UK Avoids the Global Demographic Time-Bomb
Davies, Gavyn, The Independent (London, England)
Occasionally, an economic study is published that illuminates well-known aspects of economic performance, and also has the capacity to surprise. This applies to the study on the budgetary effects of ageing populations published last week by the OECD.* If this study is even remotely right, the UK will have a huge - and until now hidden - economic advantage over other countries in the next few decades. And Japan, the miracle economy of the post-war period, could be in deep trouble long after the present deflationary shock is safely negotiated.
Economists have been aware for some time that most developed economies will face a serious problem in the next few decades as the demographic balance of their populations begins to change. The ageing of the populations, combined with quite generous provisions for pension payments, and the increasing health care costs for old people, have been threatening to produce a serious deterioration in budget balances in the first part of the next century unless offsetting action is taken soon. The OECD study published last week emphasised just how large these problems could be.
In all the large seven economies except the UK, the "dependency" ratio of elderly people to the population of working age is projected to double in the next 40 to 50 years. Of course, these population trends are not yet entirely determined - they could be affected slightly by changes in immigration, or in the birth rate. But the vast majority of the working population in the year 2015 has already been born, so the OECD's figures should not be far wrong.
In most countries, the number of young people is projected to remain roughly constant, but the population bulge created by the "baby boomers" will gradually pass from working age into retirement. Hence the elderly dependency ratio will rise sharply in all countries. It will peak at about 60 to 70 per cent in Japan, Germany, Italy and France, but will rise to only 40-50 per cent in the US, Canada and the UK. From present levels, the rise is projected to be much less pronounced in the UK than in any other economy.
As a result of these demographic changes, and the public sector pension plans now in place, the OECD estimates that public sector pension expenditure will rise sharply. Most countries offer a basic retirement provision for all citizens, regardless of contribution records, and also fund pensions for public servants out of general taxation. Many also offer top-up pensions, supposedly related to contribution records, but which are actually funded on a pay-as-you-go basis.
This multifaceted provision will mean that as the population ages in the next few decades, pension burdens on government budgets will rise to 5 to 8 per cent of GDP in the US, Canada and the UK, and to 15-20 per cent of GDP in Japan, Germany, France and Italy. This is despite assuming that all countries unify their retirement age at 65.
Because per capita needs for medical treatment rise dramatically above the age of 65, total health costs will also rise markedly in all economies as the population ages. Meanwhile, education spending will decline only slightly. The upshot will be that, on unchanged policies, government spending will rise far more rapidly than GDP, which will in itself be held down by a decline in the working population.
Tax revenue will therefore lag behind spending and, in most countries, budget deficits and government debt ratios will have a very strong tendency to rise, as is shown in the table.
Japan's debt/GDP ratio could rise from 13 per cent now to 289 per cent by 2030, while the US and continental Europe could see their debt ratios at 90 to120 per cent of GDP. These are quite alarming numbers, and the earlier that offsetting action is taken - to reduce pension commitments, or cut the budget deficit in other areas - the …
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Publication information: Article title: UK Avoids the Global Demographic Time-Bomb. Contributors: Davies, Gavyn - Author. Newspaper title: The Independent (London, England). Publication date: June 26, 1995. Page number: 18. © 2009 The Independent - London. Provided by ProQuest LLC. All Rights Reserved.