WORLD: The red ink of a greyer future

. LONDON, England / The Financial Times / Comment / Analysis / April 1, 2009 The next decade was always going to be difficult. As retirement beckons for the middle-aged “bulge” in many national populations, governments have been facing an expensive demographic transformation. Now, the economic crisis makes the outlook only worse. Once the recession passes, countries will need to work on closing their gaping fiscal deficits without triggering further collapses in output. They will also need to service bloated national debts. The International Monetary Fund estimates that among the Group of 20 nations whose leaders meet in London this week, the industrialised members will have increased their national debts by an average equivalent to nearly 25 per cent of gross domestic product between 2007 and 2014. That is a heavy burden. But, to 2050, the cost of this crisis will be no more than 5 per cent of the financial impact they face from the ageing of their citizenry. As the IMF says, “in spite of the large fiscal costs of the crisis, the major threat to long-term fiscal solvency is still represented, at least in advanced countries, by unfavourable demographic trends”. Slideshow: demographics and the crisis Unfavourable from a treasury’s point of view, that is. Increased human longevity is otherwise hardly a bad thing. Fewer people are dying young, in industrial accidents or from disease. If they make it to old age, retirees live ever longer on their pensions. Birth rates are often low, however – leaving fewer children to look after parents in their dotage and a smaller workforce to pay the taxes that also support them. Officials in many countries are prone to talking about the problem in terms that hide its immediacy: the impact of ageing on the world in four decades’ time is more commonly discussed than the weight of the problem in just 10 years. But demographic phenomena can have a significant impact on a society within a short time-span. Across much of the developed world, the end of the second world war was greeted by a jump in the number of births – the “baby boom”. That increase, a working lifetime ago, is suddenly being felt ever more acutely now, as workers drop out of the labour market in large numbers and start to claim pensions. In the UK, for example, the government expects the extra annual costs imposed by ageing to reach 1.6 per cent of GDP by 2017-18. That is an increase in spending equivalent to the cost of servicing a rise in the national debt burden of about 37 per cent of GDP, according to FT calculations. That outstrips the 29 percentage point rise that the financial crisis and economic downturn are expected to inflict. France, Germany and the US are among other countries set to see a sudden deterioration in demographic costs in the next decade after a long period of relative placidity. According to the United Nations , the number of working-age adults for each person aged over 65 in advanced economies will decrease in the next 10 years by as much as they have in the previous 30 years. The number of workers per pension claimant will fall from 4.3 to 3.4 in the next decade alone. Some countries are already much further down this road. It will take another 20 years of greying for Europe to become as elderly as Japan’s population is today. The rest of east Asia is in a race to get rich before its people get too old to work. South Korea is currently well placed, with six citizens of working age for every pensioner. Yet thanks to a collapse in its birth rate, it will be one of the greyest countries on earth by 2050. For societies, even if not always for individuals, it is possible to offset and mitigate many of the problems of ageing. Employment law is changing in order to keep people in work for longer. Nevertheless, the latest explosion in public debt – difficult enough on its own – is exacerbating the impact of an ageing that was always going to be expensive. Together, they promise to make the next decade rather tough for taxpayers. View FT comment on Demographics and the crisis Copyright The Financial Times Limited 2009