Michael Strobaek: "People will rise up like during the French Revolution"
People are living longer and longer. And society and the economy are changing radically as a result. Michael Strobaek, Global Chief Investment Officer of Credit Suisse, reflects on the double-edged sword of demographic change.
Bulletin: Mr. Strobaek, is an aging society good or bad for the national economy?
Michael Strobaek: I'm generally known to be rather straightforward and to the point. Yet this issue calls for a more nuanced answer. Demographic change is both a blessing and a curse. In and of itself, living longer is a good thing. Who wouldn't choose a longer life, particularly if it is healthier, too? And the silver economy is very good for the overall economy, too – we'll come back to that later.
Demographic change does raise the question of how to pay for it. Many industrial countries are already experiencing this due to a combination of rigid social institutions and a lack of flexibility in the labor markets.
What exactly does that mean?
Social institutions will no longer be able to support the older generation. When the Federal Old Age and Survivors' Insurance, or AHV, was introduced in Switzerland in 1948, there were more than six workers supporting each pension recipient. In thirty years, the ratio will be only two-to-one. Since 1948, life expectancy in Switzerland has increased by around 14 years, but the retirement age has remained at 65.
When people live longer, they can and must work longer. Of course, not all jobs are well suited to the older generation, but I'm sure that there will be adequate work, even if at lower wages. But there is something else that we need to address.
Aging itself is not the main problem – there's no changing that anyhow. Modern societies are suffering because we do not have enough children. People prefer to remain childless or to have only one or two children.
We haven't yet embraced the fact that men also have a role to play in caring for children.
Why is that the case?
I have three children myself, so I speak from experience. I know how complicated and expensive it is to have a big family in Switzerland. A number of things are not being done right here.
What needs to change?
As a mother, just try and find a job in a large company that is compatible with childcare commitments. It's extremely difficult! Schools send children home in the middle of the day.
This is a topic that concerns you.
Politically speaking, the topic is taboo in Switzerland. Politicians do not want to address the issue of how to create family-friendly jobs and how to encourage women to resume their careers. There is a need on one hand for daycares and full-day schools, and yet society also must tolerate women and men leaving work at 4 p.m. to pick up their children. We haven't yet embraced the fact that men also have a role to play in caring for children.
Aside from migration, there are few options for stabilizing the working population and, in doing so, social security. Simply put, have more children, make career and family compatible, retire later. That is the only recipe for success that will work.
Generally speaking, it would probably be best to somehow link retirement age to life expectancy and to economic growth.
What is a realistic retirement age?
That is a difficult question to answer and one that depends on the situation of the individual country. In Japan for instance, the country with the oldest population in the world, the average effective retirement age of men is already 69. There are even ongoing discussions about whether we should move the retirement age to 75. Generally speaking, it would probably be best to somehow link retirement age to life expectancy and to economic growth.
You mentioned the positive effects of aging on national economies. What are these, specifically?
The baby boomers, now reaching retirement age, are the wealthiest generation of all time, and they are the most rapidly growing age group among consumers worldwide. They will cause a massive shift in the demand structure. When this generation spends its wealth, it benefits the national economies.
Demographic change is one of the biggest challenges for a modern democracy.
What industries will benefit from that?
Healthcare issues will become more important, also specific solutions for assisted living and generally services and products tailored to older people. There will be a greater need for security. In retirement, many people can finally fulfil their dreams of travel and recreation that they could not realize during their working years. Fitness and beauty product providers and dietary supplement manufacturers are also likely to benefit from people wanting to lead an active life and to look attractive. Demand for life insurance products and for specific wealth management solutions will grow. We group these phenomena under the "Silver Economy" Supertrend.
Are Western societies with aging populations becoming more conservative and cautious?
Yes, I believe so. In this light, demographic change is one of the biggest challenges for a modern democracy. Like all groups, older people tend to vote in line with their own interests and support the national or public interest only secondarily. As I just explained, their aims are to secure healthcare, expand the care of older people or to guarantee public security, for example. By 2025, the median age of voters will be 60.
Why is that a problem?
Because a single sector of the population will be able to advance its own interests, but others will have to pick up the check. The necessary money can't just be conjured from thin air. Sooner or later, it will have to come from somewhere. Former British Prime Minister Margaret Thatcher once succinctly put it this way: "The problem with socialism is that you eventually run out of other people's money."
Are we living at the expense of the younger generations?
Precisely. Even today, social insurance benefit commitments outpace income. Within the pension funds, excessively high conversion rates and technical interest rates are resulting in a redistribution between the generations. The pension fund survey published by Credit Suisse estimates that around 5.3 billion Swiss francs are shifted from workers to pension recipients every year. That equates to 1,300 francs per worker annually. The law does not provide for such a redistribution in occupational pension provisions. Even the Federal Council has referred to this as an illegal redistribution.
Many people have not saved enough by the time they retire.
In the Pension Reform 2020 referendum, voters rejected a lowering of the conversion rate from 6.8 percent to 6 percent.
Our calculations show that even 6 percent will be too high without raising the retirement age.
Will private pension provision become more crucial?
Exactly. Many people have not saved enough by the time they retire. The state – the taxpayer, in other words – has to step in if anything happens to them. Our pension fund survey also revealed that people in lower income brackets struggle to save enough. The AHV, the state pension, will continue to play a major role for them. Even in well-off Switzerland, many have too little to live free of worry – and the situation is of course much more dramatic in other countries.
How much money should a person have saved by the age of 65 in order to make ends meet?
That depends mainly on what your expectations are, where you live and how much rent you have to pay. Let's assume that we are talking about a middle-class retired couple living in a rental apartment in a conurbation costing 2,000 francs per month and whose children have already moved out. I estimate that they would need 5,000 to 6,000 francs per month.
At a residual life expectancy of 20 years, 6,000 francs per month would come to 1.44 million. How can people save that much?
Invest as much as possible in the second pillar.
Thanks to technological development, automation and robots, our way of life and our working world will undergo unbelievable changes in the next 25 years. And older people will benefit.
Why is that better than investing the money yourself?
Because deposits into the pension fund are tax-deductible. That makes it an extremely interesting topic. And because the money is deducted from wages, there is no temptation to spend it. But it needs to be made even easier to selfmanage the investment strategy of the extra-mandatory part. I'd like to bring up another topic that will have a huge impact on our future, if I may.
Thanks to technological development, automation and robots, our way of life and our working world will undergo unbelievable changes in the next 25 years. And older people will benefit. It will be possible to replace body parts and even entire organs. Robots will solve the problem of caring for and supporting older people.
This development will also render human labor obsolete. Will full employment even be possible?
No. The most critical issue of the future will be that millions of people will be unemployed.
So what can we do?
We have to secure the livelihood of these people.
Through some kind of an unconditional basic income?
Precisely. Otherwise, people will rise up just like they did during the French Revolution when they dragged the nobility to the guillotine at the Place de la Concorde.
The structures of the world of work will need to be replaced by individual and self-selected structures.
Who is supposed to pay for this?
The taxpayer. But the question then becomes just what is being taxed? Bill Gates proposed a robot tax to replace the income tax and social security contributions that will be lost through automation. As a society, we still need to find answers to this question.
Not least, work serves to provide a purpose and an identity. What will all of these unemployed people do?
This is where the challenge lies. The structures of the world of work will need to be replaced by individual and self-selected structures. Intrinsic motivations will replace extrinsic ones. All of us have likely experienced the trouble that comes with this. When people have material security, then they will be able to become involved in the care of older people or of children.
You have three young children. When it comes to having a successful career, what advice will you have for them?
As simple as it seems, a good education is the most important thing. At some point, young people have to specialize. They need a core skill, otherwise automation will pass them by. And finally, I will advise my children to go to Asia to learn Mandarin Chinese and to see the world from that perspective. The Western world will no longer be the most influential power, and English will not be the primary language.
Daniel Ammann, journalist
Simon Brunner, journalist
Cyrill Matter, photographer