The Demographic Squeeze: What 'Peak 65' Means for the US Economy
Over the past few weeks, we have seen a clear deterioration in the US jobs market, despite headline payroll figures suggesting otherwise. Yesterday's ADP payroll report was notably weaker than expected. Today's release of the non-farm payroll data for May, along with the unemployment rate, will be critical for the Fed’s future rate decisions. However, we believe a significant rise in unemployment would be needed to truly justify a rate cut. These immediate economic indicators, however, are set against profound and lasting demographic shifts shaping the US economic future, often referred to as the "Peak 65" era.
The United States faces significant demographic shifts as the "Peak 65" era sees an unprecedented wave of Baby Boomers reaching retirement age. From 2024 to 2027, over 4.1 million Americans will turn 65 annually, forming the largest retiree cohort ever. This has pushed the median US age to nearly 39, significantly higher than 30 in 1980. By 2030, one in five Americans will be retirement age, rising to nearly one in four by mid-century. This ageing trend is further intensified by persistently low fertility rates, below the 2.1 replacement level, and low immigration by historical standards. The US Census Bureau reported record-low population growth of just 0.1% in 2021, and the Congressional Budget Office (CBO) projects growth will remain sluggish at only 0.2% annually. The CBO also predicts that by 2033, deaths will exceed births, making immigration the sole driver of population growth.
These demographic shifts carry significant economic and fiscal impacts. With fewer working-age individuals supporting more retirees, potential GDP growth will slow dramatically. The CBO forecasts real GDP growth below 2% annually in coming decades due to anticipated labour shortages. An older workforce may also shift economic activity toward healthcare, potentially reducing overall dynamism within the economy. Moreover, age-related government spending is set to surge, particularly on Social Security and Medicare, potentially exceeding half of federal spending by 2055. Social Security's trust fund is projected to deplete by 2034, and Medicare faces similar issues by the late 2020s. This imbalance between slowing revenues and rising costs foreshadows persistent budget deficits and mounting debt. Public debt, currently 97% of GDP, is projected to soar to 166% by 2054. Such high debt levels could constrain growth, crowd out investment, and limit government flexibility.
Japan provides a stark cautionary example of these demographic pressures, with nearly 30% of its population over 65 and continuous population decline since 2010. Japan faces acute labour shortages due to its shrinking workforce, contributing to prolonged economic stagnation known as the "Lost Decades." Businesses struggle to fill positions, often employing workers aged over 70. Japan’s unemployment rate is just 2.5%, illustrating that low unemployment in ageing societies often indicates constrained labour markets rather than robust job creation. Japan’s public debt, now around 240% of GDP, further highlights the severe fiscal risks associated with demographic decline. Although Japan has managed its debt through low interest rates and domestic investors, fiscal flexibility is severely constrained.
While recent US bond market sentiment has been negative, long-term conditions remain positive for bonds. Demographic headwinds point to structurally slower growth and potentially lower inflation, making fixed-income investments more attractive in the long term. Today's payroll data alone may not trigger immediate rate cuts, but economic conditions are becoming increasingly bond-friendly. We will gain more clarity this afternoon.
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