I remember reading a little over 10 years ago Pat Buchanan’s political and demographic book titled The Death of the West. The book focused heavily on demographic trends in Europe and America, but also touched on Japan’s abysmal situation regarding their rate of reproduction. As it turns out the trend has not changed in the decade that has passed.
Japan, as you can easily see in the charts below, has hit a tipping point. A few years ago, the tip happened in its population growth. The population began shirking because the number of deaths began to outpace the number of births. This shift wasn’t the result of war, famine or disease.
To an investor, why does this matter? This trend matters because, while similar trends may not be as pronounced in the US and many European countries, we all have similar ‘social security’ nets in place to provide assistance to the population during their retirement years. In the case of Japan, if their future workforce is continually shirking compared to the workforce group that they follow, the social security model will become a giant albatross for the entire society and economy.
If this sounds like fear mongering, it isn’t. Take California’s CALSTRS teacher retirement system. Recent projections have the program going broke by 2046. As a result the State of California is likely to move to raise contribution rates by employees and employers over the next 7 years (The amount of money current employees and their employers must pay at each pay period to the CALSTRS coffers.). For employers, it is proposed that rates would go up from 8.25% to over 19% annually over the phase in period. For employees the phased in rate hike would increase their current contribution rate by a little over 2%. This translates into fewer dollars going to educate future generations of workers and fewer dollars in the pockets of current workers to spend in the economic or save. There’s no free lunch here.
Below is Japan’s reality…which isn’t all that far from our trajectory.