Sunday, May 29, 2005

Aging population

The aging problem is a big issue being more and more recognized and put on the agenda of many countries. It may not affect the civil servants of this generation but will affect the progress of mankind. Mckinsey Quarterly ran several articles in its May 2005 issue on the economic impact of the aging population. They can be read at http://www.mckinseyquarterly.com. Here is a short extract:

By 2025, one in five Europeans will be more than 65 years old, up from 16 percent in 2002. Across the continent, the number of working-age citizens will stagnate or shrink while the number of retirees explodes. As a result, household financial wealth, which had enjoyed steady, healthy growth during past decades, will slow drastically over the next 20 years. The slowdown will leave households in three of Europe's biggest economies with a total of more than $4 trillion less than they would have accumulated. Around the world, the picture is similar. If left unchecked, the slowdown in savings and in the accumulation of financial assets by Europe's wealthiest countries could depress investment and economic growth, causing living standards to rise much more slowly. But the economic impact of aging populations could be blunted by raising the savings rates of governments and households and by increasing the returns earned on their savings. These challenges require tough choices today but could ease the pain in the future.

I recall that CS recently addressed this issue and asked whether the policy of family planning should be changed to encouraging families to have three children.

I have a pessimistic view on this subject. I think the root of the problem is the overall unchecked growth of human population to the extent that the earth cannot sustain it. Several decades ago, there were outcries that the birth rate must be checked. Many countries have the one-child policy. How come the situation is reversed on the face of economy instead of eco-sustainability? The economic problem arising from the aging population is of our own making. The measures to raise the saving rates and increase the returns on savings are very limited. Having more children in the next generation will aggravate the problem many folds in the next next generation. The burden of the aged will have to be borne until there is a change in demographics. To achieve equilibrium, mankind needs to wait until the aged generation passed away gracefully, on condition that the younger generation will be smaller instead of much larger. Then the demographics will show a larger proportion of the earning working age. My pessimistic view is that this will not happen without pain. Short-sighted politicians and economists will push for growth until the economy and the eco-system collapse. Then there will be a catastrophic adjustment. There are many examples in ancient history. We could only hope mankind could survive the change.

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