Thursday, June 27, 2013

World Turned Upside Down

Walter Russell Mead writes that while the original "Population Bomb" turned out to be a dud, the actions taken in response will leave many countries (including the US) singing a new tune called The Demographic Blues:

But if the Population Bomb was one of the many impending disasters that panicked the establishment without actually happening, the widespread unwavering faith in a world of rapid, unstoppable population growth is turning out to be a very expensive mistake. The demographic assumptions behind the population panic were deeply built into the core assumptions of the modern state.

Sixty years ago, it was hard to find people who doubted that each generation would be larger than the last. That led to some ideas about how to pay for social programs, and those assumptions are still hardwired into the structure of our public pension and entitlement programs. Whether you look at national programs like Social Security and Medicare, or you look at state and city pension plans or the pension plans of many private companies, the basic ideas that led Paul Ehrlich to predict a crisis of overpopulation still drive our old-age retirement system today.

But the demographic transition through which America and many other world societies are passing is bigger and more complicated than the deceleration, and in some cases the reversal, of population growth. To understand the adjustments we need to make, it’s important to take a number of factors into account. The size of the population is changing, its age distribution is changing, and its relationship to the workforce is changing in ways that are shaking the foundations of our social system.

Part of the population is in fact exploding; it’s just from a financial point of view the wrong part. Ehrlich expected the youthful population to lead the explosion. Actually, in many countries around the world, it is the elderly population that is growing most vigorously. It’s a combination of two factors: life expectancy continues to increase, and the population cohort now in its sixties is the Baby Boom segment born in the years after World War II, when Europe, North America and Japan were basking in a wave of prosperity.

Meanwhile, the size of the workforce that needs to pay in the taxes or otherwise support the transfer payments to older people is turning out to be much smaller than the architects of our social system expected. The Baby Boom didn’t have enough children, so in many countries the successor generations are now smaller than their parents’ generation. It’s most marked in China, where the one child policy was the most draconian population control measure since Pharaoh ordered the extermination of baby Hebrew boys, but in many countries we now see exploding numbers of elderly people resting on a smaller base.

The old population model looked something like an Egyptian pyramid, with a very broad base rising to a small peak. Today’s populations look a little more like a Russian cathedral with an onion shaped dome. Higher retirement and elder-care costs are being handed off to a smaller group of payers.

Something else is also at work: because it now takes many more years to navigate the educational system, more and more young people are out of the workforce for long periods of time. A hundred years ago the majority of Americans went to work in their teens; today many are in grad school until they turn 30. Add this to the reality that life expectancy has soared while the retirement age has risen slowly if at all, and it’s clear that there are more and more people out of work whose expenses need to be financed by the shrinking pool of people in the labor force.

The fact that countries in Western Europe and Japan, South Korea, and yes China are facing (or will soon have to face) even worse demographic challenges should provide scant comfort to Americans. The shifting age distribution is a problem that few politicians from either party are willing to seriously talk about addressing, but it's one that we and our children will feel the consequences of in the not too distant future.