Le Québécois Libre, November 15, 2010, No 283.
One of the recurring concerns of the late modern era has been population growth. The Reverend Thomas Malthus worried about it two hundred years ago, of course, as did the Club of Rome folks in the 1970s. Some still think we're going to break the resource bank when we surpass the planet's "carrying capacity," if we haven't already.
But with the global population set to top out at around 9 billion by mid-century, a decidedly different problem has been making headlines lately: the aging of the population. As population growth slows, the proportion of older people is increasing. This greying of the population puts extra strain on the social security programs of welfare states around the world. With fewer and fewer workers supporting more and more retirees, the argument goes, something's gotta give. The recent protests at France's decision to raise the retirement age by two years would be just the tip of the iceberg.
The Tsunami of Worry
The latest issues of both Foreign Affairs and Foreign Policy magazines each have an article sounding the alarm over our aging world. In the former, American Enterprise Institute scholar Nicholas Eberstadt warns of the "fertility implosion" threatening the world's future prosperity. In the latter, Washington Monthly fellow Phillip Longman worries about the "population explosion of seniors" as baby boomers from around the world retire in the coming decades. Both authors use the word "tsunami" to hammer home the severity of the situation.
Why is the world's population greying? Because life expectancy is rising and birth rates are falling. On the face of it, people living longer and choosing to have fewer children might sound like a good thing. But fear sells newspapers and magazines. As Longman frames the supposed problem, "Over time, low birth rates lead not only to fewer children, but also to fewer working-age people just as the percentage of dependent elders explodes." A greying world, the harbingers warn, will be a poorer world.
But wait a second: Why do elders have to be dependent? If I save a portion of my earnings during my working years, buying a house and making other investments, I can live off the interest of my accumulated capital when I retire. If my mortgage is paid off, my expenses will be fairly low. And if need be, as a last resort I can sell off my capital and get a reverse mortgage to finance the last few years of my life.
The real problem is that many people are not saving a lot of their income for retirement. Sure, they make social security "contributions" to government pension plans all their lives, but as a general rule, that money is not saved and invested. Rather, it is used to pay current retirees, with the understanding (or not) that the next generation will finance the retirements of current workers, and so on. Seniors do not have to be dependent on anyone, but unfunded, pay-as-you-go government pension plans have helped make them so.
Ponzi Would Be Proud
Like any Ponzi scheme, the world's social security scams seemed to work well enough as long as there were always more suckers to swindle. In the United States in 1940, there were 42 workers per retiree, according to economist Walter Williams. As population growth continues to slow, however, the jig is finally up. Today, there are only three workers per retiree in the United States, even with its relatively high birth rate by industrialized country standards.
There are only two way to keep the charade going: a) raise payroll taxes, or b) reduce benefits, either directly or by raising the retirement age, as France has just done. Workers understandably resist these modifications that change the terms of the deal for the worse. After all, in the market, such a unilateral action would be a clear breach of contract. Their mistake is in imagining that governments are bound by the rules of conduct and the reputational incentives that constrain actors in the private sphere.
Here in Quebec, payroll taxes were raised from 3.6% of pensionable earnings in 1986 to 9.9% by 2003. In our hybrid system, the surplus between current contributions and current payouts is placed in a fund and actually invested. But as Éric Duhaime points out in an Economic Note released by the Montreal Economic Institute earlier this year, that fund is set to run out by 2037 if taxes are not raised further, or benefits reduced, or both.
It didn't have to be this way—and it's not too late to chart a fairer, more sustainable course for the future. As Duhaime explains, the Chilean government actually transitioned from a doomed Ponzi scheme to a system of individual retirement savings accounts beginning way back in 1981. Retirees at the time kept their benefits, and then-current workers had the choice of opting into the new system with compensation for their past payroll taxes. Today, almost all workers have switched over to the new system, which averaged an annual rate of return of 10.3% over its first 26 years. Quebecers born in 1990 can expect a 5.1% rate of return on their payroll taxes.
A greying world need not be a poorer world, and senior citizens need not be dependent on "society" to take care of them. We can all take responsibility for ourselves and plan appropriately for retirement during our working years. As a bonus, with more income actually being invested instead of simply shifted around and consumed, economic growth will be encouraged. All we need to do to make it happen is get our governments to get out of the way.
* Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also is QL's English Editor.