A 15-Year Analysis: Demographics and Municipal Bonds

Between 2008-2022, the U.S. population grew by 10%, an increase of 30 million people. Digging into the data during this 15-year period, the underlying changes in U.S. demographics are remarkable, impacting both the economy and municipal bond sectors. Understanding these demographic trends both explains what we currently see and prepares us for future impacts.

If you're still with us and haven’t rushed off to the Census Bureau website to dive into the statistics (like us), stay tuned; we will publish a series of pieces that break down these demographic changes and the possible implications.

Part 1: Median Age of the U.S. Population

The population increase over the 15-year period occurred exclusively in the 55-and-older age brackets. Over this period, the U.S. median age increased by 2 years to 40 as those age brackets grew by 40%.  We have already seen changes in demand due to an aging population, and the data suggests that the U.S. population will continue to age faster: the number of individuals 65+ doubled while the 55–65-year-old bracket increased by 25%. Both “young states,” like Utah, with a median age of 32, and “old states,” like Florida, with a median age of 43, saw their population of 55 and older residents increase by roughly 50% during this period.

Recent Population Growth is Only Found in the 55+ Age Brackets

Source: U.S. Census Bureau as of 2022.

While the aging population impacts the entire economy and municipal sectors, for this piece we focus on two:

1. The Hospital Sector: The National Center for Health Statistics reports that 55–64-year-old individuals spend an average of 10 days per year in the hospital, while the 65+ cohort averages 17 days. Below 55-year-olds, the number of hospital days is dramatically lower.

Our Analysis: Demand for hospital beds and healthcare professionals will continue to rise, straining hospital budgets further. Depending on the metropolitan service area, we expect an increase in healthcare mergers to improve financial efficiencies and combat growing demand.  We expect a shift in demand for specializations that older adults rely upon the most like cancer and cardiology.  Hospitals that receive significant revenues from Medicare and Medicaid will require more public funding to remain solvent.

Investment Implications: Attracting medical professionals and accessing technology will help hospitals stand out as investment opportunities.  We anticipate hospitals located in larger metropolitan areas being more successful in courting employees, rural hospitals will be at a disadvantage.  We also expect teaching hospitals like Baylor Scott & White and Geisinger Health System, to have an edge as the vanguards for new procedures that shorten hospital stays or eliminate bed demand altogether.  Hospitals that provide a wide range of services, both inpatient and outpatient/clinic, will have increased flexibility and diverse revenue streams to stabilize overall performance.  Finally, we favor states like Massachusetts and Washington that offer stronger support to their healthcare infrastructure, as we anticipate that their hospitals will fare better.

2. Federal and Local Taxes: The Medicare and Social Security burden continues its unsustainable growth, while the U.S. Bureau of Labor Statistics reports that the number of employed persons increased by just 12%.  Extrapolating from Census data we see that the ratio of individuals of employment age (25-64) to retirees (65+) changed from just above 4:1 to 3:1 over the past 15 years.

Our Analysis: The aging population necessitates increased government support. The most likely source is the personal income tax rates, but changes in the tax treatment of other categories like capital gains, medical insurance premiums, mortgage interest (again), and potentially municipal bonds are among those that could be considered.  Any increases in federal taxes reduce state and local governments’ headroom to raise taxes of their own.  With the worker-to-retiree ratio already strained, states will need to figure out how to raise revenues without driving out their high earners and wealthy residents. Increased income tax rates would increase municipal bond demand, further driving performance.

Investment Implications:  State and local governments with a history of balanced budgets and healthy reserves are in a stronger position. Those that have done a better job of living within their means, like the State of Maryland or the City of Winston-Salem for example, now have increased flexibility and fewer hurdles to raise taxes and borrow debt. Per-person budget spending, as well as governments’ willingness and ability to make smart decisions, will be crucial. In addition, the security structure of these bonds must be carefully evaluated: ones that are lenient in the issuance of additional debt hold more risk as their revenue pool could become diluted.

All sectors will continue to feel the impact of the older median age as this trend continues. We will keep looking for credits that possess the flexibility to adjust to the changing needs of their population. We will continue to examine how demographic shifts are impacting states and cities, as well as other sectors, in future editions of our series.

By taking a diversified approach to the market, including through our wide range of municipal bond ETFs, investors can navigate these changing demographics and seize potential emerging opportunities.

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