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The Economic and Geopolitical Impacts of Global Aging By Paul S. Hewitt Executive Director Alliance for Generational Equity / Americans for Generational Equity For The Global Strategy Institute, CSIS March 19, 2007 [email protected] www.age-usa.org Global Aging is a global challenge requiring global solutions. The developed world’s aging will take place in an increasingly interdependent global economy. The economic, financial, and political effects of aging and depopulation in our home countries will be transmitted as shocks to other developed economies as well as to the developing world. How developed countries manage their respective aging challenges could have geopolitical consequences that outweigh their domestic impacts. The world is converging toward a median age in the mid-40s. Median age in selected years, 2000-2050 U.S LDCs World Europe * Japan China India 2000 35.3 18.3 26.8 37.6 41.3 30.1 23.4 2025 38.5 21.8 32.8 44.4 50.0 39.5 28.5 2050 39.1 27.0 37.8 47.1 52.3 44.8 38.7 Increase, 2000-2050 3.8 8.7 11.0 9.5 11.0 14.7 15.3 Source: United Nations (2004); Census Bureau for U.S. (2004) * Includes all Europe plus Asian Russia (47 countries) Demography and destiny, 2000-2050. The least developed countries will remain very young—and probably very poor—for at least the next generation. The emerging markets will age the most rapidly. However, declining and/or low total dependency over the next 30 years will provide an important economic boost. The United States will see little increase in its median age, thanks to projected population growth of 47%.* Even so, old age dependency will rise significantly, with attendant economic and financial strains. Decades of below replacement birthrates have set in motion a process of depopulation in Europe and parts of Asia, which will dramatically slow GDP growth amid steeply rising old age dependency. * U.S. Census Bureau (2004) Rising life expectancy plays a major role in global aging 80 Life Expectancy at Birth 75 68 70 71 70 73 72 71 74 74 75 76 63 63 60 62 66 65 60 59 57 55 52 55 48 50 More developed regions 45 45 Less developed regions 41 Source: UN (2004) 00 5 20 00 -2 00 0 19 95 -2 99 5 19 90 -1 99 0 19 85 -1 98 5 19 80 -1 98 0 19 75 -1 97 5 19 70 -1 97 0 19 65 -1 96 5 19 60 -1 96 0 19 55 -1 19 50 -1 95 5 40 Lifetime Births Per Woman But falling fertility is more important 8 7 6 5 4 3 2 1 0 5 0 5 0 5 0 5 0 5 0 5 5 6 6 7 7 8 8 9 9 0 0 1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -1 9 -2 0 -2 0 0 5 0 5 0 5 0 5 0 5 0 5 5 6 6 7 7 8 8 9 9 0 19 19 19 19 19 19 19 19 19 19 20 More developed regions Less developed regions, excluding LDCs Source: UN (2004) Least developed countries Every G-7 country has seen fertility fall below the “replacement rate” of 2.1 children per woman— setting motion an era of population decline. 4 3.5 3.61 3.31 2.85 2.81 3 2.5 2.49 2.5 2.04 2 2.02 1.66 1.51 1.5 1.87 1.33 1.32 1.28 1 0.5 UN (2004) ly Ita y G er m an ce Fr an pa n Ja ad a C an K d U ni te U ni te d S in g ta te s do m 0 1960-1965 2000-2005 China’s baby boom: What happened when china’s child mortality suddenly Fell (Deaths Per 1,000 Births) Lifetime Births Per Woman 7.0 250 Median Age 6.0 5.0 4.0 200 baby boom generation birthrate 3.0 2.0 child mortality 1.0 0.0 1950 23.9 1970 19.7 100 1990 25.3 50 2010 34.9 150 0 1950- 1955- 1960- 1965- 1970- 1975- 1980- 1985- 1990- 19951955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Total Fertility Rate (Left Scale) Infant Mortality Rate (Right Scale) The UN projects that 29 countries will begin depopulating before 2025 Armenia Austria Belarus Belgium Bosnia and Herzegovina Bulgaria Cuba Croatia Czech Republic Estonia Source: United Nations (2004) Georgia Germany Greece Hungary Italy Japan Latvia Lesotho Lithuania Poland Romania Russian Federation Serbia and Montenegro Slovakia Slovenia Spain Swaziland Sweden Ukraine South Korea’s Demographic Pyramid—1990 Median Age = 26.9 In 1950, there were 17 children under 20 for every Korean over 80 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—1995 Median Age = 29.4 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2000 Median Age = 32.0 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2005 Median Age = 35.0 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2010 Median Age = 38.0 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2015 Median Age = 40.8 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2020 Median Age = 43.4 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2025 Median Age = 45.8 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2030 Median Age = 48.1 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2035 Median Age = 50.2 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2040 Median Age = 51.9 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2045 Median Age = 53.4 Source: Bureau of Census, UN Population Div. (2007) South Korea’s Demographic Pyramid—2050 Median Age = 54.9 In 2050, there will be 1.4 Koreans over 80 for every child under 20 Source: Bureau of Census, UN Population Div. (2007) Global aging poses five interconnected sets of risks for today’s developed countries Economic risk: graying and shrinking workforce, stagnant or shrinking aggregate demand Budget risk: rising retirement costs, flagging tax revenues Financial risk: falling savings rates, rising public debt = possible global “capital crunch” Social risk: flagging dynamism and unwillingness to accept change, rising intergenerational tension as all wage growth is consumed by higher taxes Geopolitical risk: tight foreign affairs budgets, rising potential to export economic and financial crisis to volatile youthful and middle aged countries Risks to Growth Stagnant or declining labor forces Declining rates of savings and investment Falling demand, overcapacity, and declining profits Rising tax burdens Working-age populations in much of the EU and Japan will decline—in some cases, dramatically. 40% 33% 30% 21% 20% 17% 7% 10% -50% Ja pa n es on co un tri an y ly G er m Ki ng do m EU -1 5 Ita -25% Ac ce ss i -40% te d -30% Un i Un i te d -20% Ca na da St -10% at es 0% -26% -32% -39% Slowing labor force growth will mean slower GDP growth SSA Actuary projections 19 60 19 196 70 9 19 197 80 9 19 198 90 9 20 199 00 9 20 200 10 9 20 201 20 9 20 202 30 9 20 203 40 9 20 204 50 9 20 205 60 9 20 206 70 9 -2 07 9 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Grow th in Social Security Covered Labor Force Real GDP Grow th Source: SSA Office of the Actuary (2004) Aging recessions: when the labor force declines faster than productivity grows 3% Italy 1980-2050 2% 1% Aging recession 0% 1980-85 1990-95 2000-05 2010-15 2020-25 2030-35 2040-45 -1% -2% *Assumes 1.0%annual productivity growth Source: OECD (2001) and CSIS (2002) Budgetary Risk Declining support ratio of workers to retirees Rising cost of pay-as-you-go retirement and health benefits even as revenue base stagnates or declines Large tax hikes, large benefit cuts, or exploding public debt Percent of GDP If interest rates to rise in response to large and sustained budget deficits—as most economists believe would happen—interest on the debt could become the primary driver of deficits by the late-2020s 25 20 CBO projections Hewitt projection 15 10 5 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 Higher Spending/Lower Revenues Intermediate Spending/Lower Revenues Effects of higher interest rates on higher spending scenario Source: CBO (2005), author 2050 14,000 12,000 10,000 8,000 30.0% 25.0% 20.0% 15.0% 6,000 4,000 2,000 0 10.0% 5.0% NHE GDP Source: CMS, author’s calculations NHE as % of GDP 2030 2025 2020 2015 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 0.0% Percent of GDP Official Projections Point to National Health Expenditures of 24 Percent of GDP in 2030 1960 Billions of Dollars America’s Health Cost Explosion Financial risk Lower savings rates Less financial risk taking? Unsustainable government borrowing and possible debt crises throughout the developed world Possible weakness in stock markets Saving and productivity growth McKinsey Global: a $31 trillion “global capital shortfall” by 2024 due to declining in “prime saver” populations Developed world growth in household financial wealth to slow from 4.5% a year historically to 1.3 %. Japanese household financial wealth to decline by .2% annually. Possible Consequences: Slower economic growth as interest rates rise and productivity flags Rising debt service costs for highly indebted countries Stock market underperformance “…a collective slide down the rating scale would commence early next decade.” Standard & Poors 800% G-7 Public Debt Burdens as a Percentage of GDP 700% 2000 600% 2010 500% 2020 400% 2030 300% 2040 200% 2050 100% Ja pa n an y G er m Fr an ce . U. S Ca na da ly Ita UK 0% Source: Standard & Poors, “The Western World Past it’s Prime—Sovereign Rating Perspectives in the Ageing Context” (March 2004) Social risk Will aged populations be less entrepreneurial? Will slow or negative income growth undermine national morale, social tolerance? Will aged electorates create tension by over-taxing workers? Will aged societies be unwilling, or unable, to play a constructive role in foreign policy? Younger populations tend to be more entrepreneurial. 44 Japan Italy Germany Finland Belgium Sweden Greece Median Age in 2005 42 Croatia . Slovenia Denmark France Spain Hungary Canada Netherlands UK Portugal Norway 40 38 Australia 36 New Zealand USA Poland Iceland 34 Ireland 32 30 0 2 4 6 8 10 12 14 Index of Total Entrepreneurship Activity Source: London Business School and Babson College, “2004 Global Entrepreneurship Report”; UN (2002) 16 Under CBO’s “intermediate” scenario, old age entitlements will rise from 45 percent of noninterest spending in 2005 to 68 percent by 2030 and 75 percent in 2050. 100% 80% 60% 40% 20% 0% 2005 Source: CBO (2005) 2010 2020 Big 3 Entitlements 2030 2040 Everything Else 2050 Defense Stagnant non-health consumption: By the 2020s, increases in personal health expenditures plus taxes to pay for U.S. public pensions and health benefits could consume 96 percent of personal income growth Claims on per capita personal income growth, 1960-2030 $700 $600 $500 $400 $300 $200 $100 $0 $467 $618 $482 $534 $486 $555 $574 $145 $375 $350 $472 $357 $160 $541 $326 $92 $132 $177 $146 19601970 19701980 19801990 19902000 20002010 $410 20102020 20202030 Avg. Annual Increase in Personal Income Avg. Annual Increase in Taxes and Personal Health Outlays Source: CMS, SSA, CBO and author’s calculations $33 When retirement saving is included, worker consumption levels begin to fall in 2014 Average disposable income in 2007 dollars per hour worked $25 $20 $15 $10 Age 65 retiree Age 55 retiree $5 $0 2005 2010 Source: Schieber (2007) 2015 2020 2025 2030 “Not just in America but in the other Western democracies, too, history is replete with instances in which a turn away from openness and tolerance, often accompanied by a weakening of democratic institutions, has followed economic stagnation.” Benjamin Friedman, Harvard University “The Moral Consequences of Economic Growth” (2005) Geopolitical risk Widening global generation gap between richest and poorest nations Uncertainties in the emerging markets Waves of illegal immigration Avoiding upheaval Developed world dependency ratios 120 100 80 60 40 20 0 120 50 20 40 20 30 20 20 20 10 North America Japan Developing world dependency ratios 100 Most population growth will be in the working ages 80 60 40 20 Mexico China Iran 20 50 20 40 20 30 20 20 20 10 20 00 19 90 19 80 19 70 19 60 0 19 50 Total Dependency Ratio Europe 20 00 20 90 19 80 19 70 19 60 Most population growth will be in the 65+ age groups 19 19 50 Total Dependency Ratio Ratio of populations aged 0-14 and 65+ to population aged 15-64 Third World Labor Glut During the next 25 years, working age populations will shrink by 31 million in the more developed regions and expand by 1.2 billion in the less developed regions Under 20 20-64 Over 65 Source: UN (2004) Less Developed Regions More Developed Regions ======= ======= 122,873 -26,121 1,176,128 -31,203 150,838 51,876 In most regions, the most conflict-ridden nations are also the youngest… Central America Guatemala Nicaragua * 18.1 19.7 Greater Arabia Palestine Iraq 17.1 19.1 16.7 19.3 20.0 18.4 19.1 Caribbean Haiti Dominican Republic ** 20.0 23.3 South-central Asia Afghanistan Tajikistan Pakistan South America Bolivia Paraguay 20.8 20.8 Southeast Asia Timor-Leste Laos Europe Albania Moldova 20.2 26.6 Sub-Saharan Africa 18.0 38% of Sub-Saharan countries have experienced Type 1 or Type 2 conflicts since 1990. * 15.9 in 1975 ** 16.2 in 1965 Some 20th century conflicts were started by middleaged countries with surging unemployment 60 Median age: 15 Russian revolution, 1915 Stalin terror of 1935 Median age: 34 Serbia, 1995 Median Age 50 40 30 Median age: 17 India-Pakistan war, 1972 Iranian revolution, 1978 Iran-Iraq War, 1980 Median age: 19 Chinese cultural revolution, 1968 Koreas (North & South), 1950 Median age: 35 Germany, 1935 20 Median Age 20 Germany, 1914 Median age: 18 10 Vietnam, 1970 Median Age: 22 France, 1914 Median age: 16 Iraq, 2000 Japan, 1940 Afghanistan, 1995-2010 0 Arab Palestine, 2000 Fastest aging Countries, 2005-2050: will middle-aging foster political stability? 2005 2050 Change Guyana 25.7 49.6 23.9 Tonga 21.8 44.7 22.9 Saint Vincent and the Grenadines 24.6 44.8 20.2 Samoa 19.4 39.5 20.1 Republic of Korea 35.1 53.9 18.8 Suriname 25.1 43.3 18.2 25 43 18 China, Macao Special Administrative Region 36.6 54.4 17.8 Iran (Islamic Republic of) 23.4 40.6 17.2 Nicaragua 19.7 36.8 17.1 Mongolia 23.7 40.6 16.9 33 49.6 16.6 Martinique 36.4 53 16.6 Tunisia 26.8 43.3 16.5 Viet Nam 24.9 41.3 16.4 Syrian Arab Republic 20.6 37 16.4 Uzbekistan 22.6 38.9 16.3 Slovakia 35.6 51.8 16.2 Tajikistan 19.3 35.4 16.1 Belize 21.2 37.3 16.1 Mexico Republic of Moldova Source: UN World Population Prospects (2005 Revision) Promoting social peace in the developing world Unemployment: the founding impulse of the modern welfare state Emerging markets experiencing “demographic window” of falling dependency characterized by near-term unemployment and long-term aging. They are relying on globalizataion to maintain social peace. Middle-aged societies are more peaceful—except under conditions of severe economic distress. Policy considerations. International “peer pressure” needed to keep debt ridden “rich” countries from plunging world into financial upheaval Globalization and productivity – economic integration with third world is the best way to assure growth in aging developed countries World stock exchanges can help younger countries buy financial assets from aging developed world Structure and design of welfare states (in both the developed and developing worlds) needs rethinking Early retirement is a 20th century idea borne of labor surplus