In December, a paper from the National Bureau of Economic Research concluded that ‘children’s prospects of earning more than their parents have faded over the past 50 years in the US’. McKinsey, the management consultancy, calculated that between 1993-2005 only 2% of households in 25 developed nations experience flat or falling real incomes. In contrast, for the period 2005-14 that same ratio was estimated at a disturbing 65-70%. This equates to over 500m people across 25 countries who fear that they are ‘poorer than their parents’ – this will be the first generation since the second world war to suffer such a setback.

Critically, this phenomenon is not about the gap between those at the bottom and the top, but about what is happening to middle-income earners. Growing up, these people did not expect to be economic losers. This newly disaffected group is where modern political populism has taken root, and such sentiment is arguably being fertilised by central bank policy and demography.

Low interest rates and poor market returns are one pair of factors behind weak incomes. The ‘baby boom’ generation, born between 1945 and the early 1960s, created a bulge in the working age population. In terms of the traditional savings/investment model of the economy, this gave a significant boost to savings as boomers reached their peak earning years, leading to a lowering of the natural rate of interest. The low-rate environment has contributed to lower returns on pension savings, which is creating pressure to work and save for longer to improve pay-out prospects; the demand for savings feeds back into still-lower rates.

Data compiled by the Bank of England suggest that, over the last 20 years, demographic effects have exerted a larger downward pressure on the natural rate of interest than the slowing of global growth. This demographic effect should reverse when savers (workers) become spenders (retirees). However, we do know when precisely that reversal might begin.

Between 2006-16 the UK participation rate for over-65s jumped from 6.6% to 10.4% – but this is only the beginning for Britain. Japan’s labour market participation rate for the same group is 20%, and for men alone it is around 30%. In the US the participation rate for over-65s was around 19% in 2014, and is forecast to rise to 22% by 2024. The elderly worker looks increasingly like a growing global phenomenon for advanced economies.

The conventional assumption that the switch from saver to spender occurs at the age of 65 needs to be amended – we can only speculate on what the correct age assumption might now be. 75 is perhaps the new 65. Beyond the precise number, the trend of workers staying in jobs to an older age will sustain the downward pressure on the natural rate of interest.

A key issue with a falling natural rate is that nominal interest rate adjustments can become constrained by what used to be described as the zero lower bound. A further consequence is that this downward pressure on the natural rate of interest has accelerated the deployment of unconventional monetary policies. Middle-income earners criticise low interest rates, quantitative easing and other measures for punishing savers in the same way they criticise bailing out failing banks and borrowers. This fuels popular resentment of the political elite.

It is difficult to work demographic effects into monetary policy forecasts, but demography’s headwinds will remain a structural challenge weighing on the longer-term outlook for interest rates. This in turn suggests that the low-return world will be difficult to leave behind. Low growth, low interest rates, and poor prospects for improvement: the key elements that spawned the growth of political populism may prove durable.

Gary Smith is a Member of the OMFIF Advisory Board and Member of the Strategic Relationship Management Team, Sovereigns at Barings.