Arnold Kling  

Aging Europe

Hayekians vs. Stiglitzians... Wal-Mart controversy...

The aging of Europe is not a problem, according to Dominic Standish.

On present trends of rising productivity, employing the same number of people in 2040 as now would produce over double the amount of wealth we currently have to provide for the pensions and care of the over 60s.

However, others disagree. William G. Shipman wrote,

The payroll tax in France is 49.3 percent, Germany is 40.9 percent, Italy and Spain are 42.5 and 37.8 percent, respectively. And unlike the United States, in many cases, but not all, the tax applies to all earnings. Yet, these numbers actually understate the burden placed on European workers for in each country the payroll tax revenue is not enough to finance benefits. Additional taxes are levied to make up the difference.

For many Western European countries, the shortfall of prospective taxes to benefits, the result of demographics, is greater in present value terms than the total value of government bonds outstanding in each country. Government debt including unfunded pension liabilities in some cases is multiples of commonly measured sovereign debt.

The most definitive analysis of aging and demographics that I have found is in a report by Maureen M. Culhane. Some relevant excerpts:

The increases in the over-64 population in North America and most of Europe will be relatively benign until 2010...both Italy and Germany are forecasting that by 2050 the percentage of the population over age 80 will be greater than that under 20...By 2050 Japan, Italy, and Spain will have only 60% of the working age population they have today.

Culhane gave a less optimistic view of the effect of productivity gains.

Holding productivity for all countries constant at 1.5%, we calculate that the GDP of Japan, Spain, and Italy will increase only 30% by 2050 as a result of declines in the working age population.

For Discussion. Will Europe's economic significance decline as a result of these demographic trends?

Comments and Sharing

CATEGORIES: Social Security

COMMENTS (5 to date)
Boonton writes:

Of course, if you take more and more of your population out of the labor force then your GDP will decline. This applies if you are removing people from your labor force because they are considered too old (Europe) or if they are women (see the Taliban) or whatnot.

The only way out is if productivity increases faster than the labor force shrinks. Unfortunately productivity increasing is not very simple nor very easy.

France has a payroll tax of 49% just for retirement and disability funding? I have a hard time believing that number.

Lawrance George Lux writes:

Everyone ignores a vital statistic in the evaluation of the Aging crisis. Supply of medical and social services to these Elderly will reduce the total sum of Labor engaged in active Productivity. Every Study envisions the Young being available for maintaining Productivity. Care for the Elderly is not a Productive activity, and can never be; though Economists like to equate the Health industry as an element of Productivity.

Labor for the Health industry is a reduction of Labor assets, and Productivity; this resulting in Economies being unable to maintain current levels of Productivity with available Labor elements with static technology. Advancing technological Production will have to make up the difference, but with an unnatural Labor decline. One must remember current Medical technology insists on more highly-trained, more intensive Labor employment. This means more expensive higher numbers of Health providers to numbers of Sick; the number of Elderly vastly increasing the latter number. lgl

Bruce Bartlett writes:

Shipman somewhat overstates the case. According to the Social Security Administration, France does indeed have a total payroll tax rate of 49.3 percent (33.9% on the employer, 15.4% on the employee), but this includes payments for many programs we don't have in the US, as well as other that we fund separately, such as unemployment compensation and workers compensation. The relevant comparison for our Social Security retirment program in 16.45% in France (6.65% on the employee and 9.8% on the employer).

Tim Shell writes:

Even if we accept the claim that increases in productivity will compensate for a smaller workforce, wouldn't that still leave European nations falling way behind the US? The US would enjoy the same increases in productivity, but with a much larger workforce. With a higher percentage of the US population working, per capita GDP would increase faster than in Europe.

For the leading European nations, per capita GDP is now about 70% of what it is in the US. If US GDP grows at 1% a year faster than in Europe, by the end of this century per capita GDP in Europe will be somewhere around 20% of that in the US.

So if that happens, then yes, Europe will decline in economic significance. It's hard to see how they can avoid this.

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