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Demographics and National Bankruptcy   (October 5, 2005)

The cliche is that demographics is destiny. When it comes to bankrupting a nation, it's certainly true. The problem facing all nations with any sort of social security or government entitlement for elderly citizens is graphically demonstrated by the accompanying chart. The bar graphs denote what percentage of the citizenry is over 60--retirement age in the developed world--and the numbers along the right-hand border convey what percentage of the male population is still working after the age of 60.

It's easy to see the shape of the demographic time-bomb awaiting the European Union nations. In Italy, to take only the most egregious example, fully 25% of the population is over 60, while only 14% of the men over 60 are still working, and therefore contributing to the national social security costs via taxes.

The story gets even worse in France, where a mere 6% of the male population over 60 is still in the workforce. Contrast this with poorer nations such as Indonesia and India, where 60% of the men over 60 are still working. The reason is fairly obvious: these nations do not provide generous retirement benefits to their over-60 citizens. In the Western countries, the question is: why work in your 60s when you can draw a nice pension for not working?

The incentives are out of date, and now the Western nations face bankruptcy within our generation. Back in the day, people retired at 60 because they were broken by hard physical labor; many died before reaching retirement age. Now the average lifespan is nearly 80 throughout the developed world, so retirees are drawing pensions not for a few years but for two decades.

Note that not all developed nations have such generous (or shall we say fiscally unsound) policies: men in Asian nations are still working after reaching 60: 45% in both Japan and South Korea. Obviously, that stronger work ethic will take significant pressure off those nation's social security systems.

Although here in the U.S. you don't draw your full Social Security until 65 years of age (eventually 67), only 23% of men over 60 are still working. Clearly, most Americans are taking "early retirement" and leaving the workforce well in advance of their cohorts in Asia. That bodes ill for the U.S.

The solution to the impending bankruptcy of Social Security and Medicare is fairly obvious: raise the age at which you can begin drawing benefits to 70. The programs will still take care of citizens as they age, but they will reflect the realities of demographics: many more people are living far longer than when these entitlement programs were designed in the 1930s and 1960s. It's time to bring the programs into line with reality. Since the greediness of the current generation knows no bounds, the cuts will have to fall on the Baby Boomers (myself included). The sooner the better, for the good of the nation and the generations behind us.

I just read a work on global demographics which I recommend: Fewer: How the New Demography of Depopulation Will Shape Our Future. The book's primary thesis is that demographic trends already in place guarantee shrinking populations in virtually all nations except for the U.S. over the next century--and we are special not from high birth rates so much as our net immigration inflows. Shrinking populations pretty much preclude generous pension benefits, as the number of retirees grows to a 1:1 ratio with workers: one retiree for each worker. In a word: untenable.

Read the book. Demographics is destiny.

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copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

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