WHAT AMERICA WILL LOOK LIKE IN 25 YEARS
By MICHAEL SIVY REPORTER ASSOCIATES: LUIS FERNANDO LLOSA AND SARAH ROSE

(MONEY Magazine) – It may surprise you. It may unnerve you. It may even leave you vowing to move to Vancouver. But truth is, America in the year 2022 will in many ways resemble what you see right here: a snapshot of today's Hollywood, Fla. That's right. In 25 years...

...America as a whole will have many of the demographic and economic characteristics present today on the Atlantic coast of South Florida--and particularly in edge cities like Hollywood, just south of Fort Lauderdale and north of Miami. In fact, after an exhaustive study of U.S. Census data as well as a special MONEY computer screen comparing 3,200 U.S. counties and 326 metropolitan statistical areas, Hollywood is the exact spot where today's demographics match those that experts say will be the norm in the America of 2022. (To see what Hollywood is like today, see page 107.)

Now, we know what you're thinking. No one, perhaps least a bunch of magazine editors in of all places New York City, can predict with any degree of accuracy what a nation as sprawling and diverse as ours will look like more than two decades hence. And in many ways, of course, you are right. After all, who could even have guessed back in October 1972 of the changes brought about over the subsequent 25 years by computers and cell phones and the Internet? Or of the revolutions in medicine, finance, the sciences, the workplace? Or of the bull market that has lifted stock prices eight times as high as they were when Richard Nixon was running for his second term as President? Not many people, including us (for a look at our best financial forecasts--and our flubs--see page 234).

But, fact is, there are at least seven major trends, demographic and economic, that few forecasters dispute will largely define America come 2022. Some of the seven--like the aging of the population--are all but etched in granite. Others--like the growing globalization of trade--are only slightly less assured. For you, knowing what those trends are and how they will affect you and your family will help you prosper in the exciting years ahead. And we do mean exciting. Under the economic conditions that we foresee, stocks in 2022 could be nearly seven times as high as they are today, despite fears that baby boomers will be pulling money out of the market to pay for their retirement.

In brief, America will be older and richer, more diverse--and markedly more Latin. But most economists also warn that the already wide gap between the affluent and the poor will only grow bigger. They figure too that high technology and global trade will drive the U.S. economy even more than they do today. And unless current trends take an unexpected turn for the worse, our tame inflation is likely to remain docile, and today's moderate interest rates could decline even further. What it all adds up to is this: a bright future for people who save and invest, who have a college degree and who make their living in technical or knowledge industries. And that most likely includes you: Money's 9.8 million readers are typically professionals, have household income ranging from $40,000 to more than $100,000 and have investment portfolios of $43,500, on average. The picture looks dimmer--though not bleak, thanks to the generally robust U.S. economy we foresee--for the less educated and less affluent.

Of course, any forecast of America 25 years from now could be thrown off by unexpected events such as those described on page 106. But after looking at the megatrends that are likely to shape this country--and your own financial life--over the next 2 1/2 decades, you'll be surprised at how clear the outlook actually appears.

TREND 1: THE POPULATION IS AGING

All projections about the future are open to debate except one: We are all getting older. Moreover, two-thirds of Americans who will be adults in 2022 have already been born and are living here now; immigration will have only a small impact on America's age profile 25 years hence. So, barring a major war or a nuclear disaster, we know almost exactly how many U.S. citizens will be in each age group 25 years from now.

People 50 and older will experience the greatest growth; their numbers (now 71 million) will increase by some 46 million. That's almost three-quarters of the projected 62-million-person gain in the total U.S. population, which will balloon to 329 million from today's 267 million. As a result, within 25 years 117 million people, or more than 35% of the U.S., will be 50 or older, compared with less than 27% today. There will be a smaller 18-million-person increase (to 131 million from today's 113 million) in the number of people under 30 as well, since baby boomers in their late thirties and forties have been racing to make up for not having children when they were younger. By contrast, the number of people in their thirties and forties will actually shrink by 2 million or so (to 81 million) as the baby-bust generation--the 44.7 million people born between 1965 and 1976--reaches middle age.

Consequently, the society of 2022 will be very different from today's, dominated as it is by middle-aged boomer couples. The America of the future will be filled with far more pre- and post-retirees. But because the baby boomers have always tried to hang on to their youth, they will probably be living like 40-year-olds even after they hit their late fifties and early sixties. In addition, says demographer William Frey at the University of Michigan, aging Americans will pursue the highest available quality of life. "The yuppie elderly are going to be living in suburbs with lots of amenities," says Frey.

Contrary to what you might think, the jump in the number of retirees drawing cash out of their mutual funds and brokerage accounts won't necessarily hurt the stock market. "There won't be a great wave of disinvestment when the baby boomers start retiring," says economist Stephen Entin at the Institute for Research on the Economics of Taxation in Washington, D.C. "Many of the elderly will be able to live largely on interest and dividends--and leave most of the principal in their estates."

The other age group that will thrive will be young adults (those under age 30), who will help keep the technology revolution pulsing. In short, America will be filled with wired youngsters and roller-blading oldsters. You'll get used to it.

TREND 2: AMERICA IS GROWING MORE DIVERSE

Even if there were no immigration, non-Latino white Americans (now 72 % of U.S. residents) would make up a smaller share of the U.S. population 25 years from now than they do today. That's simply because of their relatively low birth rate. White Americans average just under two children per couple, while nonwhite and Latino Americans average 2.4 to 2.9. As a result, the white population is projected to grow by only 13 million, from 195 million today to 208 million in 2022.

But if you assume (as most demographers and policy analysts do) that immigration will continue at today's rate or a slightly lower one, America's already lively ethnic stew will become even richer by 2022. For instance, even if illegal immigration were cut to zero from today's estimated 275,000 a year, and even if the number of fully legal immigrants were reduced to a bare 250,000 from today's 800,000, by 2022 Asians would still rise to 5% of the population (vs. 3.6% today). Meanwhile, Latinos, at 14% (up from today's 10.9%), would become the nation's largest minority group. In so doing, they would surpass African Americans at 13% of the population (up from 12% today). And the white population would still decline to 68% from today's 72%.

In short, no conceivable policy changes will do more than slow America's drift toward a more diverse population. The likeliest distribution based on current immigration trends is shown in the chart below. Nonetheless, cultural continuity will prevail over fragmentation. The reason: intermarriage. Today, roughly half of all Asians and a third of all Latinos under the age of 35 marry Americans from other backgrounds. The melting pot is bubbling away just as it always has, and will continue to simmer--albeit with more Latin spice--over the next 25 years.

Apart from making society more cosmopolitan (and inspiring better ethnic restaurants), immigration helps the upper end of the economy but hurts the lower end. The influx of large numbers of relatively unskilled workers measurably depresses the earnings of Americans who lack a high school diploma, according to a recent study by Harvard economists George Borjas, Richard Freeman and Larry Katz. In addition, a recent study by the National Research Council, an affiliate of the nonpartisan National Academy of Sciences, found that immigrants with limited skills tend to have a slightly negative economic impact. For example, immigration costs the average New Jersey household $232 a year (based on the difference between the cost of government services consumed and taxes paid by immigrants).

At the opposite end of the scale, the economic benefits of well-educated or highly entrepreneurial immigrants are hard to measure but are clearly enormously positive. More than a quarter of the entrepreneurs in Silicon Valley were born outside the U.S., for instance. And the contributions of immigrants go far beyond the computer industry. Consider, for example, the case of Augusto Failde, 36, whose family left Cuba and moved to East Los Angeles in 1971 when he was 10 years old. "We left with no money, but the wealth of the mind is something no one can take away from you," says Failde. He finished Stanford in three years, worked in venture capital for three years and then went to Harvard Business School. After a stint in Tokyo with a trading firm, he launched Tropix Media in New York City in 1992. The firm, which has 85 employees and gross billings of $5 million, provides English-language television programming aimed at people of Latino heritage, such as Latin American sports and variety shows. Says Failde: "Technology can be a powerful tool for minority-owned businesses." For more on immigrants in America, see the story on page 168.

TREND 3: THE RICH WILL PROSPER MOST

If there is an unsettling note in the economic and social outlook for the next 25 years, it is that America will become even more of a "winner take all" society. Immigration and global competition will limit wage increases for the least skilled American workers, while international and technological business opportunities will pump up the earnings of those who have world-class skills.

Between 1989 and 1993, for instance, income for the least affluent 60% of American households actually fell from a maximum of $42,249 to $39,757 (in 1994 dollars). One caution: This widely publicized decline is somewhat overstated because it fails to include increases in employee contributions to retirement plans, says University of Michigan economics professor Frank Stafford.

Nonetheless, there's no question that the rich are profiting most from today's economic growth. But that's business as usual. Historically, income inequality has diminished in times of high inflation and a depressed stock market because the rich got poorer, rather than the poor getting richer. Over the next 25 years, the economy's excellent prospects mean that, though almost all Americans will enjoy a rising standard of living, benefits will flow fastest to the top 20% of the population (households making at least $62,841 in today's dollars). In fact, those households figure to receive 51% of the country's estimated $14 trillion of total household income (in today's dollars) by 2022, compared with 49% today.

TREND 4: COMPUTERS WILL BE EVERYWHERE

The computer boom of the past decade has made Bill Gates America's richest man (estimated net worth: $36 billion) and has filled Silicon Valley with busloads of mere millionaires. Further, investors nationwide have benefited from the 67 or more high-tech stocks--including Gates' own Microsoft as well as Intel, Oracle and Dell Computer--that have soared at least tenfold since 1990, according to quantitative analyst Claudia Mott at Prudential Securities. But computers have played a far more important role in building the nation's wealth. Deutsche Morgan Grenfell's chief economist Edward Yardeni estimates that computers have helped boost service productivity by 1% to 2% a year since the beginning of the decade. Yardeni believes this rising service productivity, which he says is hard to measure directly, explains how the economy has been able to grow steadily since 1990 without creating inflation.

Consider one striking, if annoying, example: automated telephone answering systems. In 1990, the financial services giant Fidelity Investments received nearly 100,000 calls a day from customers, compared with more than 500,000 today, says Steve Akin, president of Fidelity Investments Systems. More than three-quarters of today's calls are answered by Fidelity's automated response system, vs. 51% in 1990. If the firm's staffers were still handling calls at the 1990 rate, Fidelity would need almost 7,000 people instead of the 3,442 who currently handle client calls that are too complicated for the electronic system.

The computer boom seems certain to continue. "Computers, health care and telecommunications are the fastest-growing industries in the U.S.," says Yardeni. "Computers alone have accounted for 40% of the gains in the U.S. economy over the past 12 months." Moreover, the productivity benefits of computers and telecommunications are likely to accelerate as chips become more sophisticated. Voice-recognition technology will allow people to control everything from word processors to coffeemakers just by talking. And portable telecommunications devices will enable professionals to carry offices in their pockets. Of course, that may not always be a blessing if, say, you would rather spend your commute looking out the train window instead of answering your nagging e-mail.

TREND 5: BIOTECH WILL FINALLY BECOME A BIG BUSINESS

The use of cutting-edge techniques such as genetic engineering to invent drugs and other valuable products has created plenty of scientific breakthroughs but has generated only limited sales and even less profit. Revenues for the entire biotech industry today total only $15 billion--or a little more than a third of the 1997 sales for a single computer company, Hewlett-Packard. Worse yet, 17 years after biotech pioneer Genentech first went public in 1980, fewer than a dozen of the more than 300 biotech firms have ever earned a significant profit, according to Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay, Calif. Skeptics joke that biotechnology is America's most promising industry--it just keeps promising and promising.

That is about to change, however--and this time we mean it. "Biotech is finally going to pay off," says Murphy. "Technology industries go through cycles lasting 30 to 40 years. Computers are already 15 years into their cycle, but biotech is just starting. Within a decade or so, it could surpass the computer industry, and by 2022 biotech will be nearly a trillion-dollar business."

These opportunities haven't gone unnoticed on Wall Street. In 1990, Swiss drug giant Roche Holding bought a 50% stake in Genentech, which it has since increased to 67%. In addition, two chemical companies have invested in agricultural biotech firms. This year, Monsanto acquired Calgene, a creator of specialty plants such as bioengineered tomatoes that have extra-long shelf life, for an estimated total of $445 million, according to Sano Shimoda, president of BioScience Securities; and Du Pont bought a 20% stake in Pioneer Hi-Bred International, a hybrid seed producer and biotech firm, for $1.7 billion in August.

What does the coming boom in biotech mean to you? First, it will create an agricultural revolution. One promising area of research is specialty vegetable oils that could be used for everything from food processing to powering automobiles (at least your car won't have a cholesterol problem). More important for your own well-being, biotechnology promises to help discover cures for a variety of diseases, including heart disease, cancer, arthritis and glaucoma--the very ailments that are most likely to afflict aging Americans.

TREND 6: GLOBALIZATION WILL FUEL A BOOM

Since the Civil War, economic opportunities have been so enormous within U.S. borders that we've had little need to rely on global markets and foreign trade. Following World War II, U.S. exports made up less than 5% of the total economy until 1973. Since then, however, exports have risen steadily; they now account for 13.4% of our national output. In dollar terms the effects are even more striking: $103 billion in annual exports in 1973 has ballooned to nearly a trillion dollars today. Moreover, those booming exports include services as well as manufactured goods. One striking example: Work done outside the U.S. for foreign clients accounted for a hefty 8.6% of U.S. architects' billings in 1996, up from a scant 2% in 1991, according to the American Institute of Architects.

This rapid globalization will only accelerate and will help fuel the U.S. economy over the next 25 years. One key: the rise of Asia. Imagine if we told you that explorers would discover a new continent within the next two decades. Well, exporters will. "The emerging middle and upper classes in India, China and Southeast Asia, which already total more than 212 million people, will nearly quadruple to some 833 million in 25 years," says Farid Abolfathi, manager of emerging markets at Standard & Poor's DRI. "That's roughly equal to the middle- and upper-class populations of the entire industrialized world today." And although most of developing Asia has an average household income of only a few thousand dollars a year, both Singapore and Hong Kong (with per capita gross domestic product above $24,000) are more affluent than the United Kingdom ($18,000). Other Asian countries such as Taiwan, Thailand and Malaysia could reach Western economic levels within a decade. In fact, many parts of China and Southeast Asia are growing 6% to 8% annually--or twice as fast as Europe and the U.S. The result: By 2022, Asia will be as important to the world economy as North America and Europe are today. Latin America figures to enjoy a similar boom, although on a smaller scale.

TREND 7: INVESTING OPPORTUNITIES WILL GET EVEN BETTER

Dow 10,000? Try Dow 55,000. For anyone over 35 who remembers the '70s and that decade's 11% inflation, 9% interest rates and three-city-block-long lines for gasoline, the economy of the past 15 years has seemed like paradise. A sharp decline in inflation (to less than 3%) and interest rates (to below 7%) has been accompanied by corporate profit growth that has averaged 10.9% annually since 1990, compared with 9.5% a year, on average, from 1972 to '90.

The result, as investors know, has been the most robust bull market of the century, along with job creation that has reduced unemployment to a 24-year low of less than 5%. If there's a downbeat detail in the good times investors now enjoy, it's the one mentioned earlier in our third trend--the benefits of today's astonishing affluence are not enjoyed fully by blue-collar workers. But for those fortunate enough to count themselves among the top 20% of the population--households with income of $62,841 or more--this is truly the best of times.

The crucial question, of course, is whether today's supercharged economy can keep surging for another 25 years. In the narrow sense, it can't--at least not without setbacks. The U.S. economy has expanded for seven years without a recession; the normal run is only five or six years. Similarly, the stock market has climbed to record highs over the same period without a historically common setback of 10% or more. Typically, such setbacks come every two or three years. If you consider the next 25 years as a whole, though, the picture is nothing short of spectacular. The combination of stunning technological advances in computers and biotechnology coupled with global growth will pave the way for steady increases in U.S. corporate profits with minimal inflation. As the chart at left shows, yields on long-term Treasury bonds typically float one to two percentage points above the rate of growth in gross domestic product unadjusted for inflation. "Essentially, it's becoming increasingly difficult for companies to raise prices, so they've had to focus on becoming more efficient internally to ensure they can compete 10 or 20 years from now," says Richard F. Hokenson, chief economist at Donaldson Lufkin & Jenrette. "What comes out of that is less inflation and more real growth."

Such a favorable scenario could bring interest rates down somewhat. "Interest rates are still way too high, given the trend in inflation and the fact that the budget deficit is disappearing," says chief economist Bruce Steinberg at Merrill Lynch. In fact, long-term yields could ease to as little as 5.5%, a level unseen since the late 1960s. The result of all this is that rising stock prices plus dividends could multiply your wealth as much as thirteenfold, if you buy quality issues and hold them through any pullbacks. More important, the outlook for better career opportunities, improved health care and a more vibrant, diverse society make the prospects for life in America nothing less than wonderful by the time MONEY celebrates its 50th anniversary.

Reporter associates: Luis Fernando Llosa and Sarah Rose