Monday, November 17, 2008

The Demographic Time Bomb

Forecast for Dependency Rates

Many Western OECD economies are facing an unwelcome population projection. As the baby boomer generation starts to retire (around 2016), the dependency ratio (number of people not working to number of people working) is forecast to rise. This ageing population is exacerbated by declining birth rates which is reducing the number of working age adults. Some countries are affected more than others. For example:
  • Italy number of adults 16-65 is forecast to fall from 35 m to 26.1 m. Combined with an ageing population and a National Debt of over 100% to start with it looks pretty grim.
  • UK Dependency ratio is forecast to rise from: 0.34 to 0.65 by 2040.
  • In the US statistics from federal reserve suggest a fall in number of workers to dependants from: 0.63 to : 0.53 in 2080

Impact of Ageing Population

  • Fall in Income Tax Receipts. Retired people will pay very little if any income tax.
  • Increased spending on Pensions: Governments are committed to make pension commitments to everyone over the age of 65.
  • Health Care. 50% of health care is focused on people in the last year of their lives.

The government will be faced with higher spending commitments and lower tax receipts. If the government doesn't radically change policy, national debt is likely to increase. Furthermore, the government will not be borrowing to finance sustainable investment but making transfer payments which don't boost productivity.

Is it Really The End of the World?

Some doomsayers suggest that the ageing population could really cripple western economies leaving governments with unmanageable debts - leading to inflation and / or higher interest rates. However, bear in mind.
  • Some Countries are much more affected than others. The outlook looks bleak for Italy and Japan, but, not too bad for UK, Denmark and US.
  • There will also be a decline in young dependants (people under 16). Therefore, the government will be able to spend less on education and child benefit.
  • Economic growth of 2.5% should increase the nations capacity to meet rising spending commitments. If economic growth averages 2.5% and national debt increases by 2.5%, then national debt as a % of GDP will remain the same. This means that tax rates will not have to rise to meet interest payments on the consistent national debt. The problem will come if National debt increases faster than economic growth.
  • Compared to the 1960s and 1970s, female labour market participation rates have dramatically increased. This helps increase the number of effective workers to economically inactive. (However, this has been offset to some extent by declining male participation rates.)

What Choices Do the Government Have?

With prospect of higher spending and relatively lower tax receipts, the government may have to consider some politically unpopular policies.
  1. Raise retirement age to reflect longer life spans. In 1950, average life expectancy was 75. It is now 86. But a higher retirement age will not be welcomed by people who have been planning and expecting to retire at 65. Governments may delay implementation of higher pension age for several years.
  2. Higher tax rates. Increasing income tax to pay for an ageing population hardly inspires. The argument is higher tax rates will reduce productivity and deter people working. The impact of higher taxes on labour productivity is less than many claim, but, it would still be an unwelcome development
  3. Cut spending. Making people pay for private health care and private nursing homes is one solution. But, it would inevitably require an extensive and unpopular means tested scheme to decide who can't afford. It won't please children seeing a fall in their inheritance levels.
  4. Immigration. Immigration of young workers will be one of the easiest solutions to the demographic time bomb. But, immigration is equally unpopular.
The problem is arguing for the above policies is hardly going to win you favours with the electorate, therefore there is a politically pressure to keep delaying these policies for later. Which policy would you be happy to accept?


James said...

I am glad someone is blogging about this. I do too but from an environmental viewpoint.

The keyword is sustainability. Balancing working people with dependent people is not sustainable.

Sure, the immigration route is a quick fix but those migrants will grow old too thus requiring even more migrants. A never-ending cycle.

A dwindling population needs less public services so the need for more health services, education, police, road building etc. is diminished.

Overpopulation will be a problem for the planet this century, as more people chase fewer resources. Using Europe as a pressure release for Africa and Mid-East population and employment problems will do nothing for those parts of the globe. Millions might come to Europe but they will be more than replaced back home by an unchecked birth-rate.

There are many retired people in the west who would rather continue working. Who are we to stop them? Rather than pensions people should be encouraged to continue working.

Instead of investing in pensions people should invest in invalidity insurance so they can be looked after when they are finally unable to work.

Most people in the world do not have a pension so why we in the best think it is some God-given right is rather too much to ask for.

A sustainable economy not based on chanting the mantra of infinite economic growth on a finite planet must come first afore people can have the luxury of not working in old age.


The Good Life

Anonymous said...

The rise in the over sixties is mainly the result in the rise of the baby boomers in the 40's.
Something i have had to deal with all thru my life,
Hi class sizes, Hi youth unemployment in the 60's and now too many pensioners.
The Good news is all us baby boomers will fall of our perch in 2020 to 2030, causing a rapid fall in population. Problem solved
Regarding Pensions
This was the biggest pyramid scam of all time.
When the universal pension was brought in most of the labouring classes died at 55 to 60 years of age. Only the rise No's of Middle classes benifited. But now us labouring classes are living longer, the answer is to raise the retirement age.

Anonymous said...

The bigger picture shows that pensions et al are the least of our concerns - when oil begins to peak and therefore demand outstrips supply, where are we to get energy and food from? (fertilisers in all intensive farming come from oil).
The effects of global warming are now unstoppable and will mean very significant changes to world wide resources. The uk now imports most of its energy and food. Perhaps we shall be able to barter for our plentiful water?

Jimbob said...

I agree with James. The current growth-based economic model is a massive pyramid scam and is unsustainable.
In the long run human overpopulation and its consequence will increasingly outweigh all other considerations. But govts will continue to do nothing about this because the problem and answer is longer term, will need a universal response Also because bad pension models (current workers pay for current retirees) and dependance on growth-based economies con people into believing we can't cut back on population growth. Ditto developing countries with No pensions who believe that childbirth IS their pension provision.

Population decline is continuously sold as a PROBLEM in the press. It is not - it is fundamentally necessary.

Anonymous said...

It is clear that the "economic growth" paradigm is past its time. We have to look at sustainablity and reducing population.

If anyone doubts this take a look at this video set..

It is on YouTube as "the most
important video you'll ever see"

Anonymous said...

Almost everyone who is 60 now will be dead in 30 years time and the 'Demographic time bomb' disappears as the balance is restored, it really is that simple.

Basic Maths from

Damian S.

ibrahim said...

hey listen guys, just treat the foreign migrant workers the same way we treat our temps. simply just do not renew their visa when they reach 30 and do not give them indefinate leave to remain only in exceptional circumstances

ibrahim said...

also there are too many malthusian comments on here.

as population increases other factors also increase so the world can support even higher populations such as advances in agriculture and technology and architecture and engineering and, and, and,...i think i made my point.

there is almost no limit to the population the world can hold