One of the big problems that is attracting scant attention is the economic effects of an ageing population. This is even more worrying, given that extreme measures need to be taken just at a time when major countries are struggling to reignite economic growth. However, while age is a ticking time bomb that won't go away, the effects of an ageing population are accelerating very slowly, which means there is a tendency to put off making any unpopular decisions until they really become pressing. The trouble is, by this time the measures required will be even more draconian. The effects have been masked by the baby boom in the 1950s, but these people are now starting to retire. As Standard Life Investments points out, old-age dependency in the US has already risen from 13.8 per 100 working age people to over 20. And by the time all the baby boomers have retired, that ratio is projected to increase to over 34. What's more, the trend will continue as older people live longer. In the US, for example, in the 50 years to 2010, life expectancy has risen by nine years to 78.7 years, and the growing cost of ground-breaking medical advances means that attending to older people's health needs is likely to rise significantly. There are other economic effects, too. Old people don't drive as much as younger people, so car production will be affected.
How to overcome the problem? Douglas Roberts, senior international economist at Standard Life, has an unpalatable menu of measures that already need to be tackled. For the US, the fiscal deficit has to be reduced decisively. One estimate for public finances in the US suggests that on current projections, healthcare and debt interest payments would swallow up the entire budget by 2030. In Japan, attitudes to immigration (just 1.7 per cent of the labour work force are immigrants, the smallest of all developed economies) and female workers should be loosened, and China should encourage a higher birth rate. This may seem drastic, but China's one child per family rule to relieve pressure on resources has effectively put a cap on labour market growth. The effects of this can already be seen, with fewer workers leading to higher wage costs. Indeed, China is no longer the world's sweat shop and is already losing out to other less developed nations on cost competitiveness.
For Europe, there should be a root and branch reform of the pension system and people should be encouraged to work longer hours and maybe retire even later than current reforms in the UK dictate. But with the rioters already more than willing to fill the streets, none of these measures is likely to reach the statute book until events eventually push country balance sheets to the end of a fiscal cul-de-sac. Even then it is hard to envisage governments in places like France telling the trade unions that their members will have to work longer hours, retire later and put more of their wages into a pension scheme. Furthermore, the longer the delay in taking the necessary steps, the harder it will be to make them because by then a greater proportion of the population will be retired. In other words, pensioners or near pensioners will have a greater say in how things are changed and will have the political clout to do so.
Investors Chronicle's economist Chris Dillow is currently on annual leave
