ONE OF the industries thriving since the launch of the European single currency is investment management, and the reason is often said to be the ticking of a demographic time bomb driving a switch to funded, private pensions.
Ageing populations across most of the industrialised world will, it is argued, put an intolerable burden on government budgets through increased pension and healthcare costs and a reduced tax base.
Continental Europe, along with Japan, faces the most severe problems of old-age dependency. Not only is the age structure of their populations greying faster, they also have generous pay-as- you-go state pension schemes whereby today's taxpayers fund today's pensions. The number of taxpayers is falling, while the number of pensioners is growing rapidly.
The basic problems are shown in the two charts. The ratio of retired to working-age population is known as the dependency ratio. It will rise sharply across the industrialised world between now and 2030.
In the UK, the number of 0-14 year olds is expected to fall from 19.3 per cent to 14.7 per cent, and of 15-64 year olds to drop from 65 to 61.8 per cent, of a population that is barely growing in total. The proportion of over-65s is likely to rise from 15.7 to 23.5 per cent of the total. In Italy, which has the lowest birthrate in Europe, the proportion of over-65s is likely to climb from 17.6 to 29.3 per cent of a declining population. The US and Ireland are the only two countries enjoying population growth, and they too will see a rising proportion of retired people as the baby boom ages.
The pressure this places on the public purse depends on the generosity of the pension schemes. The UK's inflation-linked (rather than earnings- linked) scheme means the bite state pension payments will take out of the economy is unlikely to rise very much. But in countries like Germany and Italy the pensions burden is far heavier to start with and poised to increase dramatically.
Most of the analysis of the problem has focused on the funding question, starting from the safe presumption that taxpayers will be unwilling to pay ever-higher contributions in order to finance a growing number of pensioners. One much-mooted solution has been a switch to funded pensions, either state or private. The idea is that the switch can somehow take advantage of the high return on equities.
However, one big catch is that moving to funded pensions solves tomorrow's problem, but people who are working now have to save for their own future pensions at the same time as continuing to pay for current pensioners out of their taxes. Politically, this proposal does not have anything going for it. What's more, according to an article on pension reform in the new issue of the journal Economic Policy, advocates of funded pension schemes ignore the fact that they are risky. Indeed, the world's stock markets could be poised to give this week a demonstration of the potential risk. If one generation of pensioners happened to have suffered a poor return on their investments, a government would come under pressure to step in anyway, so the burden on the public purse would not have been entirely removed.
"The question of funding is a complete red herring," said Kevin Gardiner, an economist at Morgan Stanley. "Pensioners are always paid out of an economy's current output, and pension arrangements involve redistribution between generations. …