1. Future. City. Life! Demographic Change by John Luijs, 7th October 2013

2. 2Leuphana Startwoche Aging Presentation- Long Version.pptx 2 John Luijs Boston Consulting Group Expert on changing demographics and global aging Demographic Change 2013-10-07 Assignment B Megatrends 3. Global Aging Adapting to a new reality John Luijs October 7, 2013 4. Global aging: our three key messages 1 "...no single factor will have as pervasive an effect as the aging of our population." Ben Bernanke Global aging is a megatrend amongst megatrends 3 Companies can successfully adapt And build a competitive advantage 2 Companies will be impacted On two sides: input and output Labor Capital Growth Needs 5. Agenda Introduction Impact of aging on the global economy Growth Labor market Supply and demand for capital Customer needs 6. Canada ItalyUSUK Japan Germany France NetherlandsNetherlands Canada ItalyUSUK Japan Germany France Aging is driven by increase in life expectancy and decrease in fertility rate 0 Life expectancy at birth (year) 8642 Fertility rate 0 20 40 60 80 100 19001925195019752010Life expectancy 2 Fertility rate 2 Replacement rate Size reflects population ~100M Canada Italy US UK Japan Germany France Netherlands Note: graphical representation courtesy of Gapminder (in presentations by Hans Rosling) Source: UN 2010 Population Prospects, Gapminder Germany Japan Italy Canada US UK France Netherlands 7. Fertility rate and life expectancy of RDEs are quickly converging to "developed levels" Note: graphical representation courtesy of Gapminder Source: UN 2010 Population Prospects Russia India China Brazil US UK JapanGermany Life expectancy at birth (year) Fertility rate 86420 Replacement rate 0 20 40 60 80 100 Russia India China Brazil US UK JapanGermany Life expectancy 2 in 60 years Fertility rate 3 in 60 years 195019752010 Germany Japan US UK China India Brazil Russia Size reflects population ~100M US UK Russia Japan India Germany China Brazil 8. Aging is changing demographic pyramid of last 2,000 years FemaleMale 65 yrs 15 yrs 62% 2% 36% Roman Empire Dependency ratio 28:1 Source: Bruce W. Frier - Roman Life Expectancy: Ulpian's Evidence; BCG analysis Clear pyramid shape 6 8 10 4 2 0 140013001200110010009008007006005004003002001001 AD World population (B) 210020502000195019001800170016001500 0.2 4 2 0 2 4 Population per five-year age group (M) 9. Aging is changing demographic pyramid of last 2,000 years Source: B. W. Frier, US Census, BCG analyses Population per 5 year age group (M) 424 2 0 66 femalemale 65 yr 15 yr 62% 4% 34% 1900 (U.S.) Dependency ratio 15:1 clear pyramid shape 210020502000195019001800170016001500140013001200110010009008007006005004003002001001 AD 2 6 4 World population (Bln) 8 10 0 1.7 10. Aging is changing demographic pyramid of last 2,000 years femalemale 200100100200 World population per 5 year age group (M) 0 65 yr 15 yr 61% 5% 34% 1950 World Dependency ratio 12:1 clear pyramid shape Source: UN 2010 Population Prospects, BCG analyses 6005004003002001001 AD World population (Bln) 8 6 4 2 10 0 21002050200019501900180017001600150014001300120011001000900800700 2.5 "The beauty of [the social security system] is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in " - Paul Samuelson, 1967 11. Aging is changing demographic pyramid of last 2,000 years femalemale World population per 5 year age group (M) 200200 0 400400 65 yr 15 yr 63% 7% 30% 2000 World Dependency ratio 9:1 pyramid shape starts to change World population (Bln) 8 6 4 2 10 0 210020502000195019001800170016001500140013001200110010009008007006005004003002001001 AD 6.1 Source: UN 2010 Population Prospects, BCG analyses "[The social security system] is the Biggest Ponzi Scheme on Earth." - Milton Friedman, 1999 12. 1400 1500 1600 1700 1800 1900 0 2100205020001950 6 4 2 World population (B) 10 8 1000 1100 1200 13009008007006005004003002001001 AD Population per five-year age group (M) 6424 2 0 2050 Japan 51% 36% 13% FemaleMale Kite- shape Dependency ratio 1.4:1 10.1 World population per five-year age group (M) 300200100300 200 100 0 2050 worldwide 65 yrs FemaleMale 15 yrs 16% House- shape Dependency ratio 4:1 20% 63% Source: UN 2010 Population Prospects; BCG analysis Aging is changing demographic pyramid of last 2,000 years 13. Growth GDP growth and demand per country and segment Needs Change in consumer age mix Needs of the elderly Today's goal: discuss impact of aging on four key dimensions Customer demand What are actions companies can take... ...to deal with scarcity of labor and an aging workforce? ...to prepare for a scenario of prolonged low interest rates? ...to profit from growth across countries and sectors? ...to develop a marketing and sales strategy for the 55+ segment? Scarce resources Labor Capacity risk Productivity risk Capital Availability of capital Price of capital 14. Agenda Introduction Impact of aging on the global economy Growth Labor market Supply and demand for capital Customer needs 15. Agenda Introduction Impact of aging on the global economy Growth Labor market Supply and demand for capital Customer needs 16. Aging has an almost 'mechanical' impact on growth Substantial differences Split in workforce & GDP/ workforce needed 0 1 2 3 4 5 US Europe (G4)1Canada Japan Annual GDP growth 1990-2008 (%) 1 2 3 0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 Annual growth of productivity (GDP/workforce capita) (%) Annual growth of workforce (%) US Canada 1990 2008 Japan EU - G4 1. Germany, UK, France and Italy; 2. Hereafter we refer to GDP per 15-64 capita as "productivity", although the common definition of productivity is GDP per hour Source: UN 2010 Population Prospects, World Bank, BCG analyses size reflects 2008 GDP ~4 tln 2000 US$ 17. Aging has an almost 'mechanical' impact on growth -0.3% / -0.8% of GDP growth... ... due to aging Canada US 0 1 2 3 4 5 Aging impact on annual GDP growth (%) JapanEurope (G4)CanadaUS -0.8 -0.3 -0.7 -0.5 1 2 3 Annual growth of productivity (GDP/workforce capita) (%) 1990 2008 2010 2050 EU - G4 Japan 0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 Note: Decrease in workforce already includes an expected increase in retirement age of 2 to 4 years depending on country Note: Growth decline due to workforce effect in 2010-50 assumes constant historical productivity Source: UN 2010 Population Prospects, World Bank, BCG analyses size reflects 2008 GDP ~4 tln 2000 US$ Effect of lower workforce growth on GDP growth Annual growth of workforce (%) 18. Aging has an almost 'mechanical' impact on growth China grew much faster than other large RDEs in '90-'08 ... ... thanks to huge gains in productivity 0 2 4 6 8 10 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 China AfricaCanada US Japan Annual growth of productivity (GDP/workforce capita) (%) Europe - G4 Russia India Brazil 0 5 10 15 IndiaChina BrazilAfrica Annual GDP growth 1990-2008 (%) Russia G7 BRIC 2% GDP growth 6% GDP growth 4% GDP growth Source: UN 2010 Population Prospects, World Bank, BCG analyses size reflects 2008 GDP ~4 tln 2000 US$ Annual growth of workforce (%) 19. Aging has an almost 'mechanical' impact on growth Aging significantly reduces GDP growth of RDEs between 2010 to 2050... ... independently from changes in productivity 0 2 4 6 8 10 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Annual growth of productivity (GDP/workforce capita) (%) Russia India China Brazil Canada US Japan EU - G4 Russia India China Brazil Africa Africa 0 5 10 15 Aging impact on annual GDP growth (%) RussiaBrazilAfricaIndiaChina 2010-2050 1990-2008 2% GDP growth 6% GDP growth 4% GDP growth -1.6 -1.3 -1.7 -0.8 ? ? ? ? ? -0.6 Note: decrease in workforce already includes an expected increase in retirement age of 2 to 4 years depending on country Note: growth decline due to workforce effect in 2010-50 assumes constant historical productivity Source: UN 2010 Population Prospects, World Bank, BCG analyses size reflects 2008 GDP ~4 tln 2000 US$ Annual growth of workforce (%) Effect of lower workforce growth on GDP growth 20. We need to pull all levers to maintain GDP growth Especially productivity growth is powerful Growth levers and feasibility Increase fertility rate Few have succeeded: policies are costly, with limited effects Increase immigration Necessary change in public opinion Increase retirement age Increases above current plans possible, provided 'healthy life expectancy' keeps pace Increase GDP/ workforce capita: Increase in workforce participation and/or working hours can give a one-time boost Increase hourly productivity by investing in R&D, education, market efficiency, etc. Example (Netherlands): keep NL real GDP growth until 2050 at 2.3% as in 1990-2010 Increase fertility rate from current 1.8 to 3.2 by 2020 and onwards But impact only 'starts' in 2030 Additional 2.8 Mn workers by 2050 70,000 net working immigrants per year But they bring dependents, and will also age... Retirement age of 82 by 2050 Against a life expectancy (at birth) of 85 in 2050 Increase working hours by 28% participation from 80% to 103% working hours from 1,380 to 1,770 p.a. Increase GDP/workforce capita yearly growth to 2.5% until 2050 Historically only 1.9% in NL in 1990-2010 and in USA in 1850-2010 Note: estimates already assume an increase in retirement age of 2 years by 2050; estimates assume that new workers have the same productivity of existing ones Source: UN 2010 Population Prospects, OECD, BCG analyses Total GDP growth Productivity growth (GDP per 15-64 capita) Workforce growth (population aged 15-64) x 21. Agenda Introduction Impact of aging on the global economy Growth Labor market Supply and demand for capital Customer needs 22. Growth of labor force declining in developed countries In the G7, US and Canada workforce growth will decline significantly... Population aged 15-64 (Indexed 1950 = 100) 400 300 200 100 0 205020302010199019701950 France US UK Canadag = 0.2% g = 0.4% Population aged 15-64 (Indexed 1950 = 100) 400 300 200 100 0 205020302010199019701950 NL Italy Japan Germany ... whereas Japan, Italy and Germany will see their workforce declining Source: UN 2010 Population Prospects 2010 marked a turning point for The Netherlands as growth turned negative 23. Massive changes in the age build-up of the workforce can lead to three important issues that need to be addressed Source: UN 2010 Population Prospects Three key actions for companies Retain knowledge: strategic workforce planning To prevent shortage of key skills and knowledge loss Retain capacity: seek employees in inventive ways: -increase participation of older employees and women Since entrants to the labor market will become increasingly scarce Capacity 1 2 Enable older employees to stay as productive as possible More important as the number of older employees increases Productivity 3 Age 20 23 2926 32 3835 41 44 47 50 53 56 59 62 100 50 0 200 150 250 FTE 2017201620152014201320122011201020092008200720062005 The future: many retirees, competition for starters, and an aging workforce Distribution of FTEs across age classes within a company, based on BCG case experience 24. Company example: Canada Post pro-actively addresses future capacity gap Source: The Conference Board Report "Implementing Strategic Workforce Planning" (The Conference Board is a business membership and research association working in the public interest); Canada Post website Workforce of Canada Post has an average age of 48, far above Canadian average 50 % of employees retire within 10 years Five further job changes per departure Affecting all day-to-day activities, thus high costs Introduction of Strategic Workforce Planning (SWP) to manage staff Analyze historical data to forecast future retirements Define vulnerable "key positions" to identify critical risks Link SWP to strategic needs and talent management Company ready to absorb high workforce turnover rate Active action to minimize adverse effect of retirement by training younger employees replacing key employees early Capitalize tenure-based productivity Support strategic decisions with labor-force forecast 25. A higher proportion of older workers might lead to lower productivity Older workers might lead to lower productivity in both manufacturing... ... and services 1. Assuming line productivity before re-staffing was at par with lines staffed by younger workers Source: HBR "How BMW Is Defusing the Demographic Time Bomb" Mar 2010; BCG experience 120 100 80 0 Productivity at BMW plant1, young production line vs. old production line 93% -7% Production line staffed with workers 8 yrs older than average Production lines with average aged workers 100% 1.5 1.4 0.0 1.47 40-4435-39 1.46 30-3425-29 1.48 Bank branch advisor productivity (sales index) with age 1.42 -5% 50-56 1.49 1.37 1.48 20-24 45-49 Productivity may decrease with age due to, e.g. Lower ability to perform physically intense jobs Loss of motivation Increase in health related absenteeism Lower ability to adapt to new ways of working 26. Company example: BMW successfully overhauled one of its production lines to accommodate older workers Worried about lower productivity due to aging Experiment: staffed one production line with a mix of workers with an average age of 47 The expected average age of its workers in 2017 As expected, productivity initially decreased By 7% However, when workers were invited to suggest improvements, many of their suggestions could be quickly implemented, e.g. New equipments like special ergonomic chairs, magnifying lenses, wooden flooring Job rotation across workstations to minimize fatigue Stretching exercises before work Results were impressive despite a limited investment: Productivity at par with other lines Absenteeism dropped (7% => 2%), below plant average Line achieved a zero defects rate Source: Harvard Business Review 27. Agenda Introduction Impact of aging on the global economy Growth Labor market Supply and demand for capital Customer needs 28. As GDP growth declines in developed countries, their demand for capital investments will decrease ... resulting in an expected decline in demand for capital due to a drop in growth rates -0.9 -0.9 -1.4 -1.6 -2 -1 0 1 Decline in investment demand '10-'20 as % of GDP JapanEU-G4CanadaUS 1. Due to data unavailability, data for Russia is taken in time interval '95-'08. 2. Investments net of replacement investments (proxied by the consumption of fixed capital) Source: UN 2010 Population Prospects, World Bank, BCG analyses GDP growth and investment demand are strongly correlated... 0 5 10 15 0 5 10 15 20 25 30 Real GDP growth '90-'08 (%) Net investments2 (% of GDP) China India Russia1 Brazil US UK Japan Italy Germany France Canada 29. Impact on capital supply will be driven by 'who pays for our retirement' Pension system Private saving We ourselves The future benefits of the 'PAYG' systems will be reduced Keeping contribution rates for the next generation at more acceptable levels 3 Our generation raises its level of private savings, in anticipation of smaller 'PAYG' benefits and/or Accepts lower income levels and/or Will work longer Our children The existing 'Pay As You Go' (PAYG) pension and healthcare systems stay intact The future generation pays contributions to pay our retirement benefits (as we did for our parents) 1 Our generation keeps private saving at its current level Assuming benefits from the PAYG system will remain intact when we will retire The future workers will simply pay more for us Our grandchildren The 'PAYG' benefits will stay intact, but will be funded by government borrowing To be repaid by the generation of our grand children 2 Our generation keeps private saving at its current level Assuming benefits from the PAYG system will remain intact when we will retire 30. Putting the burden on the next generation will not work Contributions per worker would need to go up to very high levels... ...resulting in an unsustainable decrease in disposable income for future generations If future generations have to pay the increase in contribution rate from their salaries as current systems impose, disposable income will drop significantly To offset the increase in pension PAYG costs, the retirement age has to be raised by an additional five years on top of already assumed increases in retirement age (2-3 yrs) It is unlikely the future generation will accept this and keeps on paying for full benefits 1. Pension costs taken from OECD.StatExtracts; 2. Healthcare cost increases include non-age related factors such as adoption of new technologies as stated in the CBO Budget Outlook 2010 3. Assuming an increase in retirement age as described in the GDP chapter; contributions include employer's part of social expenditures; 4. Wages assumed to account for 51.6% of National Income as published by CBPP Source: OECD, World Bank, S&P, Center on Budget and Policy Priorities, US Congressional Budget Office June 2010, European Economy "The 2009 Ageing Report", BCG analyses Our children1 0 20 40 60 80 Contribution rate3 (% of wages4 ) Japan 57 32 Italy 72 43 Germany 66 39 France 59 39 UK 45 28 Canada 45 25 US 43 22 '50'08 '50'08 '50'08 '50'08 '50'08 '50'08 '50'08 Healthcare costs2 Pension costs1 31. Taking the burden through higher debt is clearly unfeasible Net government debt would have to rise to unsustainable levels Rating agencies and international policy makers are already urging countries to reform "There is little doubt that debt is unsustainable under current policies in the euro area as well as in the US." - IMF "The financial crisis is also causing public debt to soar in many countries, making it more difficult for governments to finance public pension deficits." - OECD, Private pension outlook "If no further policy changes will be made with regards to age related costs, 60% of sovereigns2 will have their debt rated as speculative grade by 2050." - Standard and Poor's 1. Assuming increase in public pension and healthcare cost is paid from new government debt; assuming an increase in retirement age as described in GDP chapter 2. Approximately 60% of a group of 49 sovereigns mentioned in S&P report "Global Aging, An Irreversible Truth" Source: OECD, World Bank, S&P, Center on Budget and Policy Priorities, US Congressional Budget Office June 2010, European Economy "The 2009 Ageing Report", IMF, BCG analyses Our grandchildren2 0 200 400 600 800 Government debt (% of GDP) 226 571 118 597 75 435 84 308 77 352 82 376 93 704 Japan at start workforce decline (1990) JapanItalyGermanyFranceUKCanadaUS 2050 net debt12010 net debtGross 32. Which leaves the third scenario... Pay as you go How our generation can handle this The future benefits of the 'pay as you go' pension systems will be reduced Keeping contribution rates for the next generation constant A Save more to maintain a level standard of living Probably the most common reaction in the middle class: Need to save extra, can afford to save extra Work longer Only an option for those who are physically fit to extend their working life Accept a drop in standard of living Probably the more common outcome for the lowest income classes, who have high disability rates and insufficient income to save B C and/or and/or Many countries have started or are considering new mandatory saving schemes What we expect Many will just 'wait and see' (relying in the end on lever and ) Some will start saving in time (using lever ) As the more wealthy people will start saving, we expect half the gap to be covered through savings B C A We ourselves3 33. Credit crisis or Aging Crisis? Within developed markets, aging leads to a decrease in capital demand ... Aging leads to a decrease in GDP growth in developed markets as: Fewer workers are added to the workforce Government spending shifts to pensions and healthcare Lower GDP growth leads to lower demand for capital at a given interest rate ... and potentially also an increase in capital supply Aging may lead to an increase in savings, as people realize that governments will not be able to fully cover future liabilities In many countries incentivized by the government (fiscally and/or mandatory) Less social security coverage may lead to higher savings (at a given interest rate) Low real interest rates Capital starts flowing to the "wrong" parties (US mortgage owners, Greece, ...) Creating either bubbles or perverse free-riding incentives, which may lead to write-downs At the same time, high government debt may increase likelihood of inflation Source: BCG 34. Agenda Introduction Impact of aging on the global economy Growth Labor market Supply and demand for capital Customer needs 35. 55+ segment expected to account for more than half of total consumer spending growth 1. Assumed that half of consumer spending of age group 45-65 comes from consumer spending of age group 55-65 Note: spending power evolution forecasted based on historic correlation with GDP, not corrected with potential higher relative savings Source: Consumer Expenditure Survey Commissioned by AARP, 2008; Consumer Expenditure Survey, 2008; Japan Statistics Bureau & Statistics Center, Statistisches Bundesamt, Centraal Bureau voor Statistiek USThe Netherlands Germany 2.0 2.0 4.0 0 5 10 15 Consumer spending ($T) 2030 10.1 6.1 Growth 2008-30 4.0 2.0 2008 6.1 4.1 0.6 0.3 0.90.1 0 1 2 3 Consumer spending ($T) 2030 1.6 0.7 Growth 2008-30 0.4 2008 1.2 0.7 86% 61% 50% 75 report difficulties hearing Decrease in sense of smell and taste 50% lremaining sense of smell by age 80 Decrease in sense of touch and response to painful stimuli 38. Older people have different attitudes towards life Differences in general well-being and in important values 6.6 6.8 6.4 7.0 Self-reported well-being in the USA (1-10 scale) Age 827466585042342618 6.2 13% Difference between percentages of 55+ vs. 0-54 women that rated dimension as very important in their life1 -8% -7% 147 4% 12% 0-7-14 -9% more important for 55+ more important for 14,000 Peace Stability Ease Appreciation Recognition Fulfillment ...and their priorities in life differ from younger peopleOlder people are happier ... 39. 55+ more interested in experiences than material possessions 0-80% 40% 80%-40% Beauty Willingness to spend money/ time after retirement in specific activity (Japan, % of interviewed) Home electronics Jewelry Fashion Automobiles Interior accessories Investment Medical appliance House Dining Viewing Movies Computer Viewing Arts Reading Hobbies Sports Lifelong study Foreign tour Domestic tour Source: Nikkei Business (Nov. 2002) Higher willingness to spend money/ time on experiences Traveling Cultural activities Hobbies Lower willingness to spend money/ time on material possessions Housing Clothing Accessories 40. Companies are increasingly targeting senior consumers Accommodate physical limitations Danone Actimel yoghurt Unilever Dove soap CareVacations cruise services Ford aging suit Kaiser's supermarket "senior" branches Fidelity investments website Denovo design articles Docomo RakuRaku phones Samsung Jitterbug phones Toyota mobility robots NHK broadcast voice slower +- + Accommodatepreferences Note: Products' relative positioning in the chart is illustrative Source: Web and press search; interviews Keio Dept. Store Ueshima coffee shops Rollz walker 41. Priority for all companies dealing with impact of aging: Turn a threat into an opportunity! Tomorrow's flex worker? Tomorrow's e-customer? To turn a threat ... into an opportunity