A looming demographic time bomb?

Europe faces a “demographic time bomb” as its population ages and a record amount of young people remain out of work, the director general of the International Labor Organization (ILO) warned recently.

Guy Ryder has said that political leaders weren’t doing enough to tackle the problem.

“If we don’t get these young people into work it’s a demographic time bomb, so there’s a bit of schizophrenia around these issues and the only way out of that schizophrenia is to find ways to get young people into work,” Ryder said. “Youth unemployment is double, triple the overall levels and we need to find those jobs.

The term schizophrenia may be somewhat questionable but, nevertheless, Guy Ryder’s meaning is clear enough. Has he got it right? What is likely to happen as Europe’s population ages and increasing numbers of retired and elderly people depend on a shrinking workforce.

Let us conduct a simple thought experiment. Suppose we  consider  a large number of  25 year olds living in a closed community, such as on a large island. It is easy to imagine they could have quite a good life. They could all work, they could set up a social security scheme to cover healthcare and any unemployment problems that arise. They could also set up a fund for their retirement. They may well have an ideological disagreement over whether to have a collective saving scheme through their government or encourage/compel everyone to pay a proportion of their income into superannuation. That won’t turn out to be the biggest issue.

Either way, everything works well for the next 40 years until they reach retirement age. Then they  all receive their pensions and even a large lump sum payout.  So in currency terms they all initially consider themselves to be very wealthy . Except of course when they go out it spend it they will find that what they have to spend it on will depend on how many children they have had and how well they  have been trained and integrated into the economy. If they’ve had no children, there will of course be absolutely nothing at all to spend their money on. If they have had many children, and they are all working productively in the economy,  then they’ll have a good retirement, in an  economy  big and healthy enough to support them.

And what if its somewhere in between? The older generation will want their spending power preserved. The younger generation will want it minimised  so it is their wages and salaries which are buying the produce of their labours and not someone’s pension. As they’ll be in demand economically  these wages  could be quite high. In effect there will be high inflation to re-establish some sort of status quo. The first reaction of many Governments  especially a future German one, will be to try to prevent inflation by fiscal measures. As income tax rates are high already in Germany any increase will likely see a mass exodus of their remaining skilled workers. A future German government could well find itself in the same position as the old DDR. It won’t be able to afford to pay its skilled workers  the market rate but neither will it be able to afford to let them go!

Europeans in previous generations would have, almost instinctively, known that their retirement prospects would depend on the level of support they could expect from their own younger family members. The present generation consider themselves to be more sophisticated and have relied much less on traditional arrangements. Birthrates have plummeted as whole populations have transferred their trust to their stored  funds to see them through their old age.

They could well be in for a very unpleasant shock in the none too distant future as  the realisation sets in that pensions aren’t just about money.  As is often said in MMT circles, any money shortfall  is easily fixed. Ultimately what matters is what those pensions will buy. They are very likely to soon realise that social security won’t be enough, and that having stored Euros and Pounds is not the same thing as stored wealth.  They will be just as dependent on the abilities of their children, to support them in their twilight years  as any previous generation.

Yes indeed Guy Ryder has it absolutely right.  He’s probably understating his case if anything. Levels of youth unemployment in Europe could justifiably be described as a crime against humanity. It is imperative for everyone,  that their skills of the young are fully developed in the way that they can only be when they  actually have  meaningful jobs.

Further reading:
http://bilbo.economicoutlook.net/blog/?p=24157

(c) Copyright 2013  Peter Martin. All Rights Reserved.