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Posts Tagged ‘Demographics’

European economic analysts are paying too much attention to the United Kingdom and too little attention to Italy.

Yes, the Brexit decision is important, and the United Kingdom is the world’s 5th-largest economy so it merits attention to see if there are any speed bumps as it escapes from the slowly sinking ship otherwise known as the European Union.

But one of the other passengers on that doomed ship is Italy, the world’s 8th-largest economy. And if the UK merits attention because of uncertainty on its way to a brighter future, then Italy should be getting five-alarm focus for its festering economic crisis as it descends into chaos.

Part of that crisis is quasi-permanent stagnation, as illustrated by this map showing changes in per-capita economic output since 1995.

To state that Italy is the slow student in the class is an understatement. There’s been a two-decade period with almost no improvement in economic output.

Even Greece has done better!

To make matters worse, Italy’s long-run stagnation is matched by an immediate banking crisis. Here are some excerpts from a MarketWatch report.

Banks in Italy are weighed by about €360 billion in nonperforming loans, or unpaid debts, according to Italy’s central bank. That represents 18.1% of total loans to consumers. Roughly €210 billion of those loans have been taken out by borrowers now considered to be insolvent. “Meanwhile, average return on equity has been less than 2% per year during the last five years, neither enough to clear out the NPLs at a decent pace, nor to attract more capital.

And, as illustrated by this chart from the Economist, this puts the nation in a very undesirable position.

There’s also a demographic disaster in Italy. The fertility rate is 1.43, which puts Italy in 208th place out of 224 nations.

To be sure, there’s nothing wrong with choosing to have fewer children. The “disaster” is that Italy has a huge, pay-as-you-go entitlement state that is premised on having an ever-growing number of new taxpayers to pay for the promises made to older taxpayers. And since Italy’s population pyramid is turning into a population cylinder, that’s obviously not happening.

Indeed, the EU Observer reports that parts of Italy are becoming ghost towns.

Around a third of villages in Italy are at risk of turning into “ghost” villages in the next 25 years because young people are leaving, and those who are left behind are dying of old age. …2,430 villages are at risk.

The “good news” is that there is some awareness that the nation faces a double-disaster of statism and unfriendly demographics.

Unfortunately, that awareness doesn’t extend to Italy’s ruling class. Almost nothing is being done to address the problems of a bloated (and notoriously incompetent) public sector and excessive government intervention. Fully one-half of the nation’s economic output is consumed by a bloated public sector. And a stifling tax burden helps to explain why economic output is stagnant.

And I’m not expecting good results from a new scheme to change the nation’s demographic outlook.

Italy’s health minister is proposing doubling a ‘baby bonus’ incentive for couples to have more children to combat what she calls a catastrophic decline in the country’s birth rate. …Lorenzin told the paper she wanted to double the standard baby bonus, currently 80 euros ($90) a month…and introduce higher payments for second and subsequent children to encourage bigger families.

Part of my concern is that I don’t think the government should pay people to have children, both because I don’t like redistribution and because I’m skeptical that you can successfully bribe people to have more children with $90 per month.

But when you dig into the details, the proposal is even more troubling. The government basically wants to encourage more children from the portion of the population that is most likely to rely on state handouts.

Higher-income families, those with taxable earnings of more than 25,000 euros per year, are not eligible for the scheme, excluding about a third of parents. The allowances are paid at higher rates for the poorest — those declaring less than 7,000 euros a year to the taxman. Under the new proposals, the payment for second and subsequent children would be 240 euros/month for average families and 400 euros/month for the poorest.

Call me crazy, but the last thing Italy needs is more people riding in the wagon of government dependency.

Oh, by the way, this scheme will add to the burden of government spending.

Lorenzin’s proposals would add 2.2 billion euros to public spending over six years, her department estimates.

More spending, bigger government, higher taxes, and additional red ink. Maybe that’s a recipe for prosperity on some planet in the universe, but it definitely won’t work on Earth.

P.S. No wonder there’s discussion in Sardinia on leaving Italy and joining Switzerland. After all, the luckiest Italian people in the world are the ones in Ticino, the southernmost canton of über-prosperous Switzerland (just as the unluckiest French people live in Menton and Roquebrune, which used to be part of Monaco).

P.P.S. Though you have to give the Italians credit for ingenuity. This doctor and this cop both went to extraordinary lengths to earn membership in the Bureaucrat Hall of Fame.

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Changing demographics is one of the most powerful arguments for genuine entitlement reform.

When programs such as Social Security and Medicare (and equivalent systems in other nations) were first created, there were lots of young people and comparatively few old people.

And so long as a “population pyramid” was the norm, reasonably sized welfare states were sustainable (though still not desirable because of the impact on labor supply, savings rates, tax policy, etc).

In most parts of the world, however, demographic profiles have changed. Because of longer life expectancy and falling birth rates, population pyramids are turning into population cylinders.

This is one of the reasons why there is a fiscal crisis in Southern European nations such as Greece. And there’s little reason for optimism since the budgetary outlook will get worse in those countries as their versions of baby-boom generations move into full retirement.

But while Southern Europe already has been hit, and while the long-run challenge in Northern European nations such as France has received a lot of attention, there’s been inadequate focus on the problem in Eastern Europe.

The fact that there’s a major problem surprises some people. After all, isn’t the welfare state smaller in these countries? Haven’t many of them adopted pro-growth reforms such as the flat tax? Isn’t Eastern Europe a success story considering that the region was enslaved by communism for many decades?

To some degree, the answer to those questions is yes. But there are two big challenges for the region.

First, while the fiscal burden of government may not be as high in some Eastern European countries as it is elsewhere on the continent (damning with faint praise), those nations tend to rank lower for other factors that determine overall economic freedom, such as regulation and the rule of law.

Looking at the most-recent edition of Economic Freedom of the World, there are nine Western European nations among the top 30 countries: Switzerland (#4), Ireland (#8), United Kingdom (#10), Finland (#19), Denmark (#22), Luxembourg (#27), Norway (#27), Germany (#29), and the Netherlands (#30).

For Eastern Europe, by contrast, the only representatives are Romania (#17), Lithuania (#19), and Estonia (#22).

Second, Eastern Europe has a giant demographic challenge.

Here’s what was recently reported by the Financial Times.

Eastern Europe’s population is shrinking like no other regional population in modern history. …a population drop throughout a whole region and over decades has never been observed in the world since the 1950s with the exception of…Eastern Europe over the last 25 consecutive years.

Here’s the chart that accompanied the article. It shows the population change over five-year periods, starting in 1955. Eastern Europe (circled in the lower right) is suffering a population hemorrhage.

By the way, it’s not like the trend is about to change.

If you look at global fertility data, these nations all rank near the bottom. And they also suffer from brain drain since a very smart person, even from fast-growing, low-tax Estonia, generally can enjoy more after-tax income by moving to an already-rich nation such as Switzerland or the United Kingdom.

So what’s the moral of the story? What lessons can be learned?

There are actually three answers, only two of which are practical.

  • First, Eastern European nations can somehow boost birthrates. But nobody knows how to coerce or bribe people to have more children.
  • Second, Eastern European nations can engage in more reform to improve overall economic liberty and thus boost growth rates.
  • Third, Eastern European nations can copy Hong Kong and Singapore (both very near the bottom for fertility) by setting up private retirement systems.

The second option obviously is good, and presumably would reduce – and perhaps ultimately reverse – the brain drain.

But the third option is the one that’s absolutely required.

The good news is that there’s been some movement in that direction. But the bad news is that reform has taken place only in some nations, and usually only partial privatization, and in some cases (like Poland and Hungary) the reforms have been reversed.

And even if full pension reform is adopted, there’s still the harder-to-solve issue of government-run healthcare.

Eastern Europe has a very grim future.

P.S. I’m a great fan of the reforms that have been adopted in some of the nations in Eastern Europe, but none of them are small-government jurisdictions. Yes, the welfare state in Eastern European countries is generally smaller than in Western European nations, but it’s worth noting that every Eastern European nation in the OECD (Czech Republic, Estonia, Hungary, Poland, Slovakia, and Slovenia) has a larger burden of government spending than the United States.

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Maybe future events will require a reassessment, but right now the biggest danger to the western world isn’t terrorism. Nor is it climate change. Or Zika. Or even Donald Trump.

The real threat is demographic change.

America’s population profile already has changed, but the future shift will be even more dramatic.

But demographics changes are neither good nor bad. The real problem, as I pointed out last month, is when you combine an aging population with poorly designed entitlement programs.

…even a small welfare state becomes a problem when a nation has a population cylinder. Simply stated, there aren’t enough people to pull the wagon and there are too many people riding in the wagon.

That’s a recipe for a crisis.

Here are some sobering details from a story in Business Insider.

The world is about to see a mind-blowing demographic situation that will be a first in human history: There are about to be more elderly people than young children. …And these two age groups will continue to grow in opposite directions: The proportion of the population ages 65 and up will continue to increase, while the proportion of the population ages 5 and under will continue decreasing. In fact, according to the Census Bureau, by 2050 those ages 65 and up will make up an estimated 15.6% of the global population — more than double that of children ages 5 and under, who will make up an estimated 7.2%. “This unique demographic phenomenon of the ‘crossing’ is unprecedented,” the report’s authors said.

Here’s the chart that accompanied the story.

And as you look at the numbers, keep in mind that entitlement programs mean that a growing population of old people means more spending, while a shrinking number of children means fewer future taxpayers to finance that spending.

Let’s now look at a nation that is the “canary in the coal mine” for why changing demographics is a recipe for fiscal crisis.

A story from The Week highlights the grim demographic outlook for Japan.

Japan is us, and we’re Japan. …Japan has a…serious problem on its hands: The country is literally dying. According to current projections, by 2060 the country will have shrunk by a third, and people over 65 years old will account for 40 percent of the population. Already, the country is selling more adult diapers than infant diapers. To say this is unsustainable is a euphemism. The country is quite simply dying. …Demography is not destiny, exactly, but it is close to it. …the impending collapse can no longer be denied, as is the case in Japan and Germany. …The extinction of a people and culture is always a global tragedy. It’s time for Japan — and the West — to wake up.

A wake-up call is needed. It’s not just Japan. The entire developed world faces a demographic problem.

The good news is that there is an understanding that something needs to change.

The not-so-good news is that many of the responses are misguided. Cheered on by the OECD, Japan has been boosting the value-added tax in hopes of financing an ever-expanding burden of government spending.

That won’t end well.

And I’m not overly enthralled by some of the other proposals.

Why not just pay people to have children? …If you lower the price of something, you will get more of it. Over the past two decades, Japan has spent trillions of dollars on mostly wasteful pork-barrel spending projects. It seems to me that the country would be better off today if that money had been spent on bonuses for second and third children instead.

For what it’s worth, I agree that giving money to parents would have been better than the various Keynesian spending binges (some of which are downright nuts) that have taken place in Japan.

But I’m not confident that child subsidies are an effective or desirable long-run solution to the nation’s demographic situation.

The one option that would work is to reform entitlement programs. Hong Kong’s demographic outlook is even more challenging than Japan’s, yet it is in much better long-run shape because it has a more sensible approach to entitlements, including a private Social Security system.

P.S. Every so often, a celebrity from the entertainment world has an epiphany about greedy and corrupt government. It definitely happened for Jon Lovitz, Will Smith, and Rob Schneider. And it might be happening for George Lopez.

Newsbusters has the details.

In a recent radio interview for BigBoyTV, comedian George Lopez let us all know that he’s endorsing Senator Bernie Sanders, while paradoxically, making it known he doesn’t want to pay any more taxes.

Here’s what he specifically said.

I endorsed Bernie Sanders. But really just to… I mean it’s cool. I can’t pay any more taxes, it’s ridiculous. But, so, we’ll figure it out.

Huh?!? He’s getting pillaged by the tax code yet he’s supporting a candidate who wants giant tax hikes. I guess his epiphany needs more clarity.

P.P.S. I admit these examples are all sarcastic, but Obama could have a Hollywood career after leaving office.

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The most depressing data about America’s economy is not the top tax rate, the regulatory burden, or the level of wasteful of government spending.

Those numbers certainly are grim, but I think they’re not nearly as depressing as America’s demographic outlook.

As you can see from this sobering image, America’s population pyramid is turning into a population cylinder.

There’s nothing a priori wrong with an aging population and a falling birthrate, of course, but those factors create a poisonous outlook when mixed with poorly designed entitlement programs.

The lesson is that a modest-sized welfare state is sustainable (even if not advisable) when a nation has a population pyramid. But even a small welfare state becomes a problem when a nation has a population cylinder. Simply stated, there aren’t enough people to pull the wagon and there are too many people riding in the wagon.

But if America’s numbers are depressing, the data from Europe should lead to mass suicide.

The Wall Street Journal has a new story on the utterly dismal fiscal and demographic data from the other side of the Atlantic Ocean.

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared. …Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. …Though its situation is unusually dire, Greece isn’t the only European government being forced to acknowledge it has made pension promises it can ill afford. …Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69. …Only a few countries estimate the total debt burden of the pension promises they have made.

The various nations is Europe may not produce the data, but one of the few good aspects of international bureaucracies is that they generate such numbers.

I’ve previously shared projections from the IMF, BIS, and OECD, all of which show the vast majority of developed nations will face serious fiscal crises in the absence of reforms to restrain the burden of government spending.

New we can add some data from the European Commission, which has an Ageing Report that is filled with some horrifying demographic and fiscal information.

First, here are the numbers showing that most parts of the world (and especially Europe) will have many more old people but a lot fewer working-age people.

Looking specifically at the European Union, here’s what will happen to the population pyramid between 2013 and 2060. As you can see, the pyramid no longer exists today and will become an upside-down pyramid in the future.

Now let’s look at data on the ratio between old people and working-age people in various EU nations.

Dark blue shows the recent data, medium blue is the dependency ratio in 2030, and the light blue shows the dependency ration in 2060.

The bottom line is that it won’t be long before any two working-age people in the EU will be expected to support themselves plus one old person. That necessarily implies a very onerous tax burden.

But the numbers actually are even more depressing than what is shown in the above chart.

In the European Commission’s Ageing Report, there’s an estimate of the “economic dependency ratio,” which compares the number of workers with the number of people supported by those workers.

The total economic dependency ratio is a more comprehensive indicator, which is calculated as the ratio between the total inactive population and employment (either 20-64 or 20-74). It gives a measure of the average number of individuals that each employed “supports”.

And here are the jaw-dropping numbers.

These numbers are basically a death knell for an economy. The tax burden necessary for this kind of society would be ruinous to an  economy. A huge share of productive people in these nations would decide not to work or to migrate where they would have a chance to keep a decent share of their earnings.

So now you understand why I wrote a column identifying safe havens that might remain stable while other nations are suffering Greek-style fiscal collapse.

Having shared all this depressing data, allow me to close with some semi-optimistic data.

I recently wrote that Hong Kong’s demographic outlook is far worse than what you find in Europe, but I explained that this won’t cause a crisis because Hong Kong wisely has chosen not to adopt a welfare state. People basically save for their own retirement.

Well, a handful of European nations have taken some steps to restrain spending. Here’s a table from the EC report on countries which have rules designed to adjust outlays as the population gets older.

These reforms are better than nothing, but the far better approach is a shift to a system of private retirement savings.

As you can see from this chart, Denmark, Sweden, and the Netherlands already have a large degree of mandatory private retirement savings, and a handful of other countries have recently adopted private Social Security systems that will help the long-run outlook.

I’ve already written about the sensible “pre-funded” system in The Netherlands, and there are many other nations (ranging from Australia to Chile to the Faroe Islands) that have implemented this type of reform.

Given all the other types of government spending across the Atlantic, Social Security reform surely won’t be a sufficient condition to save Europe, but it surely is a necessary condition.

Here’s my video explaining why such reform is a good idea, both in America and every other place in the world.

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In my speeches, I routinely argue that an aging population is one of the reasons why we need genuine entitlement reform.

A modest-sized welfare state may be feasible if a country has a “population pyramid,” I explain, Welfare State Wagon Cartoonsbut it’s a recipe for fiscal chaos when changing demographics result in fewer and fewer people pulling the wagon and more and more people riding in the wagon.

And if you somehow doubt that’s what is happening in America, check out this very sobering image showing that America’s population pyramid is turning into a population cylinder.

The bottom line is that demographics and entitlements will mean a Greek fiscal future for America and other nations.

To bolster my case (particularly for folks who might be skeptical of a libertarian message), I frequently cite pessimistic long-run fiscal data from international bureaucracies such as the IMF, BIS, and OECD.

I’m not a big fan of these organizations because they routinely endorse statist policies, but I figure skeptics will be more likely to listen to me if I point out that even left-leaning international bureaucracies agree the public sector is getting too large.

And now I have more evidence to cite. A new report from the International Monetary Fund explores “The Fiscal Consequences of Shrinking Populations.” Here’s what you need to know.

Declining fertility and increasing longevity will lead to a slower-growing, older world population. …For the world, the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100. …These developments would place public finances of countries under pressure, through two channels. First, spending on age-related programs (pensions and health) would rise. Without further reforms, these outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100. The fiscal consequences are potentially dire…large tax increases that could stymie economic growth.

Let’s now look at a couple of charts from the study.

The one of the left shows that one-third of developed nations already have negative population growth, and that number will jump to about 60 percent by 2050. And because that means fewer workers to support more old people, the chart on the right shows how the dependency ratio will worsen over time.

So what do these demographic changes mean for fiscal policy?

Well, if you live in a sensible jurisdiction such as Hong Kong or Singapore, there’s not much impact, even though birthrates are very low, because government is small and people basically are responsible for setting aside income for their retirement years.

And if live in a semi-sensible jurisdiction such as Australia or Chile, the impact is modest because personal retirement accounts preclude Social Security-type fiscal challenges.

But if you live just about anywhere else, in places where government somehow is supposed to provide pensions and health care, the situation is very grim.

Here’s another chart from the new IMF report. If you look at developed nations, you can see a big increase in the projected burden of government spending, mostly because of rising expenditures for health care.

At this stage, I can’t resist pointing out that this is one reason why the enactment of Obamacare was a spectacularly irresponsible decision.

But let’s not get sidetracked.

Returning to the IMF report, the authors contemplate possible policy responses.

They look at increased migration, but at best that’s a beggar-thy-neighbor approach. They look at increased labor force participation, which would be a very good development, but it’s hard to see that happening when nations have redistribution policies that discourage people from being in the workforce.

And the report is very skeptical about the prospects of government-induced increases in birthrates.

Boosting birth rates could slow down population aging and gradually reduce fiscal pressures. …However, a “birth rate” solution to aging is unlikely to work for most countries. The pronatalist policies seem to have only modest effects on the number of births, although they might affect the timing of births.

So that means the problem will need to be addressed through fiscal policy.

The IMF’s proposed solutions include some misguided policies, but I was surprisingly pleased by the recognition that steps were needed to limit the growth of government.

Regarding pensions, the IMF suggested higher retirement ages, which is a second-best option, while also suggesting private retirement savings, which is the ideal solution.

Reforming public pension systems can help offset the effects of aging. Raising retirement ages is an especially attractive option… For example, raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond what is already legislated would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to the baseline) in both the more and less developed countries. …increasing the role of private retirement saving schemes could be helpful in offsetting the potential decline in lifetime retirement income.

But if you recall from above, the biggest problem is rising health care costs.

And kudos to the IMF for supporting market-driven competition. Even more important, though, the international bureaucracy recognizes that the key is to limit the government’s health care spending to the growth of the private economy (sort of a a healthcare version of Mitchell’s Golden Rule).

…health care reform can be effective in containing the growth of public health spending. …There is past success in improving health outcomes without raising costs through promoting some degree of competition among insurers and service providers. …Containing the growing costs of health care would help reduce long-term fiscal risks. On average, health care costs are projected to increase faster than economic growth. …Assuming policies are able to keep the growth of health care costs per capita in line with GDP per capita, health care spending will increase at a slower rate, reflecting only demographics. Under this scenario, public health care spending pressures would be greatly subdued: by 2100, health spending would be reduced by 4½ percentage points of GDP in the more developed countries.

Interestingly, of all the options examined by the IMF, capping the growth of health care spending had the biggest positive impact on long-run government spending.

So what lessons can we learn?

Most important, the IMF study underscores the importance of the Medicaid reform and Medicare reform proposals that have been included in recent budgets on Capitol Hill.

In addition to making necessary structural changes, both of these reforms cap the annual growth of health care spending, which is precisely what the IMF report says will generate the largest savings.

So we’re actually in a very unusual situation. Some lawmakers want to do the right thing for the right reason at the right time.

But not all of them. Some politicians, either because of malice or ignorance, think we should do nothing, even though that will mean a very unpleasant future.

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Why are many developed nations facing long-run fiscal crisis according to long-run estimates from the IMF, BIS, and OECD?

Poorly designed entitlement programs are a big part of the answer, with the United States being an unfortunate example of how fiscal systems become unstable when politicians buy votes by putting burdens on future taxpayers.

But changing demographics is an equally important part of the answer.

Simply stated, birth rates are falling and lifespans are increasing all over the world. Those aren’t bad things. Indeed, longer lifespans are a very good thing.

But it means there won’t be enough workers to finance the modern welfare state. And when there are too many people riding in the wagon and too few people pulling the wagon, that is a recipe for Greek-style fiscal chaos.

When I explain this to audiences, I get the feeling that some folks think I’m exaggerating.

Indeed, some people openly accuse me of exaggerating demographic changes as part of a “scare campaign.”

They’re partially correct. My warnings about the need for reform could be considered a “scare campaign.” But that’s because I am scared. And I’m definitely not exaggerating.

Check out this very sobering image of how America’s population pyramid is turning into a population cylinder. Heck, our population profile will be somewhat akin to an upside-down pyramid by the middle of the century!

I have two thoughts when looking at this data.

The first – and most obvious – reaction is that we better implement genuine entitlement reform if we want to avoid a big mess. And the sooner, the better.

My second reaction is to express some sympathy and understanding (thought not approval) for the politicians who created America’s entitlement crisis.

Social Security was created in the mid-1930s and Medicare and Medicaid were adopted in the mid-1960s. And if you pay close attention to the above image, you’ll see that America had a “population pyramid” during those periods, meaning that there were comparatively few old people, plenty of workers, and then even larger generations of children (i.e., future workers and taxpayers).

With that type of population profile, tax-and-transfer entitlement systems appeared to be financially sustainable. That didn’t mean those programs were a good idea, of course, but it did mean that politicians could plausibly argue that it was okay to create entitlement programs that resembled Ponzi schemes.

The bottom line is that FDR and LBJ were very misguided, but their mistakes look far worse today than they did at the time.

So now the question is whether today’s politicians will show some actual foresight and fix the problems. There are reasons for optimism, but also reasons for pessimism.

P.S. Demography is not destiny. As I wrote earlier this year, “there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies. …Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze.

P.P.S. My 11th-most viewed post of all time (and the most-viewed item in the past three months) used two cows to explain economic and political theories.

Here’s an addendum to that post.

For more Greek-related humor, this cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some rather un-PC maps of how various peoples – including the Greeks – view different European nations.

 

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The Census Bureau just released a report on America’s aging population.

The big takeaway is that our population will be getting much older between now and 2050.

And since I’m a baby boomer, I very much like the fact that we’re expected to live longer.

But as a public finance economist, I’m not nearly as happy.

As I explain in this interview with the Wall Street Journal’s Digital Network (and as confirmed by BIS, OECD, and IMF data), the United States is going to get deluged by a tsunami of entitlement spending.

I mentioned that it’s important to focus on the ratio of workers to retirees. This “dependency ratio” matters because economic output largely is a function of an economy’s working-age population.

To cite my famous cartoons, you need a sufficient number of people pulling the wagon to support those riding in the wagon.

Here’s a chart from the Census report to help you understand the magnitude of the problem. As you can see, both in the United States and other nations, the increase in the dependency ratio is almost entirely the result of aging populations.

Census Dependency Ratio

This is why I said that we face a slow-motion train wreck because of poorly designed entitlement programs.

But the good news is that there is time to reform those programs and avert a crisis.

Which explains why I probably sound like a broken record about the need for genuine entitlement reform.

In a column citing the new private pension system in the Faroe Islands, I gave the arguments for modernizing Social Security with personal retirement accounts.

But we also need to deal with the health entitlements.

Here’s how to fix Medicare.

And here’s how to fix Medicaid.

By the way, some of the damaging provisions of Obamacare can be de facto repealed by including them in the Medicaid block grant, so it’s a critically important reform.

Needless to say, I think these reforms are far better for the economy than the big tax hike Obama has endorsed to deal with the giant financing gap.

P.S. For a clever look at the worker-dependency ratio, check out the party ship produced by a Danish think tank.

P.P.S. The interviewer also mentioned that America’s racial composition is changing, which gives me an excuse to point out that Social Security reform is particularly beneficial for blacks because of differences in life expectancy.

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