Transcript Edward Hugh Tel Aviv, December 2012

The Demographic Revolution – A Threat to Our Pensions?
Edward Hugh
Tel Aviv, December 2012
The real “debt cliff” is
looming over the next
10 to 20 years.
The key factors will
be:
• Pace of Reform
• Rates of Economic
Growth
• Rates of Interest
“Come gather 'round
people Wherever you
roam And admit that the
waters Around you have
grown And accept it that
soon You'll be drenched
to the bone”
“No other force is likely to shape the future of national
economic health, public finances, and policymaking as
the irreversible rate at which the world's population is
aging” - Standard & Poor’s 2010
Without Reform
“For all sovereigns in the study, burgeoning deficit ratios are expected to push the
median net debt ratio to around 245% of GDP in 2050, from below 40% of GDP
currently, as the snowball effect of rising interest payments accelerates the negative
budgetary impact. During the same period, the median debt for advanced
sovereigns under the "no-policy change" scenario grows almost five-fold to more
than 300% of GDP”.
S&P’s, 2010
Obviously there will be
reform,But how much and
how quickly?
At present voters don’t
seem to be too keen.
“If your time to you Is
worth savin‘ Then you
better start swimmin‘ Or
you'll sink like a stone
…….For the times they are
a changin‘”.
The Growth Outlook
There is an accumulating volume of
evidence that as societies age they
lose growth momentum. Italy and
Japan are two of the oldest societies
on earth. Portugal is a typical aging
European society.
“Come mothers and fathers
Throughout the land And don't
criticize What you can't understand
Your sons and your daughters Are
beyond your command Your old
road is Rapidly agin “
Structural reforms can help offset
some of this, but growth rates look
set to fall towards zero and then
beyond. Some ecologists have
argued for a “zero growth” society.
Will they like the new world when
they get to really see it?
Interest Rates
Some Countries Are Improving Their
Credit Rating – Mainly Emerging
Markets
While Others – Largely
Developed Economies – See
Their’s Steadily Worsening
“Come gather round people, throughout the land, and don’t criticise what you can’t
understand, the times they are a’changin”.
What Demographic Revolution?
Almost all populations globally are aging.
This is a result of both declining fertility
and rising life expectancy. In the
developed countries the situation
becomes acute since fertility falls (often)
well blow replacement and stays there for
decades.
Not All Developed Countries Are Aging At An Equal Rate
Some European
societies are getting
older much more
rapidly than others.
Most emerging market and
less developed economy
countries are also aging, but
they are still quite young.
EMs are normally “older”
than LDCs.
As far as we are able to understand the issue at this point,
population ageing will have major economic impacts and these can
be categorised under four main headings:
i) ageing will affect the size of the working age population, and with this the
level of trend economic growth in one country after another
ii) ageing will affect patterns of national saving and borrowing, and with these
the directions and magnitudes of global capital flows
iii) through the saving and borrowing path the process can influence values of
key assets like housing and equities
iv) through changes in the dependency ratio, ageing will influence pressure on
global sovereign debt, producing significant changes in ranking as between
developed and emerging economies.
Importance Of The Prime Age Groups
There are basically three important age groups – prime borrowers, primesavers, and
prime age workers. The proportions between these three groups in any given society
seem key pieces of economic data, yet few studies even consider them.
Estimates of the exact age extension of the different groups vary, but 25-40 would be a
good rule of thumb measure of the borrowing range, 40 to 55 for the peak savers, and
35 to 50 for the prime age workers.
Beyond this, the question is an empirical one of measuring and testing to determine
more precise boundaries and frontiers.
For every country the proportion of each of these key groups peaks at a given moment
in time. Where these actual age brackets lie, and the extent to which they may overlap,
is still a subject of some controversy,
One of the key points to grasp, is that the proportion the population which is to be
found in one of the ‘prime’ age groups at a given moment in time, is absolutely critical,
and much more important for understanding the processes at work than the mere size
of the working age population.
Non Linear Aspects – The Spanish Case
Spain is
suffering from a
clear case of
“self reinforcing
problem” illness
Unemployment rises and
rieses since the economy
is “broken”. House prices
fall, and the number of
bad loans rise.
With growing
numbers of
pensions, and
ever fewer
contributors the
pension system
becomes
unsustainable.
Credit is scarce
as there is little
solvent
demand, and
young
educated
people leave.
What Will The World Look Like After Japan Hits The Wall?
The line it is drawn The curse it is cast The slow one
now Will later be fast As the present now Will later be
past The order is Rapidly fadin‘ And the first one now
Will later be last For the times they are a-changin'.