Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, January 28, 2005

The Aging Population and Its Effect on Gubmnt Pensions

My friend, Brian Ferguson, sent me this link from the BBC News. It is a very important exploration of the effects of an aging population on the Japanese economy. Brian writes:

Remember when rapid population growth was bad and ZPG [Zero Population Growth] good? The problem, of course, was that we built our social security systems along the lines of overlapping generations models, on the assumption that rates of population growth would maintain constant.

One reason this [link] is interesting (if only to historians of economic thought) is that, back in the late 40s and early 50s there was a line of thought called secular stagnation theory, which held that low post-WWII birth rates would cause a recession if not a depression, on the argument that much consumption expenditure was demographically driven.
[note: I remember these "underconsumptionist" theories of Higgens et al. - I was raised on them]. It was an argument that vanished as the magnitude of the post war baby boom became clear. My bet is that the arguments from that period are going to be recycled, and treated as new.

This ties in with social security reform arguments in various countries - if the baby boom group's retirement is financed by saving which has been invested in productive capital, there's no serious problem and, in fact, declining labour supply, by driving up wages, means that the (declining) working age population will not find supporting a retired population that much of a burden. But if we keep putting social security funds into government bonds, we're essentially operating a consumption-loan system with negative impact on capital accumulation and growth, meaning that there will be a real burden on the coming generations. That's not necessarily an argument for individual social security accounts invested in the stock market, as seems to be the rage in the US debate, but it is an argument for shifting social security funds out of government bonds and into markets, as has been going on with CPP. I'm inclined to think that the people who argue that government bonds are the safest form of investment are neglecting the question of where the government will get the funds to redeem them when they come due.

In addition, I wonder where the economic growth for the future will come from if so many of us in the older generations will be engaged in dissaving.

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