Today I would like to share one of the key conclusions I make in my new book The End of Indexing; that ageing of society is going to have a massive impact on all of us in the years to come.
Across the OECD, 150 million people will retire in the next 15 years – a trend that will change everything.
Before going any further, let me introduce you to one of the most important – but also one of the simplest – equations in economic growth theory:
∆GDP = ∆Workforce + ∆Productivity
Now to the important point; the workforce will shrink in many countries between now and 2050. In the worst affected country, Japan, it will shrink by no less than 1% per annum.
Don’t just take my word for it:
The stark consequence of this is that, unless productivity grows by at least 1% annually, the Japanese economy will shrink for many years to come.
Although other OECD countries are not as badly affected as Japan, the outlook in the Eurozone isn’t too good, with Italy and Germany being particularly badly affected by ageing.
In those two countries, the workforce will shrink by about 0.8% annually between now and 2050.
Here in the UK, we won’t be as badly affected by ageing as most other countries. The UK workforce will actually increase marginally between now and 2050, meaning that UK GDP growth will (largely) equal UK productivity growth.
Ten to fifteen years from now, the pro-Brexit brigade will argue that 'we did the right thing when leaving the EU. Our economy is growing much faster than those poor countries still trapped inside the EU'.
Wrong! It is not because we left the EU but because of demographic factors. Assuming productivity growth is similar across countries (which is a fair assumption), UK GDP will, thanks to demographics, grow 0.8-0.9% faster annually than German GDP.
Ageing will also have a massive impact on government debt levels, as servicing the elderly is very costly and will further tie up capital that could otherwise be used to enhance productivity.
In other words, GDP growth will continue to decelerate. According to the UN, longevity in the developed world will improve by three years between now and 2030. That said, according to the IMF, debt-to-GDP will increase by 50% as a result.
The implication of all of this is that our political leadership are either misinformed, or they lie through their teeth, when they argue that they can certainly get the economy going again.
Ageing of society will be with us for many years. The problem will peak between 2030 and 2050, but it will affect economic growth negatively for the rest of this century.