will be our competitors as well.

But right now, our major competitors for complex manufactured goods on a global market, really are these other Western European nations as well as Japan. And frankly, they're going to have a harder and harder time doing it because they don't have this demographic tailwind that the U.S. has.

When you really break things down, there's only two elements really to GDP growth: how many people you've got and how productive are they. Population growth and productivity growth.

So unless there are massive changes in birthrates in the world--and those tend to be pretty stable over time, the U.S. has culturally had a higher birthrate than many other countries--or immigration rates, and the U.S. has historically been very immigration-friendly relative to many other countries in the world.

Well, over a very long haul, it puts us on firmer footing, perhaps, than our industrialized competitors.

I'm Pat Dorsey and thanks for watching.