Cialis online

Aging Population – A Demographic Bomb

July 13, 2009 by Aziz Boghani
Filed under: Economy, General comments, Pensions 

A scenario described by Karl Marx, almost century and a half ago, where he predicted the current financial crisis which may lead to communism is called a “Perfect Storm”. Contrary, the scenario “Demographic Bomb” may lead the developed economies towards total free market (no welfare state, e.g third world countries)

Today, it is not unusual for people to have idle retired life of 20 to 30 years as they are on average living as long as 80 years. This is very high in comparsion to an average age of 50 in early 1900s when the PAYG pension system was introduced.

The situation has worsened by the falling birth rate. It means that less people are available to support the retirees. In 1950, there were 7 people to 1 retiree. Where as now it is 4:1 and by 2050 it will be 2:1.

The official figures reflect that the dependency ratio (How many young people (under 16) and older people (over 64) depends upon working age (16 – 64)) in UK is forecast to rise from 0.34 to 0.65 by 2040.

UK Population

2009

2031

Total

62m

71 m (up 1.74 per cent)

Of working age

38m

44m (up 16 per cent)

Aged 50 – 65

9.2m

13m (up 41 per cent)

Over current State Pension Age

11.3m

17.9m ( up 58 per cent)

The key implication of an increasing dependency ratio on the state pension systems that operated on pay-as-you-go (PAYG) basis will become less viable. Under PAYG system, today’s pensions are paid out of today’s revenues. In simple terms, if the working population declines relative to the number of pensioners, there will be less revenue from taxes, yet an increasing bill for pensions.

Therefore we can say that an aging population is another storm that the Great Britain, like all the other developed economies, experiencing will lead to a stormy scenario “A Demographic Bomb”.

The high number of poor retirees will not able to participate in generating the economic wealth (Taxes and NI Contribution) and contribute in the productivity (GDP) and therefore the impact on the total revenue available will be adverse. Hence this will enforce the future government to borrow more and will result in increase in the taxes for working population to serve these debts.

On the other hand, the lack of private savings today, especially by the current low earner, will force the future retirees in to the extreme poverty. The inability to afford the health and care services will demand further resources from the state in the form of services, allowance and income support.

To deal with this a current low earner with minimal skills may go and find work. However, the changing economic structure will only require technical knowledge and skills which is not currently acquired by the majority of people working in manual jobs.

In a nut shell, an aging population and declining birth rate, will place significant strain on public expenditure and create a large deficit in the budget. The decreasing number of people able to work will leave the future government with less revenue in taxes and therefore less public funds available. Studies indicate that choice in public services is something that is here to stay. In the absence of appropriate savings, the pressure to provide services including elderly home care and health services to meet increasing morbidity (rate of illness) will be enormous.

Tha above scenario raises key concerns about the future of penion system in UK. Let us discuss this in detail tomorrow.

Bookmark and Share

Tags: ,

Comments

Tell me what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!