Transcript The Economic and Geopolitical Impacts of Global Aging

The Economic and
Geopolitical Impacts of
Global Aging
By Paul S. Hewitt
Executive Director
Alliance for Generational Equity / Americans for Generational Equity
For
The Global Strategy Institute, CSIS
March 19, 2007
[email protected]
www.age-usa.org
Global Aging is a global challenge requiring
global solutions.
 The developed world’s aging will take place in an
increasingly interdependent global economy.
 The economic, financial, and political effects of aging
and depopulation in our home countries will be
transmitted as shocks to other developed economies as
well as to the developing world.
 How developed countries manage their respective aging
challenges could have geopolitical consequences that
outweigh their domestic impacts.
The world is converging toward a median age in
the mid-40s.
Median age in selected years, 2000-2050
U.S
LDCs
World
Europe *
Japan
China
India
2000
35.3
18.3
26.8
37.6
41.3
30.1
23.4
2025
38.5
21.8
32.8
44.4
50.0
39.5
28.5
2050
39.1
27.0
37.8
47.1
52.3
44.8
38.7
Increase,
2000-2050
3.8
8.7
11.0
9.5
11.0
14.7
15.3
Source: United Nations (2004); Census Bureau for U.S. (2004)
* Includes all Europe plus Asian Russia (47 countries)
Demography and destiny, 2000-2050.
 The least developed countries will remain very young—and
probably very poor—for at least the next generation.
 The emerging markets will age the most rapidly. However,
declining and/or low total dependency over the next 30
years will provide an important economic boost.
 The United States will see little increase in its median age,
thanks to projected population growth of 47%.* Even so,
old age dependency will rise significantly, with attendant
economic and financial strains.
 Decades of below replacement birthrates have set in
motion a process of depopulation in Europe and parts of
Asia, which will dramatically slow GDP growth amid
steeply rising old age dependency.
* U.S. Census Bureau (2004)
Rising life expectancy plays a major
role in global aging
80
Life Expectancy at Birth
75
68
70
71
70
73
72
71
74
74
75
76
63
63
60
62
66
65
60
59
57
55
52
55
48
50
More developed regions
45
45
Less developed regions
41
Source: UN (2004)
00
5
20
00
-2
00
0
19
95
-2
99
5
19
90
-1
99
0
19
85
-1
98
5
19
80
-1
98
0
19
75
-1
97
5
19
70
-1
97
0
19
65
-1
96
5
19
60
-1
96
0
19
55
-1
19
50
-1
95
5
40
Lifetime Births Per Woman
But falling fertility is more important
8
7
6
5
4
3
2
1
0
5
0
5
0
5
0
5
0
5
0
5
5
6
6
7
7
8
8
9
9
0
0
1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -2 0 -2 0
0
5
0
5
0
5
0
5
0
5
0
5
5
6
6
7
7
8
8
9
9
0
19
19
19
19
19
19
19
19
19
19
20
More developed regions
Less developed regions, excluding LDCs
Source: UN (2004)
Least developed countries
Every G-7 country has seen fertility fall below the
“replacement rate” of 2.1 children per woman—
setting motion an era of population decline.
4
3.5
3.61
3.31
2.85
2.81
3
2.5
2.49
2.5
2.04
2
2.02
1.66
1.51
1.5
1.87
1.33
1.32
1.28
1
0.5
UN (2004)
ly
Ita
y
G
er
m
an
ce
Fr
an
pa
n
Ja
ad
a
C
an
K
d
U
ni
te
U
ni
te
d
S
in
g
ta
te
s
do
m
0
1960-1965
2000-2005
China’s baby boom: What happened when
china’s child mortality suddenly Fell
(Deaths Per 1,000 Births)
Lifetime Births Per Woman
7.0
250
Median Age
6.0
5.0
4.0
200
baby
boom
generation
birthrate
3.0
2.0
child mortality
1.0
0.0
1950
23.9
1970
19.7
100
1990
25.3
50
2010
34.9
150
0
1950- 1955- 1960- 1965- 1970- 1975- 1980- 1985- 1990- 19951955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Total Fertility Rate (Left Scale)
Infant Mortality Rate (Right Scale)
The UN projects that 29 countries will
begin depopulating before 2025
Armenia
Austria
Belarus
Belgium
Bosnia and Herzegovina
Bulgaria
Cuba
Croatia
Czech Republic
Estonia
Source: United Nations (2004)
Georgia
Germany
Greece
Hungary
Italy
Japan
Latvia
Lesotho
Lithuania
Poland
Romania
Russian Federation
Serbia and Montenegro
Slovakia
Slovenia
Spain
Swaziland
Sweden
Ukraine
South Korea’s Demographic Pyramid—1990
Median Age = 26.9
In 1950, there were 17 children under 20 for every Korean over 80
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—1995
Median Age = 29.4
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2000
Median Age = 32.0
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2005
Median Age = 35.0
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2010
Median Age = 38.0
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2015
Median Age = 40.8
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2020
Median Age = 43.4
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2025
Median Age = 45.8
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2030
Median Age = 48.1
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2035
Median Age = 50.2
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2040
Median Age = 51.9
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2045
Median Age = 53.4
Source: Bureau of Census, UN Population Div. (2007)
South Korea’s Demographic Pyramid—2050
Median Age = 54.9
In 2050, there will be 1.4 Koreans over 80 for every child under 20
Source: Bureau of Census, UN Population Div. (2007)
Global aging poses five interconnected sets of risks for
today’s developed countries
 Economic risk: graying and shrinking workforce,
stagnant or shrinking aggregate demand
 Budget risk: rising retirement costs, flagging tax
revenues
 Financial risk: falling savings rates, rising public
debt = possible global “capital crunch”
 Social risk: flagging dynamism and unwillingness to
accept change, rising intergenerational tension as all
wage growth is consumed by higher taxes
 Geopolitical risk: tight foreign affairs budgets, rising
potential to export economic and financial crisis to
volatile youthful and middle aged countries
Risks to Growth
 Stagnant or declining labor forces
 Declining rates of savings and investment
 Falling demand, overcapacity, and declining profits
 Rising tax burdens
Working-age populations in much of the EU
and Japan will decline—in some cases,
dramatically.
40%
33%
30%
21%
20%
17%
7%
10%
-50%
Ja
pa
n
es
on
co
un
tri
an
y
ly
G
er
m
Ki
ng
do
m
EU
-1
5
Ita
-25%
Ac
ce
ss
i
-40%
te
d
-30%
Un
i
Un
i
te
d
-20%
Ca
na
da
St
-10%
at
es
0%
-26%
-32%
-39%
Slowing labor force growth will mean slower
GDP growth
SSA Actuary projections
19
60
19 196
70 9
19 197
80 9
19 198
90 9
20 199
00 9
20 200
10 9
20 201
20 9
20 202
30 9
20 203
40 9
20 204
50 9
20 205
60 9
20 206
70 9
-2
07
9
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Grow th in Social Security Covered Labor Force
Real GDP Grow th
Source: SSA Office of the Actuary (2004)
Aging recessions: when the labor force declines faster
than productivity grows
3%
Italy 1980-2050
2%
1%
Aging recession
0%
1980-85 1990-95 2000-05 2010-15 2020-25 2030-35 2040-45
-1%
-2%
*Assumes 1.0%annual productivity growth
Source: OECD (2001) and CSIS (2002)
Budgetary Risk
 Declining support ratio of workers to retirees
 Rising cost of pay-as-you-go retirement and health
benefits even as revenue base stagnates or declines
 Large tax hikes, large benefit cuts, or exploding public
debt
Percent of GDP
If interest rates to rise in response to large and
sustained budget deficits—as most economists believe
would happen—interest on the debt could become the
primary driver of deficits by the late-2020s
25
20
CBO projections
Hewitt projection
15
10
5
0
2005
2010
2015
2020
2025
2030
2035
2040
2045
Higher Spending/Lower Revenues
Intermediate Spending/Lower Revenues
Effects of higher interest rates on higher spending scenario
Source: CBO (2005), author
2050
14,000
12,000
10,000
8,000
30.0%
25.0%
20.0%
15.0%
6,000
4,000
2,000
0
10.0%
5.0%
NHE
GDP
Source: CMS, author’s calculations
NHE as % of GDP
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
0.0%
Percent of GDP
Official Projections Point to National Health
Expenditures of 24 Percent of GDP in 2030
1960
Billions of Dollars
America’s Health Cost Explosion
Financial risk
 Lower savings rates
 Less financial risk taking?
 Unsustainable government borrowing and possible debt
crises throughout the developed world
 Possible weakness in stock markets
Saving and productivity growth

McKinsey Global: a $31 trillion “global capital
shortfall” by 2024 due to declining in “prime
saver” populations



Developed world growth in household financial wealth to
slow from 4.5% a year historically to 1.3 %.
Japanese household financial wealth to decline by .2%
annually.
Possible Consequences:



Slower economic growth as interest rates rise and
productivity flags
Rising debt service costs for highly
indebted countries
Stock market underperformance
“…a collective slide down the rating scale would
commence early next decade.”
Standard & Poors
800%
G-7 Public Debt Burdens as a Percentage of GDP
700%
2000
600%
2010
500%
2020
400%
2030
300%
2040
200%
2050
100%
Ja
pa
n
an
y
G
er
m
Fr
an
ce
.
U.
S
Ca
na
da
ly
Ita
UK
0%
Source: Standard & Poors, “The Western World Past it’s Prime—Sovereign Rating Perspectives in
the Ageing Context” (March 2004)
Social risk
 Will aged populations be less entrepreneurial?
 Will slow or negative income growth undermine national
morale, social tolerance?
 Will aged electorates create tension by over-taxing workers?
 Will aged societies be unwilling, or unable, to play a
constructive role in foreign policy?
Younger populations tend to be more
entrepreneurial.
44
Japan
Italy
Germany
Finland
Belgium Sweden
Greece
Median Age in 2005
42
Croatia . Slovenia Denmark
France
Spain
Hungary
Canada
Netherlands
UK
Portugal
Norway
40
38
Australia
36
New Zealand
USA
Poland
Iceland
34
Ireland
32
30
0
2
4
6
8
10
12
14
Index of Total Entrepreneurship Activity
Source: London Business School and Babson College, “2004 Global Entrepreneurship Report”; UN (2002)
16
Under CBO’s “intermediate” scenario, old age
entitlements will rise from 45 percent of noninterest spending in 2005 to 68 percent by
2030 and 75 percent in 2050.
100%
80%
60%
40%
20%
0%
2005
Source: CBO (2005)
2010
2020
Big 3 Entitlements
2030
2040
Everything Else
2050
Defense
Stagnant non-health consumption: By the 2020s,
increases in personal health expenditures plus taxes
to pay for U.S. public pensions and health benefits
could consume 96 percent of personal income growth
Claims on per capita personal income growth, 1960-2030
$700
$600
$500
$400
$300
$200
$100
$0
$467
$618
$482
$534
$486
$555
$574
$145
$375
$350
$472
$357
$160
$541
$326
$92
$132
$177
$146
19601970
19701980
19801990
19902000
20002010
$410
20102020
20202030
Avg. Annual Increase in Personal Income
Avg. Annual Increase in Taxes and Personal Health Outlays
Source: CMS, SSA, CBO and author’s calculations
$33
When retirement saving is included, worker
consumption levels begin to fall in 2014
Average disposable income in 2007 dollars per hour worked
$25
$20
$15
$10
Age 65 retiree
Age 55 retiree
$5
$0
2005
2010
Source: Schieber (2007)
2015
2020
2025
2030
“Not just in America but in the other Western
democracies, too, history is replete with
instances in which a turn away from openness
and tolerance, often accompanied by a
weakening of democratic institutions, has
followed economic stagnation.”
Benjamin Friedman, Harvard University
“The Moral Consequences of Economic Growth” (2005)
Geopolitical risk
 Widening global generation gap between richest
and poorest nations
 Uncertainties in the emerging markets
 Waves of illegal immigration
 Avoiding upheaval
Developed world dependency ratios
120
100
80
60
40
20
0
120
50
20
40
20
30
20
20
20
10
North America
Japan
Developing world dependency ratios
100
Most population growth will
be in the working ages
80
60
40
20
Mexico
China
Iran
20
50
20
40
20
30
20
20
20
10
20
00
19
90
19
80
19
70
19
60
0
19
50
Total Dependency Ratio
Europe
20
00
20
90
19
80
19
70
19
60
Most population growth will
be in the 65+ age groups
19
19
50
Total Dependency Ratio
Ratio of populations aged 0-14 and 65+ to population aged 15-64
Third World Labor Glut
During the next 25 years, working age populations will
shrink by 31 million in the more developed regions and
expand by 1.2 billion in the less developed regions
Under 20
20-64
Over 65
Source: UN (2004)
Less
Developed
Regions
More
Developed
Regions
=======
=======
122,873
-26,121
1,176,128
-31,203
150,838
51,876
In most regions, the most conflict-ridden
nations are also the youngest…
Central America
Guatemala
Nicaragua *
18.1
19.7
Greater Arabia
Palestine
Iraq
17.1
19.1
16.7
19.3
20.0
18.4
19.1
Caribbean
Haiti
Dominican Republic **
20.0
23.3
South-central Asia
Afghanistan
Tajikistan
Pakistan
South America
Bolivia
Paraguay
20.8
20.8
Southeast Asia
Timor-Leste
Laos
Europe
Albania
Moldova
20.2
26.6
Sub-Saharan Africa
18.0
38% of Sub-Saharan countries
have experienced Type 1 or Type
2 conflicts since 1990.
* 15.9 in 1975
** 16.2 in 1965
Some 20th century conflicts were started by middleaged countries with surging unemployment
60
Median age: 15
Russian revolution, 1915
Stalin terror of 1935
Median age: 34
Serbia, 1995
Median Age
50
40
30
Median age: 17
India-Pakistan war, 1972
Iranian revolution, 1978
Iran-Iraq War, 1980
Median age: 19
Chinese cultural revolution, 1968
Koreas (North & South), 1950
Median age: 35
Germany, 1935
20
Median Age 20
Germany, 1914
Median age: 18
10
Vietnam, 1970
Median Age: 22
France, 1914
Median age: 16 Iraq, 2000
Japan, 1940
Afghanistan, 1995-2010
0
Arab Palestine, 2000
Fastest aging Countries, 2005-2050:
will middle-aging foster political stability?
2005
2050
Change
Guyana
25.7
49.6
23.9
Tonga
21.8
44.7
22.9
Saint Vincent and the Grenadines
24.6
44.8
20.2
Samoa
19.4
39.5
20.1
Republic of Korea
35.1
53.9
18.8
Suriname
25.1
43.3
18.2
25
43
18
China, Macao Special Administrative Region
36.6
54.4
17.8
Iran (Islamic Republic of)
23.4
40.6
17.2
Nicaragua
19.7
36.8
17.1
Mongolia
23.7
40.6
16.9
33
49.6
16.6
Martinique
36.4
53
16.6
Tunisia
26.8
43.3
16.5
Viet Nam
24.9
41.3
16.4
Syrian Arab Republic
20.6
37
16.4
Uzbekistan
22.6
38.9
16.3
Slovakia
35.6
51.8
16.2
Tajikistan
19.3
35.4
16.1
Belize
21.2
37.3
16.1
Mexico
Republic of Moldova
Source: UN World Population Prospects (2005 Revision)
Promoting social peace in the
developing world
 Unemployment: the founding impulse of
the modern welfare state
 Emerging markets experiencing
“demographic window” of falling
dependency characterized by near-term
unemployment and long-term aging.
They are relying on globalizataion to
maintain social peace.
 Middle-aged societies are more
peaceful—except under conditions of
severe economic distress.
Policy considerations.

International “peer pressure” needed to keep debt
ridden “rich” countries from plunging world into
financial upheaval

Globalization and productivity – economic
integration with third world is the best way to
assure growth in aging developed countries

World stock exchanges can help younger countries
buy financial assets from aging developed world

Structure and design of welfare states (in both the
developed and developing worlds) needs rethinking

Early retirement is a 20th century idea borne of
labor surplus