Demographics, Elroy. Demographics.
tradelight, you sound like you're auditioning for "the graduate II" <g>
but to your point of demographics driving the RE market, if anything in the longer term, our demographics do not bode well for ever-increasing RE prices. (as RE prices going up and the affordabilty index diverge, despite low interest rates)
this article deals more with the effects on taxation and pensions, but considering that the net worth of americans is much more tied into real estate holdings than pension funds, i should think the correlations of decreasing aggregate demand and diminishing income (as the boomer "bulge" begins to enter retirement) doesn't exactly paint a wildly bullish scenario.
frontlinethoughts.com
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Age Vulnerability: Your Pension or Your Life
Let's next look at a lengthy report entitled "The 2003 Aging Vulnerability Index" by the Center for Strategic and International Studies and Watson Wyatt Worldwide (Richard Jackson and Neil Howe were the authors of this extremely well researched article. They are to be congratulated for avoiding the usual indecipherable academic language and writing a very readable paper. You can read the entire piece at csis.org. FYI, Howe is also the co-author of one of the more important (and very readable) books on the future I have read called The Fourth Turning.)
The report analyzes the cost of public pension funds (like Social Security, the state retirement funds mentioned above, etc.) for 12 different developing countries. It then analyzes how the various countries will fare in the future, factoring in their economies, taxes, costs, and the actual circumstances surrounding retirement. (For instance, it makes a difference on whether you are likely to be supported by your kids or out on your own.)
In short, it clearly shows us that there will be staggering budget problems for these countries, and some more than others. The report categorizes Australia, the UK and the US as low vulnerability countries. Given what we know of potential US problems from an aging population, this means the report posits grim news for certain countries, especially the mainstay countries in Europe (France, Germany, Italy, Spain and the Netherlands). Howe and Jackson give a whole new meaning to the concept of "Old Europe."
Let's look at a few salient items:
"Today, there are 30 pension-eligible elders in the developed world for every 100 working age adults. By the year 2040, there will be 70. In Italy, Japan, and Spain, the fastest-aging countries, there will be 100. In other words, there will be as many retirees as workers. This rising old-age dependency ratio will translate into a sharply rising costs for pay-as-you-go retirement programs - and a heavy burden on the budget, on the economy, and on working age adults in any country that does not take serious steps to prepare... public benefits to the elderly will reach an average of 25% of GDP in the developed countries by 2040, double today's level."
"... In Japan, they will reach 27% of GDP; in France, they will reach 29%; and in Italy and Spain, they will exceed 30%. This growth will throw into question the sustainability of today's retirement systems - and indeed, society's very ability to provide a decent standard of living for the old without overburdening the young.... It is unclear whether they can change course without economic and social turmoil. (emphasis mine)
"For most of history, the elderly - here defined as adults aged 60 and over - comprised only a tiny fraction of the population, never more than five percent in any country. Today in the developed countries, they comprise 20 percent. Forty years from now, the share will reach roughly 35 percent. And that's just the average. In Japan and some of the fast-aging countries of continental Europe, where the median age is expected to exceed 50, the share will be approaching 50 percent."
Today, looking at the data, the five main economies of the European Union spend about 15% of their GDP on public benefits to the elderly. This will rise rapidly to almost 30% by 2040. Japanese benefits will rise 250% to 27% in 2040 from today's "mere" 11.8%.
Contemplating the Impossible Events
How do you pay for such increases? If the increase were paid for entirely by tax hikes, not one European country would pay less than 50% of its GDP in taxes, and France would be at 62%. By comparison, the US tax share of GDP would rise from 33% to 44% (I assume this includes all level of taxes). Japan's taxes would be 46% of GDP.
It should be clear to everyone that such an outcome would be an utter economic disaster. Taxes for the working population would be consuming 80-90-% of their income. It would be an economic death spiral. Whatever economic growth might be possible in an aging US, Europe or Japan will be completely squelched by such high taxes. The "giant whooshing sound" would be that of young workers leaving for more favorable working and tax conditions.
If the increase in benefit costs were paid for entirely in cuts to other spending projects, Japan would see its public benefits rise to 66% of total public spending, France and the US to 53% and Germany to 49%. Today, these expenditures are all around 31%. What do you cut? In the US, you might cut defense spending, but there is little to cut in Europe and Japan. Education? Welfare? Parks? Transportation? Medicare or health programs for the working? It gets so very ugly. Since such an outcome (50% of GDP for pensions) is impossible, long before that type of debacle is reached, other solutions, painful as they are, will have to be chosen.
The following is a quick table of when government debt reaches 150% of GDP if the various governments decide to pay for the costs by running deficits (borrowing).
Country Year
------- ----
US 2026
Japan 2020
France 2024
Germany 2033
Canada 2024
Some other gleanings: a mere 10% cut in benefits pushes approximately 5% of the elderly population into poverty in Europe - think what a 20% cut in benefits would do. Japan is ranked in the middle of the vulnerability pack, despite their poor economic outlook, because over 50% of the elderly live with their children. The three most vulnerable countries are France, Italy and Spain. Australians will live longer (86.7 years) than any group except the Japanese, who are expected to live to an average of 91.9 years.
In France, 67% of the income of their elderly population comes from public funding, in Germany it is 61%, compared with 35% in the US and Japan. These are projected to rise only slightly over the coming decades, but because the elderly population is growing so rapidly, actual outlays will soar.
Not surprisingly, if you add in medical costs, the percentage of public spending increases significantly, assuming no new benefits.
Demography Is Destiny
The world economy is currently dominated by the US, Europe and Japan. These studies suggest that there will be little or no help from Europe and Japan in regards to world growth. The world is already far too US-centric. Everyone wants to sell to the US consumer. Our international trade deficit for 2003 was over $500 billion, which simply cannot be sustained.
BCA suggests that the Japanese government debt will grow to 300% of GDP over the coming decades. To put this into perspective, that would be the equivalent of a $36 trillion dollar US debt. Even with zero interest rates, that is a staggering sum. The Japanese economy cannot handle such a deficit without turning on the printing press in a manner unprecedented for major countries. It is hard to imagine the dollar, as weak as some think it is, to drop long-term against such massive and mounting deficits which will have to be financed by attempts at inflation.
Europe is already spending a very small percentage of its budget on defense. As one wag puts it, they will be faced with the choice of "guns or rocking chairs?" With a declining population, they will be hard-pressed to find enough bodies to man their military as it currently exists.
Unless they unwind their pension promises, Europe will play a smaller role in the world of the future, notwithstanding the view from France. The role of Asia, especially China and India, will be far more significant in the future world of our children.
The problems outlined in the two studies suggest that turmoil is coming to the developed countries of Europe and Japan. They cannot pay for their promises to retirees and still grow their economies. They will have to choose one or the other. If they choose higher taxes and fewer opportunities, the best youth of Europe will vote with their feet, as did their ancestors in the 18th and 19th century. That will only make their situation worse. But can a retiring population which will be in the voting majority actually vote to cut their own benefits?
In short, for the world economy to grow, developing countries are going to have to look to themselves for growth. The aging developed countries will simply not provide the growth engine they have been for the last half of the last century. |
