Opinion: The malignancy of aging populations

By Neville Bennett The Greater Depression hastens structural change. The transfer of economic dominance from the West to the East is one example. Previous articles have also indicated the gap between the saving countries and the grossly indebted West. I now want to explore the hypothesis that the Crisis has exacerbated the ageing population problem. The aging time-bomb dwarfs the malevolent effects of the present crisis. A document from The Economist indicates that age-related spending will be nine or ten times greater than the cost of cleaning up the present crisis. The data comes from the IMF relating to 2050. Perhaps it may seem premature to write now about problems which mature in 2050. My point is not merely that we should try to mitigate the impact of the problem in 2050, but perhaps recognise that the problem is already gaining malignancy.

Japan Japan's Democratic Party is in the forefront of the challenges of a rapidly growing ageing population. Japan has run budget deficits for many years, partly for health and welfare reasons, but mostly to stimulate economic activity. It is now the most endebted major economy with a public debt equivalent to 170% of GDP. Like most of the OECD countries, Japan has a huge wave of retiring baby-boomers that require growing revenue to fund health, pensions and welfare. Borrowing to meet these commitments is becoming less of an option because Japan demographic problems are intense. The population peaked at 110 million a few years ago, and unless there are massive changes in the birthrate or immigration policy, their population will have halved to 55 million in 2050. By that time there will be one working age person to one retired-aged person. It is not difficult to add to the State's debt. There is no program of debt reduction, and as the population falls, the debt obligation of each survivor is increasing. Investors will be aware that the credit rating of existing debt must be under pressure as the Japanese economy has shown minimal growth for two decades. Japan is lucky because it has a huge pool of domestic savers who have been willing to accept very low interest rates on their investments. Certainly, minimal interest rates have been essential for the management of the debt. Even so the cost of debt service has become prohibitive and Japan will have to increase taxes to increase revenue. An increase it the rate of the Consumption Tax appears to be imperative. The crisis has exacerbated the deep-seated demographic problem by damaging the economy. State debt has increased to make up for falls in revenue, for additional payments to a record number of unemployed, and for a huge stimulus programme. Japan presents the strange spectacle of a rapidly growing debt mountain. The paradox is that notionally it will be discharged by future generations, but the reality is the future generations are unlikely to be born. The USA The second term of Ben Bernanke's chairmanship 2010-2014 will coincide with a massive wave of retiring baby boomers. It is a tsunami of a size which Kiwis will struggle to comprehend. There are 76 million Americans in this group, more than three times the combined present population of New Zealand and Australia, or more than the population of the UK. It is a generation that is assertive of its rights and determined to enjoy its social security and Medicare benefits. It will maintain political pressure on the administration for self-interested policies such as falling taxes while debt reduction will require more austerity. It must be remembered that the current economic crisis has dealt the greatest blows in their lifetime to wealth accumulation. Their housing assets will have fallen by about one-third and their equities' investment, while recovering, it still about a third below its peak in 2007. Moreover, the crisis-induced low interest rate scenario has made it very difficult to obtain a livable income form safe investments in cash and high credit rated fixed interest. Both Federal and State governments are going to be pushed to provide them as they already run budget deficits, and future projections are extremely depressing because of the patent conflict between debt servicing and soaring costs for health and retirement. The US Budget The US National Debt will nearly double in the next ten years. Perhaps we are all now desensitivized to the idea that Government debt can double in a decade, but our forefathers would be appalled. Previous generations accepted more debt to pay for wars or infrastructure: not bailing out unpopular financial institutions and a vague series of unrelated "stimulus" packages. The national debt had been about US$11 trillion but Obama's budget plans involve increasing that to around about $20 trillion because it projects a series of massive budget deficits. Health care alone will cost an additional $1 trillion. The budget deficit for 2009 is $1.58 tln, and a further $1.5 tln in 2010. The deficits will be at least $500 billion per annum every year through to 2019. The lack of sensitivity to these numbers is obvious when the US last year fearfully incurred a deficit of $459 bln. when many institutions needed bailing out, and the government was waging war in Iraq and Afghanistan. The budget deficit will be around 5.1% of GDP each year, which breaches all rules of prudence. Usually, economists say that a deficit should not exceed 3%. I recall the EU imposed this limit as prudential. The budget deficit issue is linked to the problem of the dollar and interest rates. There is a question mark, especially among crucial foreign investors, about underwriting the risk of investing in US debt. Rising interest rates will be necessary to compensate for the risk. Back to ageing An ageing population's problems have been enhanced by the Crisis: slow or negative growth, falling productivity, rising public spending on health and pensions, and labour shortages. The UN's biennial forecast projects a huge median age rise from 29 now to 38 by 2050. By that time 22% of the global population will be over 60 years old. The projection is firm because these people are already born. In the rich world, one in three people will be a pensioner (if pensions still exist in their present form which is questionable). ____________ * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. neville@bennetteconomics.com www.bennetteconomics.com