Boom and Bust

Aging’s Impact on the Economy

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By Father John Flynn, LC

ROME, MARCH 1, 2009 ( Concerns over the environment have given birth control advocates a new lease of life.

Paul R. Ehrlich’s 1968 book «The Population Bomb» sparked off a wave of neo-Malthusian pressures to lower population growth, but as the years passed, and the foretold disasters failed to eventuate, enthusiasm for population control waned.

A new wave of concern is being stoked, however, by ecology activists. In England Jonathon Porritt, who chairs the government’s Sustainable Development Commission, said that families should be limited to two children, the London-based Sunday Times newspaper reported, Feb. 1.

According to the article, Porritt will be lobbying environmental pressure groups to persuade them to make population a focus of their campaigning.

His remarks came on the heels of comments by James Lovelock, who was the author of the Gaia theory, which posits the Earth as a self-regulating single organism.

In an interview published in the Jan. 23 issue of the New Scientist magazine Lovelock made the apocalyptic forecast that due to global warming by the end of this century around 90% of the world’s population will have died in what he termed, «a cull.»

The clamor of green activists tends to receive widespread media attention, while a more worrying situation — that of an aging population due to a lack of children — often goes without attention. Following drastic falls in fertility in past decades, many countries face enormous economic problems due to a higher proportion of elderly people in the population.

Demographic change

An in-depth analysis of the economic impact of aging has recently been published by George Magnus, the senior economic advisor at the Swiss UBS investment bank.

In «The Age of Aging: How Demographics Are Changing the Global Economy and Our World» (John Wiley and Sons), Magnus starts by commenting that we have no precedents to guide us in this situation of a rapidly aging population.

By 2050 there will be almost 2 billion people over 60, around 22% of the forecasted total world population, a major change compared to this group’s current share of 10%. The shift in age structure will bring with it, Magnus explained, new economic, social and political issues.

As for the over-80s, they are expected to increase from the current number of 88 million, to over 400 million by 2050.

Magnus is well-qualified to speak out on global economic issues. According to a Nov. 8 article published by the U.K.’s Telegraph newspaper Magnus, last March, at the time when U.S. Treasury Secretary Henry Paulson announced he was not concerned about global market instabilities, published a paper warning that the U.S. sub-prime mortgage crisis could cause the end of the credit cycle «with potentially systemic economic consequences.»

An aging population means there will be less people working to support those who are retired. The working-age population, from 15-64, will grow, but only slowly, in the United Sates in coming years.

In Japan, however, the working-age numbers are already declining and in Western Europe they are almost at a standstill, Magnus explained. Some countries will be particularly hard hit.

Fewer at work

In Japan and Italy, for example, the over-65s were approximately 30% of the working-age population in 2005. By 2050 they will have reached no less than 70%. In practical terms this means that while currently in Japan there are 3.4 people at work for every person over 65, by 2050 this will have diminished to only 1.3.

In general, in Western Europe the current level of almost four working people for every person over 65 will be approximately halved by 2050.

It’s not only the developed world that is facing a dramatic shift in age distribution. In China, thanks to the draconian family planning measures, the number of those working for every person over 65 will plummet from today’s level of 9.2 down to 2.5 by 2050.

Persuading more people to enter the workforce is one solution to a shortage of workers, but Magnus deflated the expectations of that solution, referring to a study carried out by the International Monetary Fund (IMF).

According to the IMF the overall participation rate of a nation’s population who are working would have to increase by a bit over 10% in advanced countries to help offset aging. In the economically booming times of the 1990s, however, workforce participation increased by only 6%, when economic conditions were about as favorable as they can be.

For countries like Spain, South Korea, and Italy, participation rates would have to increase by 18-20% due to the rapid aging of their populations, an impossible target, Magnus declared.

Immigration is no instant solution either, he continued. On average, in advanced economies, total immigration as a percentage of population was around 6% in 2000. By 2050 this would have to reach a level of 30% in order to counterbalance aging.

Raising retirement ages and encouraging more women to enter the workforce can contribute to a solution for falling numbers of workers, but are only very partial remedies, according to Magnus.

At the same time that aging is taking place, younger people are delaying their entry into work, he added. In part this is due to increasing numbers undertaking university studies, but many young people are also taking breaks before entering the workforce and living at home with their parents.

Financing dilemmas

An older population means much higher health care costs and increased welfare spending. But with fewer taxpayers supporting government finances, funding this expenditure will be a real problem, noted Magnus.

Already increased pension costs are proving to be a heavy burden for companies and governments. This will worsen as life expectancies increase. Magnus observed that just in the U.K. in the two years to March 2007, private sector companies added about 30 billion pounds to their pension liabilities by recognizing the longer life expectancy of their former employees.

Moreover, Magnus commented that many people do not do enough to save for retirement. He cited a recent survey in the United States showing that many people simply assume they will receive health coverage and a pension from their company and have only negligible savings.

In fact, Magnus said, for some time American households have been undersaving, or overconsuming. Even countries like Japan, with traditionally high savings rates, have seen a decline in savings in the last decade, due to adverse economic conditions.

Government spending on the retired and elderly will soar in the coming years, at a much faster rate than the underlying rate of economic growth can finance, Magnus observed. So there are going to be difficult decisions about spending priorities and levels of taxation.

Governments in a number of countries have tightened up the generosity of their pension schemes in recent years. For example, in the U.K., someone on average earnings who retires in 2050 will receive a pension equivalent to only 31% of their pre-retirement income.

Unless employees start to put away more of their income into savings schemes for retirement, poverty in old age will be a serious risk, Magnus warned.

The economic situation since the book’s publication, and the current collapse in stocks and the money markets, highlights the challenges laid out in Magnus’s study. Already the current woes have severely affected many retired people who depended on investments to finance their retirement. With aging set to bring about drastic demographic change in coming decades, the future prospects for many people are looking worrying.

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