This blog is intended to go along with Population: An Introduction to Concepts and Issues, by John R. Weeks, published by Cengage Learning. The latest edition is the 12th (it came out in 2015), but this blog is meant to complement any edition of the book by showing the way in which demographic issues are regularly in the news.

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Friday, October 2, 2015

The Economics of Demographic Aging

If we're lucky, we'll all live long lives. But how well will we live in those older years? That depends. And in the answer to that question we find some complicated economic problems. Last week's Economist raised some of the issues:
THE population of the developed world is ageing. Everyone knows that it is happening but no one is sure what it will mean. A new paper from Morgan Stanley, part-written by Charles Goodhart, a former member of the Bank of England’s rate-setting committee, along with Manoj Pradhan and Pratyancha Pardeshi, suggests there may be dramatic economic impacts.
In particular, the paper suggests that the greying population may reverse three long-term trends: a decline in real (inflation-adjusted) interest rates, a squeeze on real wages and widening inequality. That is because those trends were driven by previous demographic shifts; first, the entry of the baby boomers into the workforce after 1970 and second, the more than doubling of the globally integrated workforce as China and eastern Europe joined the capitalist system.
Baby boomers produced a genuine demographic dividend for North America and Western Europe, but that dividend is drying up as boomers age and cheaper labor takes their places. These trends have heightened inequality in the rich countries, particularly because they have pushed down interest rates, increasing the value of assets already owned by the rich. This was aggravated by the Chinese, where a "relatively closed financial system and lack of a social safety net created a savings glut that added to the downward pressure on real interest rates."

The attempt to fix the poor Chinese safety net was on display today in a paper out of Yale University, where the author, Professor Xi Chen, notes that in 2009 China instituted the New Rural Pension Scheme, to help the older population. It is not very generous, but it is enough money to allow the children of the rural elders to leave home and get a job elsewhere--so much for filial piety, as I've noted before. 

But Americans cannot be very smug, either, about well-being in old age. A report in May from the General Accounting Office noted that:

Many retirees and workers approaching retirement have limited financial resources. About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA). According to GAO’s analysis of the 2013 Survey of Consumer Finances, many older households without retirement savings have few other resources, such as a defined benefit (DB) plan or nonretirement savings, to draw on in retirement.
Very few businesses offer defined pension plans any more. That has lowered the cost of doing business and, in the process, has also exacerbated inequality. In the country with the highest average per person income, we have become accustomed to spending money, rather than saving it and of course the low real interest rates have unfortunately lowered the incentive to save, while the cheap wages now going into products lower their prices thus increasing our incentive to buy things. Can we get out of this loop? The Morgan Stanley report thinks that interest rates are about to rise, and that will be a good thing. Stay tuned.

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