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An aging population can also bring an economic recovery, but you have to play smart

An aging population can also bring an economic recovery, but you have to play smart
The article was originally published in this language: English

Life expectancy is increasing around the world, and the birth rate is decreasing, so it is no coincidence that pension systems are collapsing. What does this problem mean for the economy as a whole?

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By 2050, the number of people aged 65 or over worldwide will rise to 1.6 billion, more than double the number in 2021. There are two fundamental positive factors behind this trend: one is the improvement in the health status of the population, and the other is that Although women's education is improving, their number of children is constantly decreasing.

However, the effects of population aging are more cause for concern than joy. Last year, the world's eyes were on France when President Macron's government announced plans to raise the retirement age from 62 to 64. This announcement led to a series of demonstrations across the country, and the French took to the streets in most major cities.

At the time, Macron claimed that according to his government, two years of additional work was needed for the system to cope with the tax burden imposed by an aging population. The French described this announcement as an open attack on famously protected workers' rights. Their economic arguments fell on deaf ears, and the pension reform passed through the French National Assembly without a vote.

Balancing burdens and budgets

Macron's position was far from popular, but that does not mean he was not right. If the number of retirees increases while the number of young people decreases, this will impose a greater burden on state budgets, and the necessary steps must be taken to ensure pension security as well. According to Eurostat data, the EU's old-age dependency ratio reached 33% in 2022, meaning that for every person aged 65 or over, there were just over three adults of working age (15-64 years). By January 2050, spending on health and pensions is certain to rise, as this could reach 56.7%.

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The impact of population aging on productivity

The impact of aging on productivity fuels poor expectations. If there are few working-age people in the economy, companies may have difficulty filling jobs. Fewer people produce fewer goods, the number of services decreases, and this hurts domestic competitiveness and, of course, international competitiveness.

Until recently, demographic changes in the eurozone did not cause significant damage to productivity. 21st. In the first 20 years of the twentieth century, the number of working older people increased, and the longer working age compensated for the higher rate of aging. The problem for governments is that this process does not last forever. The coronavirus pandemic has discouraged many older workers from returning to day labor, and raising the retirement age is a difficult and bumpy road, and far from politically rewarding.

Immigration can be a short-term help, as immigrants can solve the labor shortage, but it is not a sustainable solution. The future flow of young workers to older countries depends largely on how the demographic situation of the sending countries (mostly in the Southern Hemisphere) develops. Many of these countries bemoan the productivity problems they face precisely because young people are leaving their countries in search of better opportunities abroad.

The elderly live on their savings

Let's start with this: When demand for bank deposits increases, loans can be cheaper, but the opposite is also true. Let's ask the question: How do seniors manage their money?

According to Charles Goodhart, a former employee of the Bank of England, if older people start reducing their savings, this could lead to higher interest rates, which is confirmed by Joseph Kopecky, assistant professor in the Department of Economics at Trinity College Dublin. . Goodhart's model may one day become a reality, he says, but the impact of workers' work in middle and late life should not be underestimated.

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Nowadays, people in their 40s, who are financially prepared for their retirement years and are frugal, are raising their savings rate. Therefore, even if they retired, it is questionable how timid they would be. The desire to leave a legacy often prompts older consumers to tighten their wallets, which is good news for their children, but less so for the economy.

Today, people over 40 who are counting their money are preparing for longer retirement years and are more likely to build larger reserves. If people throughout the population save more, this will increase the supply of money, but if demand for investments remains the same, interest rates will fall.

To be sure, the current fundamental situation is different: the world is just recovering from severe inflation, borrowing costs in major economies have risen, growth is stagnant, and banks are stressed.

Note that while population aging is likely to strain public finances, it also paradoxically makes borrowing easier. Future interest rates are subject to many variables and it is impossible to predict with certainty what will happen in, say, ten years. One thing is certain: the younger generation will learn something from the frugal people in their 40s, especially if that frugality also helps the future of today's young people – especially if fewer people have to contribute to supporting society's older people.

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