Thursday, February 25, 2010

Demography is destiny: The inevitable decline of the welfare state.

The trend to ignore old age or even to fight it by chemical and surgical means permeates not only our modern society by our government policy as well.

But age, like gravity and rust, always wins in the end. Populations all over the world, with few exceptions, are getting older. Aging populations severely impacts western-style welfare states.

The ratio of payers to beneficiary has been more than cut in half over the last 50 years. Even the US, where population growth continues and the median age is a relatively young 38, social security went from 16:1 in 1950 to 3.3:1 today and is projected to reach 2:1 in 2050.

The problem is more severe in Western Europe and Japan where population growth is often negative and median age is now above 40. It is no coincidence that the biggest budget deficits are now being experienced by countries (Portugal, Italy, Greece, and Spain collectively known as Eurozone PIGS) with highest median age and lowest population growth.

For welfare states costs are rising and fewer workers are paying to support more retirees. This imbalance, temporarily aggravated by depressed economies, is simply not sustainable. Something has to give and this something is the welfare state.

Welfare state will not go quietly into the night. It will fight all the way to the end, this after all is an existentialist threat.

The outcome, I believe, is not in doubt. And strangely, Europe will lead America on that journey. The question is not of if, but of when.

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