08 The GREY Dawn

This article was publish over 10 years ago, but it still has the same value.  Both Europe and the United States has an aging population which will serious affects our economy and retirement systems.

The GREY Dawn

How a global aging crisis could engulf the world economy and threaten democracy itself?  by Peter G. Peterson

A little-understood global hazard –  the greying of the developed world’s population – may actually do more to reshape our collective future than deadly superviruses, extreme climate change or the proliferation of nuclear, biological and chemical weapons.

Over the next several decades, countries in the developed world will experience an unprecedented growth in the number of their elderly and an unprecedented decline in the number of their youth.

The timing and magnitude of this demographic transformation have already been determined. Next century’s elderly have already been born and can be counted – and their cost to retirement benefit systems can be projected.

• It is time to take an unflinching look at the shape of things to come The Floridization of the developed world. Been to Florida lately? You may not have realizedit, but the vast concentration of seniors there – nearly 19 percent of the population – represents humanity’s future. Today’s Florida is a demographic benchmark that every developed nation will soon pass. Italy will hit the mark as early as 2003, followed by Japan in 2005 ad Germany in 2006. Britain will pass present-day Florida around 2016; the United States in 2021 and Canada in 2023.

• Societies much older than we have ever known

Global life expectancy has grown more in the last 50 years than over the previous 5,000. Until the Industrial Revolution, people age 65 and over never amounted to more than two percent or three percent of the population. In today’s developed world, they amount to 14 percent . By the year 2030, they will reach 25 percent and be closing in on the 30 percent in some countries.

• An Unprecedented economic burden on working-age people

Early in the next century, working-age populations in most developed countries will shrink. Today, the ratio of working tax-payers to non-working pensioners in the developed world is around 3:1. By 2030, absent reform, this ratio will fall to 1.5:1. In some countries such as Germany and Italy, it will drop to 1:1 or even lower.

…Miraculous Triumph…

The longevity revolution represents a miraculous triumph of modern medicine and extra years of life will surely be treasured by the elderly and their families. But pension plans and other retirement-benefit programs were not designed to provide those extra years of payouts.

• The aging of the aged: the number of  “old old” will grow much faster than the number of “young old”.

The United Nations projects that by 2050, the number of people age 64 to 84 worldwide will grow from 400 million to 1.3 billion ( a threefold increase). The number of people age 85 and older will grow from 26 million to 175 million ( a sixfold increase).  The number age 100 and over, will jump from 135,000 to 2.2 million ( a sixteenfold increase).

The “old old” consume far more health care than the “young old” – about two to three times as much.

For nursing-home care, the ratio is roughly 20:1. Yet little of this cost is figured in the official projections of future public expenditures.

Falling birthrates will intensify the global aging trend. As lifespans increase, fewer babies are being born. As recently as the 1960s, the worldwide total fertility rate ( that is, the average number of lifetime births per woman) stood at about 5.0, well within the historical range.

Then came a behavioral revolution, driven by growing affluence, urbanization, feminism, rising female participation in the workforce, new birth-control technologies and legalized abortion. The result: an unprecedented and unexpected decline in the global fertility rate to about 2.7 – a drop fast approaching the replacement rate of 2.1 (the rate required merely to maintain a constant population).

• A shrinking population in an aging developed world

Unless their fertility rates rebound, the populations of western Europe and Japan will shrink to about one-half of their current size before the end of the next century.

In 1950, seven of the most populous nations were in the developed world: the United States, Russia, Japan, Germany, France, Italy and the United Kingdom.

The United Nations predicts that by 2050, only the United States will remain on that list. Nigeria, Pakistan, Ethiopia, Congo, Mexico and the Philippines will replace the others.

• From worker shortage to rising immigration pressure

Perhaps the most predictable consequence will be the rising demand for immigrant workers in the older and wealthier societies facing labour shortages. Immigrants are typically young and tend to bring with them the family practices of their native culture – including higher fertility rates.

In many European countries, non-European foreigners already make up roughly 10 percent of the population. This includes 10 to 13 million Muslims, nearly all of whom are working-age or younger. In Germany, foreigners will make up 30 percent of the total population  by 2030, and more than half the population of of major cities such as Munich and Frankfurt.

Global aging and attendant labour shortages will therefore ensure that immigration remains a major issue in the developed countries for decades to come.   Culture wars could erupt over language and religion. Electorates could divide along   ethnic lines and émigré leaders could sway foreign policy.

Within 30 years, developed countries may have to spend  an extra 9 percent to 16 percent of gross domestic product simply to meet their old-age benefit promises. The unfunded liabilities for pensions (that is, benefits already earned by today’s workers for which nothing has been saved) are already almost $35 trillion.

Add in health care, and the total jumps to at least twice as much. At minimum, the global aging issue thus represents, to paraphrase the old quiz show, a $64 trillion question hanging over the developed world’s future.

To pay for promised benefits through increased taxation is unfeasible. Doing so would raise the total tax burden by an unthinkable 25 percent to 40 percent of every worker’s taxable wages – in countries where payroll tax rates sometimes already exceed 40 percent.

To finance the costs of these benefits by borrowing would be just as disastrous. Governments would run unprecedented deficits that would quickly consume the savings of the developed world.

And the $64 trillion estimate is probably low. It likely underestimates future growth in longevity and health-care costs and ignores the negative effects on the economy of more borrowing, higher interest rates, values, less saving nad lower rates of productivity and wage growth.

Failure to respond to the aging challenge wil destabilize the global economy, straining financial and political institutions around the world. As they age, some nations will do little to change course, while others may succeed in boosting their national savings rate, at least temporarily, through a combination of fiscal restraint and household thrift. Yet this, too, could result in a volatile dis-equilibrium in supply and demand for global capital.

A quarter century from now, will the divide between today’s “rich” and “poor” nations be better described as a divide between growth and decline, surplus and deficit, expansion and retreat, future and past?

By the mid-2020’s, will the contrast between North and South be better described as a contrast between young and old?

Countries where populations are still exploding rank high on any list of potential trouble spots, whereas the countries most likely to lose population are the staunchest friends of liberal democracy.

In many parts of the developing world, the total fertility rate remains very high (7.3 in the Gaza Strip versus 2.7 in Israel), most people are very young (49 percent under age 15 in Uganda), and the population is growing very rapidly (doubling every 26 years in Iran).

These areas also tend to be the poorest, most rapidly urbanizing, most institutionally unstable – and most likely to fall under the sway of rogue leadership. They are the same societies that spawned most of the military strongmen and terrorists who have bedeviled the United States and Europe in recent decades.

The Pentagon’s long-term planners predict that outbreaks of regional anarchy will occur more frequently early in the next century. To pinpoint when and where, they track what they call “youth bulges” in the world’s poorest urban centres.

Is demography destiny, after all? Is the rapidly aging developed world fated to decline? Must it cede leadership to younger and faster-growing societies?

For the answer to be “no”, the developed world must redefine that role around a new mission. How governments ultimately prepare for global aging will also depend on how global aging itself reshapes politics.

Already, some of the largest and most strident interest groups in the United States are those that claim to speak for senior citizens, such as the American Association of Retired persons, with its 33 million members, 1,700 paid employees, 17,000 trained volunteers, and an annual budget of $5.5 billion.

Senior power is rising in Europe, where it manifests itself less through independent senior organizations than in labour unions and political parties that formally adopt pro-retiree platforms. Could age-based political parties be the wave of the future?

Global aging could trigger a crisis that engulfs the world economy. this crisis may even threaten democracy itself. The grey dawn approaches.

We must establish new ways of thinking and new institutions to help us prepare for a much older world.

• Peter G. Peterson is chairman of the U.S Institute for International Economics, and chairman of the Council on Foreign Relations.