Authors: Stephen D. King
An alternative approach is to consider the changing supply of workers (aged fifteen to sixty-five) by region over time.
In 1950, the population of working age in the developed nations stood at 494 million out of a global total of 1.4 billion, a share of 33.8 per cent.
In 2000, the working-age population in the developed nations had increased to 743 million but the global total had increased much more, reaching 3.7 billion, leaving the developed nation share down at 20.3 per cent.
By 2050, the UN estimates the working-age population in the developed world will have declined to just 662 million, a share of only 12.4 per cent in a global total which, by then, may be as high as 5.3 billion, a reflection of continued population increases in the emerging world and a rapid population acceleration in the world’s most impoverished nations.
This is a stunning transformation.
For the developed world, population ageing is not just a story about providing pensions and healthcare for the elderly: it’s also a reflection of shifting global economic power and influence.
The rich nations really are running out of workers.
There is a rather tedious debate that suggests population ageing matters for some countries in the developed world but not for others.
Those countries that depend on ‘pay-as-you-go’ pensions and healthcare provision are supposedly more vulnerable, as they rely on current taxpayers to fund the elderly.
If the old-age dependency ratio is rapidly rising, the burden on current taxpayers – especially people
of working age – threatens to become too painful.
Higher tax rates might leave them disinclined to work or tempted to emigrate to countries with more favourable tax regimes, in which case a vicious downward spiral ensues.
As the young begin to leave, the nightclubs close and the schools are converted to old people’s homes, encouraging a further youthful exodus.
The associated loss of tax revenues undermines the government’s ability to support the elderly, leading to a further hike in taxes on remaining taxpayers.
The cycle is repeated.
Many of the continental European countries fit this description.
Meanwhile, those countries with funded pension schemes, where money in previous years had been deliberately set aside and invested to support future pension and healthcare needs, will supposedly be better off.
This second category includes the US, the UK and the Netherlands.
It’s an enticing distinction, but it’s largely false.
Ultimately, the elderly need access to real resources – doctors, nurses, nursing homes, cruise ships and bowling greens – but, to ensure these resources are put in place, savings need to be invested in the right areas.
There is absolutely no reason to believe that this actually happens.
The demographic deficit is decidedly not just a problem for nations with pay-as-you-go pension systems.
It’s also a major difficulty for those who chose, at the outset, to be thrifty.
To understand why, consider two forms of saving.
The risk-averse baby boomers of country A decide to deposit their savings in a bank and leave them there, earning a modest amount of interest per year.
The buccaneering baby boomers of country B choose to invest their money in real estate and equities, hoping for significant capital returns.
The boomers in both countries then reach retirement age.
Awash with savings, they decide to go on a spending spree.
The boomers in country A withdraw their piles of cash from the bank and head off to the plastic surgeons and the stair-lift
manufacturers.
They soon discover that not enough doctors and purveyors of stair-lifts exist, because the younger working generation is now fewer in number than the retired boomers.
As the boomers spend their cash, surgery and stair-lift prices start to rise.
An unpleasant dose of inflation follows, eroding the real spending power of their hard-earned savings (the plastic surgeons, of course, will end up with more money in their pockets but, as this is spent, other prices will also begin to rise).
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The boomers in country B believe they have been much wiser than those in country A.
They, after all, have built up impressive portfolios of property and stocks.
In retirement, all they have to do is sell their portfolios to the younger generation because, ultimately, they need to have cash in their pockets before they can buy their matinee theatre tickets or book their place in the nursing home.
To get the cash, they need someone to buy their assets.
If the younger working generation is smaller in size, the process of selling assets will prompt asset prices to fall.
The boomers may discover, in fact, that they have been unconsciously involved in a giant scam.
From the 1980s through to the early years of the twenty-first century, conventional wisdom suggested that people should invest in equities and property for the long term.
Large numbers of boomers followed that advice.
Their surplus incomes were invested in all manner of risky assets, creating a self-fulfilling asset price boom.
Yet there was no particular reason to argue that long-run returns on these assets were rising.
Prices went up because more and more boomers chose to buy risky assets, not because the risky assets suddenly offered better returns.
Put another way, as boomers choose to offload assets upon reaching retirement, asset prices are likely to come back down again.
The pot of gold at the end of the rainbow may be much smaller than commonly believed.
The evidence to support this view is striking.
In 1989, Japanese boomers believed they had made a killing.
The stock market had risen dramatically through the 1980s and rising land prices seemed to be a one-way bet.
Shortly afterwards, however, equity prices and then land prices began to fall, marking the beginning of a twenty-year period of persistent asset-price declines.
Ten years later, at the height of the technology bubble in 1999, American and European boomers found themselves in a similar state of fervour.
Even when stock prices slumped in 2000, house prices carried on rising, creating the false impression that people genuinely owned assets that would support them in their impending retirements.
Other, more esoteric, assets became increasingly popular.
Pension funds loaded up on asset-backed securities, which too often were linked to poor-quality loans in the US housing market.
Ten years later, with equity markets still hobbled and with house prices having persistently declined for the first time in US post-war history, it turned out that the boomers were not so wealthy after all.
Even worse, many Americans and British citizens had borrowed heavily against inflated asset values, leaving them awash with debt at precisely the wrong demographic moment.
In the absence of sufficient funds, pay-as-you-go problems, supposedly banished, are making a comeback.
The underlying problem, ultimately, is command over limited resources.
The risk of inflation or of asset-price declines stems from the process of retirement itself and the creation of a large number of elderly dependants.
When pension systems were first created, life expectancy and retirement age were roughly the same.
Pensions were designed to provide protection for those who were lucky enough to
live beyond the average age of death.
There weren’t many; the majority of people worked and then died.
With improvements in sanitation, healthcare and nutrition, life expectancy has gradually risen.
A bigger and bigger gap has opened up between the age of retirement and the average age at which a person dies.
Most Americans, for example, plan to retire at around the age of sixty, but life expectancy at birth is now seventy-eight and rising.
Meanwhile, those who reach the age of sixty-five can reasonably expect to live another nineteen years.
At the beginning of the twentieth century, life expectancy at birth was only forty-seven, while those lucky survivors who managed to hang on to sixty-five could expect to live only another fourteen years.
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The numbers reaching retirement age are, therefore, much higher than they used to be.
For a while, this demographic reality didn’t have much of an economic impact because, while the numbers in retirement were rising, the numbers in work, thanks to the baby boomers, were rising even faster.
The tables are now being turned.
As the boomers retire, there are fewer workers left to support a large dependant elderly population: the population pyramid is being inverted.
Workers can only produce so much, but there are now many more dependant mouths to feed.
This is a true issue of economic scarcity.
At the individual country level, markets can adjust.
A shortage of workers will push up real wages.
Potential retirees may, as a result, choose to delay their retirement.
Other workers may choose to work longer hours.
Perhaps policymakers will deliver more flexible labour markets by encouraging more part-time work, increasing the provision of crèches and by adopting a more explicit ‘hire and fire’ mentality (the risk to a company of hiring a worker is reduced if workers can more easily be fired, thereby increasing the demand for workers and, hence, lowering the structural rate of unemployment).
Workers in company pension schemes may find themselves
having to take on board greater pension risk as defined-benefit pension schemes are shut down.
In theory, capital-market reforms might boost investment returns and, hence, lift productivity.
(In practice, the law of unintended consequences can sometimes work rather too well.
Before the sub-prime crisis of 2007, it was generally believed that securitization was a source of stability in financial markets whereas, in the immediate aftermath of the crisis, securitization received a sizeable proportion of the blame.)
Yet the scope for domestic action is ultimately limited because, with an ageing population, domestic resources are limited.
Domestic policies can slice the cake up in different ways but cannot so easily provide a bigger cake, even if people do end up working for longer.
If countries want access to additional resources, they have to go global.
The security and well-being of the developed world’s elderly increasingly depends on the co-operation of workers from other parts of the world, in emerging markets and, increasingly, in some of the world’s poorest countries.
On UN projections, the population of working age in the developed world started to shrink between 2005 and 2010.
By 2030, the population of working age in the least developed countries will surpass that of the developed nations for the first time since records began.
The mechanisms to allow adjustment to this new demographic reality involve the cross-border movement of labour and capital.
First, the elderly can move to parts of the world where workers are more plentiful and, hence, living costs are lower.
That, though, is easier said than done.
Laws and customs vary and the elderly may want to spend time with their children rather than head off to a strange new land.
Second, capital in the developed world can move elsewhere to take advantage of the availability of more plentiful workers.
This, in effect, has been the model pursued by Japan and Germany, wealthy countries with ageing populations which, over the years, have run
persistent balance of payments current-account surpluses.
In other words, domestic savings are higher than domestic investment, implying that savings are being invested abroad.
But are these savings being invested on a demographic basis?
The evidence is not particularly convincing.
From 2005 through to 2008, the biggest recipients of German direct investment included the US, the UK, Italy, Spain, Austria, the Netherlands and Russia, nations not especially known for their youthful demographic disposition.
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There is, in fact, a good reason for squeamishness when it comes to investing in the emerging world.
It’s far more difficult for businesses to thrive.
While multinationals are increasingly willing to invest in China and India, as we saw in Chapter 3, it’s still heavy going.
According to
Doing Business 2009
, the US and the UK are ranked third and sixth in the list of favoured economies as places to get business done.
Japan is twelfth, Germany twenty-fifth, France thirty-first and Italy sixty-fifth.
While a handful of emerging economies rank well – Thailand is thirteenth, Saudi Arabia is sixteenth and Malaysia is twentieth – the emerging powerhouses score a lot less favourably.
China ranks eighty-third, with particular difficulties in business start-ups, employment and construction permits.
Russia, India and Brazil sit at positions 120, 122 and 125 respectively, held back by problems in starting up and closing down businesses and paying taxes.
In any case, investing abroad will not create doctors and nurses at home.
Outsourcing and off-shoring might help bring down the price of iPods and flat-screen televisions, but they’re unlikely to have so much impact on the provision of healthcare for the elderly and infirm.