As I outlined in my previous deep dive, The End of Cheap Labor, the world is aging rapidly and this demographic sea change is having a dramatic impact on our financial system. I previously focused on China and other emerging economies, while in this paper I will take a closer look at the US and western Europe.
A demographic shift
As discussed previously, the birth rate has been collapsing almost everywhere, with the exception of a few countries. Chart 1 below shows the global fertility rate, with the majority of the world at less than two live births per woman or the replacement level. Where this begins to really impact things is down the road – over the next 25 years, as outlined in the dependency ratio in Chart 2.
Note that the acceleration in the trend will take place in the next five years. Unless the birth rate changes dramatically –very quickly – or immigration from the high-birth-rate countries increases, many of these countries will be heading into financial destabilization. The remaining workers will not be able to support the number of retirees in the system, leading to a number of unwanted alternatives. The French government's political firestorm with the changing of the retirement age from 62 to 64 is just a taste of what is coming.
Chart 1: Total fertility rate
Chart 2: Dependency ratio
Chart 3 lays it out a bit differently, but explains how the over-65 population will continue to grow as a percentage of the population over the next 10-15 years, putting stress on the social welfare system setup for retirees.