It’s The Demographics – Stupid!
As Clinton advisor James Carville said in the 1992 election: “It’s the economy, stupid!” Well, the same obvious point about demographics applies to the world economy but many seem to be ignoring it.
The world population reached 7 billion in 2011 but this fact has quite different impacts depending on where you live. Almost all of this growth (97%!) will occur outside of North America and Europe! In developed countries the ratio of working adults that support the elderly continues to decline sharply due to lower birth rates and longevity. Worldwide, the % of the global population now over age 65 is 5%. In 2050 it is projected to be 16%.
This raises critical issues involving taxes, the design and scope of entitlement programs, health care, and the shifting of consumer demand to elderly needs.
Hypothesis: Future growth and prosperity hinges on the key ratio of working adults to retirees. The closer this ratio to 1:1, the closer you approach economic Armageddon if you do not address the serious public policy issues of entitlement programs and income adequacy for retirees.
According to the SSA, in 1955, there were 8.6 US workers supporting each retiree. By 1975, that ratio had declined to 3.2 workers per beneficiary and has remained between 3.2 and 3.4 for the last 30 years. However, the ratio began declining again in 2008 when baby boomers started retiring (it’s now about 3.1), and will decrease at an accelerating rate until it reaches 2.1 workers per beneficiary in 2031! Thereafter, it will decline a bit more slowly, arriving in 2080 at only 1.8 workers per beneficiary. Thus, the U.S. proportion of GDP spent on just Social Security and Medicare is projected to rise from 8.4% today to 14.5% by 2050 if no changes are made in these entitlement programs. As bad as this sounds, we still will we be ahead of Japan, France, the U.K., and Russia who will have even smaller ratios. In contrast, Pakistan and Bangladesh will have closer to 5 workers per retiree in 2050.
Today’s US workers also bear a higher FICA tax burden (contribute at a much higher rate on much higher incomes) than workers in 1950. Some argue that the shrinking worker ratio can be offset by fewer workers continuing historical productivity gains. But haven’t many of these “gains” led to fewer, good American jobs and contributed to this cycle?
Different problems exist in many developing countries with higher birthrates and a younger median age. Developing countries with an educated workforce and political stability have become an outsourcing destination while those without either, primarily Africa, remain mired in poverty and tribal/sectarian warfare. Growing populations in lagging developing nations also pose an immigration issue as individuals seek better lives elsewhere. This immigration influx, primarily Hispanic to this country, is one factor keeping the U.S. ratio slightly higher than its European and Asian counterparts.
Succinctly stated by Bill Butz of the Population Reference Bureau, a nonprofit organization: “On the one hand, chronically low birth rates in developed countries are beginning to challenge the health and financial security of their elderly. On the other, the developing countries are adding over 80 million to the population every year and the poorest of those countries are adding 20 million, exacerbating poverty and threatening the environment.”
If current trends continue, by 2050 Ethiopia and the Congo will replace Russia and Japan in the “top ten” most populous nations. For example, Ethiopia and Germany are now about the same size with 85 million people but not for long because the current birth rate in Germany is 1.3 vs. 5.4 in Ethiopia. Germany will shrink from 82 million to 72 million while Ethiopia will grow from 85 million to 174 million. Another example: Canada will grow from 31 million to just 42 million while Uganda will grow from 34 million to 96 million people in the same timeframe.
Many countries in Europe, as well as the Asian nations of Japan and S. Korea, have actually begun to shrink in population. In Japan, the fertility rate is 1.4 and the ratio of working age people (15 to 64) to those ages 65 and older is projected to be 1:1 by 2050. Germany, Italy, and France will be close behind at about 2:1. This is not a sustainable financial model. In S. Korea, a recent article described how teenagers were being trained to deal with the mounting number of Alzheimer cases.
A NY Times article described how young Japanese are seeking opportunity elsewhere for many reasons. Societal norms favoring older persons means fewer jobs for graduates accompanied by dedication of increased resources to the elderly. In other words, the country that gave us Toyota, Honda, and Panasonic is losing potential entrepreneurs abroad.
Even China’s ascendancy may be short-lived because of its one child policy. While this policy is currently aiding its rapid transition from agrarian to industrial to consumer economy, it will eventually lead to a shrinking worker/retiree ratio and the attendant problems described above.
See 4/7/11 article in NYTimes “China One Child Policy May Be Hard to Reverse” http://www.nytimes.com/2011/04/07/world/asia/07population.html?scp=3&sq=china%201%20child%20policy&st=cse
In connection with overall population, India is predicted to surpass China by 2050 with 1.7 billion vs. 1.4 billion people.