Tuesday, June 30, 2009

Cost of Economic Crisis and Ageing

A report by the IMF suggests that the fiscal cost of the current recession and economic crisis will be dwarfed by the looming demographic timebomb slowly creeping upon many developed countries.

This forecast is the last thing the government will want to hear, given they are desperately trying to juggle the political and social desire to increase spending, with long term fiscal deficits which require some kind of future spending cuts.

e.g. in US, the net present value of the the current recession to 2050 is about 20% of GDP. But, the net present value of an ageing population is close to 700% of GDP. In Britain the cost of an ageing population is around 300% of GDP

I have talked about the demographic timebomb on previous occasions. If I keep returning to it, the reason is that it is liable to prove the defining economic issue of the next few decades. A few startling statistics.

  • In 1950, 95 million or 12% of the developed world population was over 60.
  • In 2010 that has risen to 269 million or 22%.
  • By 2050 that is forecast to rise to 416 million or 33% of the developed world.
  • It is almost a tripling of the population over 60. Yet, apart from a few exceptions, retirement ages have increased only by a small amount - if at all.
Source: "World Population Prospects", United Nations 2009

It is not just a situation related to developed countries, it is also becoming an issue for developing countries like China

This is not to suggest the economic cost of the current recession is a trifling matter, but, what it means is that efforts to reduce the cyclical deficits will prove very difficult as underlying structural deficits play a growing role in shaping government's deficits.

An ageing population should not be a cause of depression. An ageing population is a sign of better living standards, improved health care and longer life expectancy. Improved life expectancy should be welcomed as a major achievement, but, if we expect this increased life expectancy to just equate to increased length of retirement we will let one of the great boons of the modern age become one of the great curses.

Someone will having to be making difficult choices, will the taxpayer be sympathetic?

A slow burning fuse - special report at Economist

No comments: