Demography as Destiny:Part II

by Laura Ehrenberg-Chesler on June 14, 2012

in Debt,Employment,Fiscal Policy

On May 10th I posted a blog about how shifting demographics in Japan has changed the economic, consumer, and investment landscape in that country. Both yesterday and this morning economist Ed Yardeni wrote about this phenomenon, and how the low fertility rate in the developed countries has been driven by social welfare entitlement programs, thus causing a major demographic change. Demography is destiny. If so, then the future will be challenging in many countries around the world where fertility rates have dropped below the replacement rate (Fig. 7). At the same time, people are living longer (Fig. 8). So dependency ratios are destined to soar. Why have fertility rates fallen around the world? There are a few plausible explanations. One of them stands out, in my opinion. In the past, people relied on their children to support them in their old age. Your children were your old-age insurance policy. Over the past century, people have come to depend increasingly on social security provided by their governments. So they are having fewer kids. That’s fine as long as the ratio of retirees to workers isn’t so high that the burden of supporting our senior citizens crushes any incentive to work resulting from excessively high tax rates. The cost of increasingly generous and excessive entitlements has been soaring relative to taxable earned incomes in many countries even before dependency ratios are set to rise in many countries. Governments have chosen to borrow to finance social security and other entitlements, to avoid burdening workers with the extremely high tax rates that are necessary to balance entitlement-bloated budgets. People around the world are awfully inconsiderate. They are lingering into their 80s and 90s. Some of them believe that they are entitled to retire in their late 50s and early 60s even though they are living longer. Yet, they didn’t have enough children to support them either directly (out-of-pocket) or indirectly (through taxation). Instead, they expect that their governments will support them. So governments have had to borrow more to fund retirement benefits. That debt is mounting fast and will be a great burden for our children. The result

can only be described as the Theft of Generations.

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