AGEING IN JAPAN (AND ELSEWHERE)

I have just got around to reading the Economist's 20 November survey on ageing in Japan. It is sobering.

Japan's working age population, that between 15 and 64, was 50 million in 1950, and rose steadily to a peak of 87 million in 1996. Since then it has been in decline, and is expected to fall to 50 million again around 2050. However, whereas workers in 1950 were supporting a relatively small number of dependants (old and young), this will no longer be true in 2050. When public pensions were first introduced in the 1960's, there were 11 workers for every pensioner; now there are only 2.6. The ratio is likely to worsen further in the future because of the country's extremely low birth rate, at 1.4 the second lowest in the rich world after South Korea. Put this all together and Japan represents the fastest-ageing society on Earth. In the next 40 years, its current population of 127 million will fall to under 90 million; in 2050, a staggering 40% of all Japanese will be over 65.

Increased productivity can help offset this demographic monster; after all, virtually everybody in the world is more productive in 2010 than they were in 1950. However, this can only go so far, and is unlikely to make up for the shortfall as workers hit retirement age. Besides, if Japanese women are not having babies - and they are not - then no amount of productivity gains can help; there are simply not enough workers around that can be productive.

Japan's demographic bell-curve is an extreme example of rich-world ageing. Britain's and France's population, for example, are both expected to continue to grow during the next 40 years; though Germany has a similar, if milder, problem to that of Japan, and its population has already started to shrink (the U.K. is forecast to overtake it as the most populous country in Europe by 2050). And the U.S. is protected by the steady number of people who manage, either legally or illegally, to enter and participate in its economy.

Nevertheless, Japan acts as a warning to the problems, which will inevitably occur in rich societies. Pension and healthcare promises are, quite simply, unsustainable at current levels. Basically, there are four options for dealing with this; increased productivity, working longer, saving more (through either saving directly or higher taxes) or importing labour (i.e. immigration). Since the last of these is, for a variety of reasons, not possible, at least in the amounts needed to solve the problem, and since productivity increases are, in general, outside Governments' control, policy changes will have to come from a combination of the second and third. In particular, the pension age will rise, forcing people to work longer, and pension contributions as a proportion of salary will also rise.

This will create tensions within societies, as people who have to pay for solving the problem clash with people who believe that they have earned rights in the past. Those clashes may be figurative; but they may also be literal (as recent footage in Greece and France has shown). The groups on one side or the other may also be fluid. One of the interesting facets of the French demonstrations against the raising of the pension age from 60 to 62 was the large number of young people involved. As potential payers of 60-year old retirees, you would have thought that they would support a higher retirement age, which reduced their obligations. However, what seems to have been more at the forefront of their minds was that they felt that they were unlikely to get a job unless and until those 60-year olds shuffled off into retirement and opened the way for them.

These problems will not be easy to solve. But they are crucial for the future of the rich world. Those countries that manage things best will be the world's leaders in 2050.

Walter Blotscher