An Ageing Population and the Economy

A couple of related pieces today that both underline a theme that has been commonplace at Demography is Destiny over the past few months.  If you have to ask what that theme is then you obviously have not been reading with the necessary assiduity and I am not going to help you.

Oh ok, fine, but just this once.  That theme is this: that many countries in the world (and beyond just Western Europe) are in trouble because of their ageing populations.  Far from worrying about an increasing population, many countries in the world are faced with a declining number of workers and a growing number of retirees.  This means that there is less money coming in through taxes and more money being spent on retirement funds and superannuation. 
As I said, two further illustrations of this theme are at hand.  The first illustration comes from Canada, which, although it can be proud of its rugby team’s commitment in the World Cup, has been warned about its “shaky financial ground”.  The Office of the Parliamentary Budget Officer in Canada has just released a report that has announced that current financial systems at both the federal and provincial level are not sustainable “due to an ageing population and current economic trends”.  For the 2011-2012 budget year, the consolidated fiscal gap for all levels of Government sits at 2.7% of GDP (or CAD46 billion).  This gap is likely to increase as:

“A greying population will put downward pressure on revenues as growth in the tax base slows, while spending demands will mount as more retirees tap seniors' benefits.  Even if the economy fully recovers over the next few years, the additional spending on health care and elderly benefits is expected to erode public finances, taking governments from surpluses over the medium term to "sizable deficits" over the long term…” The Office recommends either increasing taxes or chopping spending – two fairly unpalatable alternatives. For the long term, they could suggest a more popular pastime to help bridge the gap: have more babies!
The second illustration is literally an illustration – one of those great little graphs that the Economist regularly produces.  This graph is taken from the Asian Development Bank’s Asian Development Outlook and it calculates the economic impact of demographics upon certain Asian economies as the annual percentage change on GDP per capita:

“Demographics…are a noteworthy determinant of economic potential. Youngsters and retirees do not work, which harms growth directly. And because these dependants make a claim on a country’s income without adding to it, they also depress savings, thereby slowing the accumulation of capital and the growth of productivity.” The graph shows this demographic impact over the last ten years which was very positive for Vietnam at 1.5%, around 1% for Malaysia, and between 0.5% and 1% for Indonesia, the Philippines, India, Thailand and China.  It then sets out the forecast for the next two decades.  The interesting figure are those for 2021-2030, when demographics are expected to have a negative impact on the GDP per capita per annum of Singapore (-2.5%), Hong Kong (-2.2%), Taiwan (-1.5%), South Korea (-1.5%), Thailand (-0.8%), China (-0.75%) and Vietnam (-0.2%).   For that decade, only Malaysia, Indonesia, the Philippines and India are expected to be benefiting still from a demographic dividend.


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