the aging population doesn't reduce the number of people, right? It just changes the products they're interested in. So one of the key areas that we will likely see increasing in demand is this you know, how do seniors manage their money, manage their finances? Insurance products for older Americans.
And even, you know, you see the mortgage related products like reverse mortgages ages off and kind of gets its finances in order, you know, banks still very much have an opportunity to, to facilitate those types of customers.
From the American Bankers Association, this is the A BA Banking Journal podcast. Welcome back. I'm Evan Sparks and I'm delighted to be digging into a topic that we don't talk about all the time, but that we do try to make sure we talk about from time to time because it's really important not for the next, next six months of bank planning, but for the next several years of banker planning and strategic foresight. And that is how demographic shifts.
Are changing the US banking landscape, we are in a demo. Demography is destiny, as they say.
We have published several stories on this before in the a b, a banking journal, but it, you know, we, it's very important for us to understand how birth rates, death rates are affecting the outlook for banks and how that is a shift, how that regional shifts, how, how these trends are shifting based on different regions of the country and making sure that we are aware of how the changes in population trends are going to affect affect banks of all sizes.
So to help me do that is someone who is much more of an expert than I am, and that is my colleague JP Rothenberg, vice President and Economist in our office of the Chief Economist here at a BA. He has an article in the newest issue of the a BA banking journal, the July August issue on this very subject. So jp, welcome to the show. Thanks for being with me today.
Thank you, Evan. I very much appreciate it. Yeah, so the banking landscape is obviously tied to, to demographic trends that we're experiencing, and unfortunately, demography tends to be one of those. Forecasting tools that's fairly stable, pretty far out, and so.
Making sure we, we take a look at it and see how the, the future is going to unfold when it comes to, you know, the aging population, the working population, the birth and the immigration type statistics is, is incredibly useful and, and provides some pretty practical insights for what the, the next couple years look like. And even farther out than that.
So. Really like working with demographic data primarily because in at least the world of forecasting, it's one of the only reliable long-term projections that we really have at our disposal.
Yeah. So so you, you, in your article you talk about these three key forces that are affecting the demographic transition, aging population, declining birth rates, and then the shifting immigration patterns. Obviously we're hearing a lot about the latter in the, in the news every day these days. But, you know, can you walk us through what, walk me through what are the you know, how, how do what, what are these trends look like right now?
So in, in the US and, and to some extent globally, at least in developed economies one of the largest trends that we're going to be dealing with is the, the aging population. And that is primarily due to. Generation after World War ii whi, which definitely lends itself to, to see how far out some of these major events like wars and pandemics can, can affect the the far future. So starting in about 2011, the, the baby boomer generation started going to, to 65 plus.
And you, you had large numbers start retiring. And so then by what is it, by about 2030, I believe the, the vast majority of the, the baby boomer generation will be over 65. And what that does for the US primarily is make a pretty dramatic shift in the old age dependency ratio. So that's the, the number of seniors, 65 plus versus the, the number of what you would typically consider working age. So let's say like 20 to to 65.
So. In the article we, we raised the point that that number was about 20 seniors per 100 working age adults. In, in 2005, it increased to about 29 seniors to, to a hundred working age adults in 2020. We'll shoot up to 36 by 2030. So you we're basically going from an environment in the, the early two thousands where you had one senior per five workers. And soon we're gonna be ending up at a number that's over about one senior to three workers whi, which is a, a very dramatic impact.
On social programs like, like Social Security and Medicare but also things that directly relate to banking, such as deposit characteristics.
Yeah. And that's what, you know, we, we've got. They're, we've got a if we're, if we're looking at the deposit trends, I mean, you talk in the piece and I wanna get to the issue with loan trends where the, you know, loan demand goes when you have a significantly more, a population that has a significantly, that's significantly advanced in age. But. What, what are we looking at in terms of the, the deposit trends that we can expect from an aging population with a declining birth rate?
So the, most of the, the data I'm working off of here was actually in two BIS papers. One was aging gracefully steering the banking sector through demographic shifts in 2024. And the other was population agent and bank risk taking in 2022. And both the articles get at these shifts as the demographic profile ages for banking. And particularly here, what they find is that older generation basically. They tend to hold a lot more in deposits than younger generations.
So I believe it was about twice the deposits of the, the 55 to 64 cohort and over three times the deposits of younger cohorts. And that is then paired against the fact that seniors don't tend to borrow as much. So you end up in these regions and it de definitely tends to be kind of a regional effect. Where you'll have just massive imbalances in the amount of deposits a bank sees coming in versus the amount of lending demand.
And so what ends up happening at least according to these papers, is that in order to you know. Put those deposits to use. They end up looking for younger borrowers, which tend to tend to be in areas where they don't have a current. This is for kind of smaller community banks. And then they go outside their local area to, to find these borrowers. And because they're outside of their local area, they tend to bring less expertise into the local economy.
And then that then in turns drives higher loan to deposit ratios or, I mean, sorry. Loan to income ratios and also then ends up in causing kind of higher delinquency rates in these loans that are made outside their regions of expertise.
Yeah, no, that's fascinating. And, and, and, and it seems like that's a unique dynamic to an economy like ours that has lots of. Smaller institutions as opposed to say an economy with four or five big institutions that are everywhere. They deploy those, they may deploy those loans in different geographies, but they also already have the local, the local lending capacity in those geographies.
Absolutely since the, the US isn't necessarily unique in its demographic profile, particularly the aging drivers, but yeah, our, our. The amount of community banks, of smaller institutions that have those geographic concentrations, something that is, is somewhat unique to the us
And, and that's so, so it seems like this is actually something that if you go through this over a couple of credit cycles and you deal with you deal with the the fallout on the down end of the cycle. Could actually, could this be a driver of, for an accelerant to further consolidation or is this, is that not something that you'd, you'd expect to see?
So it, the paper that looked at the credit quality of lending outside your local area focused on 2008. So I, I wanna be careful saying. This, this deterioration in credit quality is something that's persistent because it, it, it didn't actually appear to be, it's actually kind of a, a, a dual effect to where, you know, if you have a higher exposure to an older clientele, they actually tend to be less risky in normal times. But then when you end up in periods of stress.
That's when the, these kind of credit quality concerns come to the forefront. So going back to, could it encourage consolidation on its own? Probably not that much. However, in a stress environment, if, if something happens and banks are having difficulty with credit quality of their loan portfolios and you have banks ending up in trouble, this could be a marginal influence. As to which banks end up getting sought out stress.
So I wouldn't say in normal times it's gonna be a driver of that, but you know, definitely at the margins, it, it would be a driver of, of bank stress characteristics.
Now, the shift toward high toward a greater share of the population in age, in aging categories where then we are, we, it seems possible that we will end up in a situation where we have fewer new businesses being formed and fewer start fast growing businesses being formed. What is the, what is the impact of an aging population profile on community bank? Business loan demand and you know, commer and, and the commercial side of the, of the portfolio.
So I, I would hazard a guess here, that business formation largely at 20 to 65 cohort that, that we were talking about earlier and. Unfortunately from 2020 to 2030, that stays pretty consistent. So even though we saw this kind of dramatic aging via that baby boomer generation the, the working age population in general is kind of staying. Fairly stable.
So from that point, you, you would expect less business formation, or at least not dramatic growth in the business for formation that would keep up with the expectation of increased deposits at banking institutions as seniors hold on to their assets in safe venues. So that then kind of spins into the immigration question that we were talking about.
And us along with most other major developed countries is, is not having enough births to necessarily replenish the, the working age population over time. It's, it's. Rebounded from the pandemic. In fact, that's, that's kind of an interesting stat that during the pandemic we had a pretty significant dropoffs in births. But like the baby boomer generation, we saw something similar where as the pandemic slowed down that the deficiency in, in birth actually caught up to trend by December, 2021.
But then shifting back to the demographics question. The, the Wharton Budget Lab did an interesting paper where they were looking at the amount of immigration we would need to maintain our growing population. They came to the conclusion that we would need to increase the immigration rate, and I, I believe this was based on quotas. By three and a half times, right? In order to, to maintain that working age population.
So in this environment that, that we're seeing where immigration is being further restricted and we see that our working age population is more or less stagnant. We, we very much need to, keep a close eye on the number of. Working Americans. Right. I'm sorry, I actually forgot the the question that we started with here. No, that's okay. We were talking,
I mean,
what you brought up an,
you brought up an interesting point too because I know there's data from the small business administration that talks about, from about maybe 10 years ago that shows that immigrants have a higher by about 10 basis points, you know, a higher business ownership rate, and then they're about three times more likely to start a business compared to the non-immigrant population.
That's, you know, so that's, that is an additional source of, you know, of dynamism provided the immigrants coming in are of the, are of a skill level to be able to take advantage of the opportunities to form and grow businesses here.
Yeah, absolutely. And it just goes to, to show how critical kind of the immigration factor is. And that is as, as far as demographics goes, one of the harder things to predict. So it adds a lot of volatility to these forecasts, even though it's such an important plug. Into the, the actual, you know, growth of the nation.
Yeah. You know, any, any additional perspectives, insights on kind of what, where we can ex what we can, what we can look for in terms of how these demographic trends, should they persist? Should they you know. I mean, I, I feel like the aging population and declining birth rate is very hard one to reverse, right? I mean, I don't think there's any developed country that's figured out how to reverse a declining birth rate or or at le or even slow it substantially.
But as these trends persist are there opportunities for banks to capitalize on while opportunities that will open up that perhaps weren't available to them?
Yeah. So obviously we, we have a change in customer, right? So the, the aging population definitely it, it doesn't reduce the number of people, right? It just changes the products they're interested in. So one of the key areas that we will likely see increasing in demand is this you know, how do seniors manage their money, manage their finances? Insurance products for, for older Americans.
And even, you know, you see the mortgage related products like reverse mortgages ages off and kind of gets its finances in order, you know, banks still very much have an opportunity to, to facilitate those types of customers. The other side of that is kind of the business perspective. Banks aren't the only ones serving an aging population. We, we've seen dramatic growth in businesses like nursing homes that, you know, will continue to, to increase their footprint as the population ages.
The. Other potential avenue, which which might seem somewhat unrelated, is technology, right? Even things like AI was, you're, you're dealing with a population where the number of workers is reducing to the number of dependents. You need to increase productivity. And productivity right now has, you know, a great number of very exciting trends. And you will need that productivity in, in order to facilitate things like these long-term care facilities.
So is that truism that change, you know, creative destruction. Is the old economy gonna look like the new economy? No. But as those things shift. That does bring a, a lot of new opportunities for those that are kind of keeping track of where the future's going. Yeah.
All good insights. We could talk about this for another hour or so but we'll, we'll spare our listeners, you can check out JP's article on the banking journal website at aba.com/banking journal. It's a, a great piece and a good and and, and an important perspective. So, jp, thank you for being on the show today.
Thank so much, Evan.
For our listeners, you can find this in previous episodes at aba.com/banking journal podcast. You can also find all kinds of great foresight related content related to banking on our website, aba.com/banking journal. That concludes season eight of the A BA Banking Journal podcast. We'll be off in August and we'll be back after Labor Day. Thanks so much for listening and see you in the fall.