Coming of age: Fixed income and changing demographics

This figure only tells a part of the story; in 2020, the number of people aged 60 years and older outnumbered children younger than five years. Meanwhile, between 2015 and 2050, the proportion of the world’s population over 60 years will nearly double from 12% to 22%. There is an unfortunate consequence of our increasing longevity: living longer costs more.

The demographic pyramid has now begun to invert. It is no longer sitting on a solid base of population that will one day enter the workforce. Instead, it is top heavy, with those over 65 becoming an increasing share. Changing demographics is one of the most consequential macroeconomic shifts of the century and, in our view, will have substantial social, economic and political impacts, as well as a significant effect on markets.

An age-old problem: shaping the economy

One of the megatrends that will shape the economy in the coming years, the impact of an ageing population will be profound. We could see slower economic growth, increased inflation, and a shift in consumption patterns, as well as regional winners and losers from the trend.

The old-age dependency ratio (the number of individuals aged 65 or older per 100 working age people) has been steadily increasing from 19% in 1980 to 31% in 2023 and is projected to rise further to 52% by 2060,² demonstrating how quickly the working age population is declining proportionally. In the European Union, working age population growth has already turned negative and is projected to increase as the ‘baby boomer’ generation, which has been a sizable cohort of the working age population, retires.³ We also see this in the UK, where the number of people aged 70 years and over is predicted to rise from 9.2 million in 2020 to 13.5 million in 2045.⁴

A growing problem

In turn, this can have a negative impact on economic growth. An expanding GDP for a country relies on either more workers participating in the workforce or each worker producing more to generate more growth. Due to population change, the OECD estimates that the employment-to-population ratio will decrease by 1.9% by 2060 in the OECD area, with regional variations. In turn, they estimate that this will result in a GDP per capita reduction by about 40% over the period between 2024-2060.⁵

As the labour force shrinks, the focus has to be on each worker generating more to make up for the lost numbers in the workforce. According to McKinsey, in advanced economies and China, GDP per capita growth could slow by 0.4% annually on average between 2030 and 2050. To counteract this negative effect on growth would require productivity growth of two to four times, or for people to work one to five hours more per week.⁶

Not only does an ageing population result in fewer people contributing to the economy, but also it leads to a reduction in capital contribution, which could hinder economic growth. While a decline in the workforce may be counterbalanced by stable or increased productivity as a result of the use of artificial intelligence (AI) and technology, an ebb in capital contribution (ageing populations tend to invest less and drawdown on savings) cannot be offset by AI.

The inflationary effect

Aside from a negative impact on growth, an ageing population can have implications for the long-term trajectory of inflation; as more people enter retirement, their contribution to the economy diminishes but their spending does not necessarily decrease.

In fact, the share of consumption of those 65 years or older, is expected to increase to 31% of consumption by 2050, up from 21% in 2024. This can vary significantly by region, with advanced economies in Asia seeing direct consumption by older people rising from 26% in 2024, to 39% in 2050.⁷ While a slower rate of growth might also typically indicate a deflationary cycle, this demographic trend might break this assumption. Demand will likely remain, funded by savings and pensions, but economic output would decrease, creating an inflationary impulse, although this did not transpire in the case of Japan as low growth, high savings and 'safe'-asset demand won out. The changing age mix in an economy is critically important for understanding the trajectory of interest rates over the long-term. This imbalance between supply and demand could require central banks to increase interest rates to mitigate the impact. Rate rises could create an attractive entry point to the bond market for fixed income investors, potentially enabling them to benefit from higher bond yields. This will likely vary across geographies according to the varied impact of demographic change, creating diverging cycles for bond investors to take advantage of.

Government debt and demographics

The 40^th US President, Ronald Reagan, once said, “Don’t worry about the deficit; it’s big enough to take care of itself”. The same year Reagan became president, the US deficit hit a milestone – it crossed the $1 trillion mark. Today, at $1.8 trillion and no signs of abating, investors are starting to worry. The deficit is only big enough to take care of itself if it fuels a growing economy. The concerns begin when the conditions for growth are no longer there.

The impacts of an ageing economy on government deficits are threefold; they face increased spending pressures, lower revenues and potentially higher debt servicing costs.

(S)pending pressures

Increased government spending on pensions or healthcare may crowd out government spending on productivity enhancing investments. Moreover, spending-induced government deficits may absorb private savings and crowd out private investments. If governments are unable to contain spending pressures through structural reforms or cuts in pension entitlements, they will need to boost tax revenue significantly to prevent public debt from rising.

Currently in the UK, pensions cost the government £138 billion (around 5% of GDP)⁷, while the US spends 21% of its budget on social security.⁸ The UK Office for Budget Responsibility (OBR) estimates that increased age-related spending pressures would increase government expenditure by 10% of GDP by 2074, assuming a baseline productivity growth of 1.5% per annum, which may be optimistic.⁹ McKinsey estimates that retirement systems might need to channel as much as 50% of labour income to fund a 1.5-time increase in the gap between the aggregate consumption and income of seniors.¹⁰

The other half of the equation

Not only does an ageing population increase the pressures on government expenditure, but a smaller working age population will result in lower tax receipts and revenue, reducing a government’s ability to both support an older population and service increasing debt piles.

A shrinking labour force will result in lower tax receipts, while pension income is often taxed at a lower rate, reducing overall revenues. For example, in the US, the difference between taxes paid and transfers received by the average senior is $21,000, totalling to a difference of more than $1.2 trillion annually.  As tax revenues fall and age-related expenditures increase, McKinsey estimates that this gap will increase by 12%, resulting in an increase in the US government deficit from 6.2% in 2023 to 8.1% in 2050.

Instead, the working age population is left to shoulder the burden. This forces governments into an unenviable position of whether to penalise retirees, which are a significant voting force, or workers. We have seen the difficulty of balancing this equation quite clearly with recent events in France. Facing escalating debt levels, the government has been forced to attempt pension reforms, to be met with significant backlash and months of political instability.

Why does this matter?

Government debt levels in developed markets are already approaching levels reached only during the Global Financial Crisis and the Second World War. Combined with the long-term trend of an ageing population, this puts upward pressure on the debt trajectory in the long-run, calling into question the fiscal sustainability of government deficits in the eyes of investors.

If the assumption that an ageing population will prove inflationary over the long-term, central banks will likely increase interest rates in response, resulting in higher debt servicing costs for governments.

With governments likely to continue with strong debt issuance, the question remains as to whether bond investors are willing to absorb the supply at higher yields or whether they will turn elsewhere, to sovereigns with greater fiscal credibility. 

Case study – Japan

Investors seeking a playbook on how to navigate a scenario where governments struggle to maintain a growing economy with an ageing population.

Japan has one of the highest debt levels in terms of debt as a percentage of GDP. A significant driver of this large debt pile has been its ageing population – resulting in low levels of economic growth and consistent fiscal deficits. With Japan’s fertility rate declining below the replacement rate in the 1970s and declining further since, while its life expectancy increased, Japan had a large ageing population to support. As a result, Japan’s ageing population placed downward pressure on bond yields through high savings, weak growth and demand for safe assets.

Japan’s experience demonstrates that rapid population ageing can quickly erode fiscal sustainability, destabilise labour markets and strain social welfare systems.

Navigating the market impact

Aside from the macroeconomic and sovereign implications of an ageing population, this long-term trend has the potential to shape financial markets and capital flows.

By 2030, one in five Americans is expected to be over 65 years old, making up 20.7% of the population, while those 17 years or younger will shrink from 21% of the population in 2025 to 20.2% of the population in 2030.¹¹ While trends may reverse, the composition of the population today dictates what it will look like over the next decades. Therefore, this is a market trend worth noting.

An appetite for fixed income

With fixed income now offering attractive yields, as people move into retirement that will drive further demand for fixed income. Demand for different asset classes changes between the pension accumulation phase and the decumulation phase. The income provided by fixed income will be necessary as more people begin to retire; from simply living to satisfying their dreams of travelling the world.

Furthermore, investors tend to adjust their portfolio compositions as they grow older. With younger cohorts attempting to grow their savings rapidly via comparatively riskier equities, while older households seek a more stable return, via ‘safer’ assets such as fixed income.¹²

As a population ages, this will increase the pressure on pension funds to create the right balance between income and liquidity,  with fixed income offering a potential solution.

However, the older a population, the lower the savings rate tends to be. This is as older households draw down savings. A period which sees a significant draw down could also add strain to financial markets.

The demographic dividend

While this demographic trend towards ageing is prevalent throughout developed markets, it is not the case globally. We are seeing a significant split between developed markets (DM) and emerging markets (EM).

Currently 85% of the world’s population live in EM countries, and this is set to grow with a positive demographic impulse in some of these countries – creating an economic advantage, with an uplift in the workforce. For example, India has grown rapidly, becoming the most populous country in the world in 2023, home to around one-sixth of the global population; providing a significant tailwind for the country’s rapid economic growth. Furthermore, as literacy rates and education systems improve in these economies, this will generate a domestic workforce able to fill skills gaps.

As a result, EM with favourable demographic profiles could attract greater capital flows as investors seek higher growth. This could amplify a shift towards EM over the long-term.

Conclusion

The pace and the impact of this trend differs globally, as well as the government response and adaptation. We believe this will create significant differentials across growth, inflation, interest rates and government debt, allowing active investors to seek out differentiated opportunities. Given the long-term nature of this transition, it may not be at the forefront of investors’ minds, but it is a trend which it may pay to be cognisant of.

While we experience a lot of noise day to day, it is often not these events that will have a truly long-lasting impact on markets. While not a new topic, changing demographics is no less pertinent. The demographic megatrend is likely to have a profound impact on the economy, on fiscal sustainability and on markets.

^1,2,5 OECD, ‘OECD Employment Outlook 2025’, (oecd.org), July 2025.
³ European Central Bank, ‘The macroeconomic and fiscal impact of population ageing’, (ecb.europa.eu), June 2022.
⁴ IFS, ‘The economic consequences of the UK’s ageing population’, (ifs.org.uk), March 2022.
⁶ McKinsey, ‘Dependency and depopulation? Confronting the consequences of a new demographic reality’, (mckinsey.com), January 2025.
⁷ OBR, ‘Fiscal risks and sustainability’, (obr.uk), July 2025.
⁸ Center on Budget and Policy Priorities, ‘Where do our federal tax dollars go?’, (cbpp.org), January 2025.
⁹ House of Lords, ‘Preparing for an ageing society’, (publications.parliament.uk), December 2025.
¹⁰ McKinsey, ‘Dependency and depopulation? Confronting the consequences of a new demographic reality’, (mckinsey.com), January 2025.
¹¹ S&P Global, ‘1 in 5 Americans to be 65 years old or older by 2030’, (spglobal.com), November 2024.
¹² ECB, ‘Navigating financial stability in an ageing world’, (ecb.europa.eu), May 2025.