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Economics: The Demographics of Change
New York: August 02, 2004
By John R. Stephenson

If you live in a western country you've probably noticed or even read about the aging population of these countries. But just how big a deal is this? As it turns out - it is quite a big deal. Studies conducted by the United Nations have highlighted the fact that, over the next fifty years, we should see a rather dramatic decrease in the populations of the west and a dramatic increase in the populations of undeveloped countries particularly Islamic countries. Over the next fifty years, the population of Japan is expected to fall to 109 million whereas the populations of both Iraq and Saudi Arabia are expected to grow to 110 million each. Throughout the history of the world, differential population growth rates between neighbors has managed to upset the balance of power.

Figure 1: UN Population Projections

If the projections based on the United Nations 2002 population study are accurate, then both Japan and Europe stand to lose considerable world power and influence. Not only are developing countries with lower median age populations going to wield more economic clout in the future, but the economic demands on countries with large retired populations are truly staggering. Currently, the developed world has 30 pension-eligible workers for every 100 working adults. But by the year 2040, this ratio will shift and there will be 70 for every 100 working age adults and in Italy, Japan and Spain, this ratio will zoom to 100 for every 100 working age adults. This burden of caring for the elderly will stretch the finances of western governments, as the percentage of GDP attributable to public benefits to the elderly will double to 25 percent of GDP by 2040. In Japan this number will be higher at 27 percent of GDP and in France it will be 29 percent and in Italy and Spain the number will exceed 30 percent.

Think these number look bad as a percentage of GDP? Consider what the projected costs in 2050 would be as expressed as a percentage of total public spending. If you were to finance the care of the elderly entirely from the public purse and at the expense of other social programs, Japan would see its public benefits rise to 66 percent of total public spending, United States to 53% and Germany to 49%. Today, these expenditures are around 31 percent. But if the public sector decides to fund these future expenditures just what would you cut? In the U.S. you can cut defense but what would Europe cut? Would it be education or healthcare?

The situation is worse in countries such as France where the government accounts for 67 percent of the income of the elderly. Although the long-term economic trend for Japan looks awful, the situation is someone mitigated in Japan because over 50% of the elderly live with their children. If you were to add in the costs of providing medical coverage (even assuming no new benefits), the percentage of public spending on the elderly will soar. What will the world look like in the next fifty years - a world that is currently dominated by the United States, Europe and Japan? Can the world continue to prosper by selling things to the American consumer?

Figure 2: Percent of Elderly Income from Public Funding

Source: The Center for Strategic and International Studies

So what conclusions can we make about the future of the world? As I mentioned before, the likely economic losers over the next several decades should be the economies of Europe and Japan that should experience large falls in demand for consumer goods and real estate. The good news is, that with so many retirees in these countries, there should be no problem finding jobs and the relative scarcity of workers should drive wages up.

The trend of outsourcing manufacturing to Asia will likely continue and will only be exacerbated by the weak demand and labor shortages in the west. The grim economic outlook for Europe brings into question the sustainability of the euro zone. The various fiscal conditions across the European union will cause the common monetary policy to undergo enormous strains as the union tries to chart a middling path. Should something be done to ease the problems of Spain and France? Won't that penalize the United Kingdom? These will be just some of the challenges that the European Union will have to deal with. All of these problems both in Europe and in other parts of the world will likely lead to the dismantling of the welfare state as it will be impossible to maintain the current level of public sector services as fiscal strains rise.

As investors, it would be wise to avoid European stocks as weak aggregate demand will be bearish for stocks and rising government deficits will be a problem for bonds. China should continue to do well for some time, however, the fertility rate is below the replacement level and the working age population of China is projected to peak in 2025

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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