What does that mean for investors? Who are the winners and losers under such a scenario?
Biotech a winner?
The natural winner in life extension is the biotechnology industry. But not so fast! The real winners may not be available for investment.
Here is a case in point. Back in 1979-80, I correctly identified the microcomputer (they were called microcomputers back then as IBM didn’t introduce the PC until August 1981), would be the growth industry of the future. I told anyone who listened that the microcomputer would be as common as the office photocopier in five years. I was wrong, it was more common than the photocopier as there were multiple PCs in most offices.
Who were the major publicly listed players in the microcomputer then? They were Commodore, Tandy (Radio Shack) and Atari, which was a division of Warner Communications. Apple hadn’t gone public yet and hadn’t gotten into the business at the time. Microsoft was just a small private concern.
This story shows that it is possible to identify a long-term trend, but the winners may not be available to the ordinary investor for quite some time.
If we can’t invest in the more obvious primary winners of a trend like life extension, we can identify the winners and losers from second order effects of longevity.
Loser: Pension funds
There has been an implicit social contract in Social Security and other defined benefit pension plans. Contribute to it and we pay you when you retire, but you promise to die on time.
What if people stopped dying in accordance to the actuarial projections? Today, the leading edge of the post-World War II Baby Boom cohort are now beginning to face retirement. There have also been a tremendous amount of work being done on life extension strategies, which will likely to bear fruit in the next ten years or so. If these strategies begin to take effect for the Boomers as they enter retirement, then the extension of even a few years of expected lifespan would increase pension fund liabilities.
Already there have been a number of terrifying articles on the path of the U.S. budget and Social Security by Laurence Kotlikoff. Here is an example of Kotlikoff’s projections (and this was written in 2006 before the advent of the trillion dollar deficits):
To close our fiscal gap, we face a menu of pain: raise income taxes 70%, hike payroll taxes 109%, cut Social Security and Medicare a combined 41%, eliminate 79% of federal discretionary spending, or some combination.
In a later study, however, Kotlikoff revised his projections by stating that China can save the day but the results wouldn't still be pretty.
At the extreme, pension benefits may have to get modified. David Merkel at Aleph Blog wrote that retirement is a modern invention. If things get bad enough, we may have to un-invent the concept.
Winner: Life insurance companies
The reverse side of the pension plan liability coin is the life insurance business. If you are paying premiums based on an expected life expectancy of, say 78 years, and you die at 85, then you will have overpaid for insurance protection. The life insurance company wins, at least from a financial viewpoint. Multiple that by several million people and you get an idea of the gains the industry faces.
Winner: Equities and real estate
In America, the effects of the Baby Boom generation are well known. They grew up, dabbled in alternative lifestyles, went into the work force, bought houses and now they are now approaching retirement. Standard retirement planning prescriptions has been to heavily invest in equities when young and lower the equity allocation with age. The question is, with the huge number of Boomers, who are they going to sell their stocks and houses to? The next age cohorts, popularly dubbed Generation X and Y, don’t have the same sheer numbers as the Boomers.
If the Boomers live longer, then the selling pressure on their equity and residential real estate holdings will lessen.
Possible losers: Gen X and Y
If these life extension technologies arrive in time to affect the Baby Boomers and combined with pension pressures, will the Boomers be tempted, or forced to stay at the wheel and work longer than expected? If so, what happens to the cohorts behind them? Will the Gen X cohort and Gen Y behind them be frustrated by lack of advancement because the Boomers refuse to relinquish their mantle of leadership?
What about Europe? There is a smaller Baby Boom generation in Europe, but that cohort is about ten years behind the post-World War II baby boom effect well-known in North America, Australia and New Zealand. This European age cohort will have more time to take advantage of these technologies. What will happen to social and demographic pressures were that to happen?
Other winners and losers
The purpose of this post is to encourage debate and comments are welcome. Can you think of any other winners and losers?
I have tried to avoid the simple analysis of “leisure industries would be the winners” as people live longer and tried to think more about the longer term implications. I would welcome any comments on this long-dated theme, especially from actuaries.
This is a “big picture” investment thesis with a time horizon that is longer than the horizon of most investment managers, much like the controversial Peak Oil thesis (which gained greater attention last week from the controversy over IEA’s projections). As such, I expect that the theme wouldn’t get a lot of investment traction. Nevertheless, it’s important to keep your eye on the horizon as you invest.