For over a decade it has been quite apparent that Japan is in and will continue to be in a demographic malaise. Too many elderly people and too few young people have tilted their demographic scales away from productivity and growth. An increasingly elderly nation is one that (in general) is less productive and less economically active. Unfortunately, the path of Japan is not too far from the path of the U.S. and other Western countries.
In Japan 26% of the population is currently over 65 years of age. By 2050 the over 65 population is projected to hit 40%. This trend has been in place since the mid-90’s when the country’s 15-64 year old population hit its peak. For the U.S., the problem is similar, yet less pronounced compared to Japan. Currently, our over 65 population is roughly 14% of our total population and it expected to top 20% by 2050.
If you read or listen to economic experts speak of Japan’s on-going economic issues, you will often note that they reference the country’s demographics as part of the problem. Taking a look into the proverbial crystal ball, what I foresee within the U.S. and the rest of the western world (Europe) is an increasingly strong headwind that will impede each economies economic growth.
Modern society’s welfare system is not something I see dramatically changing in the current or future decades. If anything, it will likely grow in size and scope. This means that with an expanding population of elderly people, greater public funds will diverted in order to deal with their needs. Examples of this will be Medicare costs, further augmentation of pension pools with public funds, and more direct services via Federal and State governments for senior care. Again, this is not limited to the U.S., but the entire swath of Western society.
The onslaught of our greying reality is upon us. In the State of California, public employee pension costs in the last few years have significantly increased and are projected to continue throughout each agency’s listed timelines (PERS & STRS). The Cal PERS employer contribution rate is projected in nearly double between 2014 and 2020. This means that a larger fraction of goods intended for specific public services and goods will be diverted to support the viability of pension systems. Similar diversions will not be limited to pensions. Additional services required and demanded for elderly people will require additional tax revenues. What these funds would have been spend on in a private or public manner will not be seen directly. This stealth transfer will be akin to as an elderly tax on society.
At this point the question might arise as to how do we ‘fix’ this problem. Have more kids, I suppose…and go back in time and have some more. Or flood Western countries with immigrants, which will bring an entire set of issues to address. The answer is that we do not have a good answer to this ‘problem’.
In reality, this isn’t a ‘problem’ to fix; it’s simply reality. The difficulty we have with this reality is that it is counter to human historical cycles. We want to resolve the problem that can only change through the gradual process of time and new generations.
An over-sized elderly population will cause confusion in a number of areas of life. One area will be that of economic expectations. What was seen in generations past will be increasingly difficult to realize because the dynamics that existed then, do not exist now. Demographics matter because human behavior changes in predicable patters as we age. These patterns impact economic decisions. This has the power to transform the way our economy expands and/or contacts.
The truth be told is that Japan’s demographic malaise is also ours to own and wrestle with. It is not that Japan since the 1990’s has experienced brain drain or their work ethic has degenerated; they reproduced too much after the 2nd World War and their subsequent offspring reproduced too few (You can look at it both ways.). The U.S. and relative countries are in the same boat. We are akin to a runner with weights on its ankles. In an ideal setting we could run as fast as we knew before, yet the weights are part of who we are. The ideal that we once had is not the reality we’ve sown for ourselves. This is the every emerging new reality.