The Demographic Timebomb...
Growing investor concerns regarding the sustainability of fiscal deficits across the developed world are even more justified when the impact of demographic decline, both in terms of exploding unfunded social and healthcare costs, and in depressing trend GDP growth, is taken into account. Europe, Canada, the United States, Japan, South Korea, and even China are aging at unprecedented rates. Today, the proportion of people aged 60 or older in China and South Korea is 12-15%. It is 15-22% in the European Union, Canada, and the United States and 30% in Japan. With life expectancy increasing (and typically a 65 year old can today expect to enjoy almost 20 years of retirement in Europe, the US and Japan), these numbers will increase dramatically. In 2050, approximately 30% of Americans, Canadians, Chinese, and Europeans will be over 60, as will more than 40% of Japanese and South Koreans.
Industrialized countries are experiencing a drop in their working-age populations that is even more severe than the overall slowdown in their population growth. South Korea represents the most extreme example. Even as its total population is projected to decline by almost 9 percent by 2050 (from 48.3 million to 44.1 million), the population of working-age South Koreans is expected to drop by 36 percent (from 32.9 million to 21.1 million), and the number of South Koreans aged 60 and older will increase by almost 150 percent (from 7.3 million to 18 million). By 2050, in other words, the entire working-age population will barely exceed the 60-and-older population. Although South Korea's case is extreme, it represents an increasingly common fate for developed countries. In 2002, the US population was adding ten people of working age for every single new potential retiree (those aged over 65). By 2023, there will be 10 retirees for each new working age person.
Old Age Dependency Ratios – OECD
Europe is expected to lose 24 percent of its prime working-age population (about 120 million workers) by 2050, and its 60 plus population is expected to increase by 47 percent. In the US, where higher fertility and more immigration are expected than in Europe, the working-age population will grow by 15 percent over the next four decades, compared to its growth of 62% between 1950 and 2010. And by 2050, the United States' 60-and-older population is expected to double. In economic terms, a decline in the number of new consumers and new households will depress trend GDP growth rates, and this is an overlooked aspect of the Japanese experience. When developed countries' labor forces were growing by 0.5-1.0 percent per year, as they did until 2005, even annual increases in real output per worker of just 1.7 percent meant that annual economic growth totaled 2.2-2.7 percent per year. But with the labor forces of many developed countries now shrinking by 0.2 percent per year and those of other countries, the same 1.7 percent increase in real output per worker yields only 1.5-1.9 percent annual overall growth. Moreover, developed countries will be lucky to keep productivity growth at even that level; in many developed countries, productivity is more likely to decline as the population ages and experienced workers drop out of the workforce; China is an exception, where older workers tend to be very poorly educated compared to new entrants and productivity should benefit from the generational shift over the next decade.
Old Age Dependency Ratios – BRIC
Changes in population structure have profound effects on investment flows as much as aggregate demand and output. The forces that fueled economic growth in industrialized countries during the second half of the twentieth century, notably increased productivity due to rising average educational attainment, the movement of women into the labor force, and technological breakthroughs like the transistor that had a broad multiplier effect on productivity, will all likely weaken in the coming decades. College enrollment boomed after World War II, a trend that is not likely to recur in the twenty-first century; the extensive movement of women into the labor force also was a one-time social change; and the technological change of the time resulted from innovators who created new products and leading-edge consumers who were willing to try them out -- two groups that are thinning out as the industrialized world's population ages. A further strain on industrialized economies will be rising medical costs: 30% of total healthcare costs are expended in sustaining the last year of life. Public pension schemes for aging populations are already being reformed in various industrialized countries and in theory, at least, pensions might be kept solvent by increasing the retirement age, raising taxes modestly, and phasing out benefits for the wealthy. Regardless, the number of retirees over 80, who are highly likely to require nursing-home and other expensive care, will rise dramatically. Both Japan's "lost decade" and the 2008/9 global slump stem from a combination of excess savings and the deflation of immense asset bubbles. The implications of demographic decline, in conjunction with the explosion in aggregate debt levels of recent years, are to make stagflation the most likely sustained economic scenario while depressing asset returns as savings are gradually liquidated; that 'wall of money' thesis ignores demographic reality. Perhaps one radical solution to control spiralling costs will be to ship millions of developed world retirees to the sunny climes of the developing world, where healthcare costs are a fraction of those at home, and the nurses are friendlier. Who knows, it might even win Obamacare a few votes.