By George Magnus

The economic and financial effects of rapid ageing in western countries start to become more evident from now, as the leading edge of the baby boomers leads the long march into retirement.

Dealing with the so-called demographic transition poses challenges for which governments, not least that of President-elect Obama, and citizens are still largely unprepared. For at least three reasons, the financial crisis and the ensuing recession could not be happening at a worse time.

First, our economies face an extended period of rising unemployment and bankruptcies at a time when we should be devising changes in legislation and in business practices, designed to increase the overall levels of employment participation, and standards of educational attainment, both of which are key determinants of poverty and productivity.

The recent performance measures of both have been disappointing, and are expected to deteriorate further during the coming downturn.

The recession is self-evidently bad when it comes to employment and participation levels, especially for women, and people aged over 60, many of whom work in part-time and lower skilled positions that are often most at risk in major business downturns. However, they are also the groups for whom higher participation levels are achievable over the next few years, given the right policy incentives and conducive workplace routines and arrangements.

Second, governments should be preparing for the surge in age-related spending, which will average about 7% of GDP in advanced countries over the next 3-4 decades, but may be as high as 11-15% of GDP in countries including the US. However, fiscal spending and public debt are surging, due to the banking system rescue plans, the recession, and discretionary fiscal management.

There isn’t a choice. It is clear, however, that the burden of age-related spending over the next few years will pose an even greater challenge than had already been envisaged.

Adequate and affordable healthcare provision in some countries, especially the US, is a particularly sensitive part of the ageing agenda. The US records nearly 47 million people, or about one in six, without any health insurance, a rise of about 7 million since 2000, and a rising proportion of whom are middle-income earners and middle aged. Far more have inadequate health insurance. The debate about public spending priorities and about the burden and distribution of taxation is about to become much more vocal.

Third, recent pensioners and those counting the time to retirement are particularly at risk from slumping housing and pension asset values that may not recover for a considerable time. Official data indicate that US pension plans had lost $1,000bn in the year to June 2008, a number that might have doubled by now.

In the UK, Aon has reported that defined contribution pension plans had lost nearly 30% in the year to October 2008. Losing retirement savings is bad enough but around 50-60% of the oldest baby boomers in OECD economies do not have adequate retirement savings anyway.

Although it is true that savings rise with age, and that the highest concentration of savings resides with people aged 50-64, the aggregate national data for savings and wealth mask a highly unequal distribution of savings in favour of higher income households.

Even so, average savings measured as a share of disposable income, are less than 1% in the UK, about 2% in the US, and 3% in Japan. Many boomers, whether they like it or not, are going to have to save more, and may find that they have little option but to try to stay at work for longer than they might have planned or desired.

The recession unquestionably demands urgent policy attention. However, we need a plan for ageing because the issues aren’t going to go away. Out of the financial and economic crisis, the culture of debt is likely to be replaced by a culture of thrift and greater financial literacy. This would be beneficial for personal behaviour in an ageing world. The reversion to bigger government in the economy could also be advantageous, since we shall most likely look to government for more holistic and equitable solutions to ageing issues, than market mechanisms might offer.

The economic and social reboot that seems to be underway could also be an opportunity to do two other things to improve our societies and prepare better for the consequences of rapid ageing: first, to change business practices and legal and institutional barriers that restrict employment; and second, to act decisively to arrest the creeping trend for people to retire with higher skill and educational attainment levels than people now entering the work force. These don’t really compete with the recession for headlines, but if we don’t address them, they could do so all too soon.

George Magnus is senior economic adviser, UBS Investment Bank, and author of The Age of Aging: How Demographics Are Changing The Global Economy And Our World

November 6, 2008 11:59am in Uncategorized | Comment