Ageing societies and structural financial deficits – an unexpected “road to revolution” (in western democracies)?

I will focus on the specific, inner societal problems (and costs) of demographic change ignoring other major problems, such as resource sustainability and climate change, global conflicts and war, disintegration of the global economy, need for digital upskilling of the workforce, or potential “black swans”. However, the high costs of these other major problems will make it even harder to bear the costs of demographic change in countries with ageing societies.

Future workforce situation in Germany as an example (many countries facing the same problem)

If we assume the forecasts and population trends are correct, it looks something like this:
≈ 13 million baby boomers will retire until 2035 (aging society, rising dependency ratio)
≈ 7,5 million workers missing until 2035 (≈ 16% of total work force)
≈ 2,9 million workers missing (≈ 6%) with annual 200.000 net migration and significant higher work participation rate of women (biggest potential: woman with migrant background)

Consequences

  • Retired baby boomers will stop producing output and mainly consume
  • Baby boomers will switch side of the balance sheet, from net payer to mainly net recipient (i.e. constantly rising pension payments and health care costs, especially health care costs will significantly rise, because of increased life expectancy accompanied by higher risk of dementia and the need for more and very expensive cancer treatments, for example)

How to maintain the same economic output (standard of living) without these workers?
How to sustain (at least slow) GDP growth?
How to additionally finance higher pensions and health care costs of baby boomers?

“Possible” solutions

1. “Hire” enough people from “young societies” as India, Pakistan of Africa, for example
(=> Other parts of the world pay the bill)
Problem:
– As ageing countries are mostly industrialised countries, they are transforming their economy, they need skilled and tech-savvy workers, not unskilled ones
– It’s not sure if they want to be hired and if they are welcome (rise of right-wing parties)

2. Transferring unproductive public sector workers to the private economy
(=> Government pays the bill as it loses power and influence)
Problem:
– Major government reform and reduction of bureaucracy necessary, public institutions have proven incapable of reforming themselves significantly (even in recent situations of major crisis)
– Government won’t be keen to lose influence
– Many public sector workers won’t be in favour of this kind of change

3. Debt financing pensions and health care system
– Fiscal deficit will be paid by debt
– Debt will be “monetised” by central banks
(=> Kids will pay the bill)
Problem:
– High interest payments in the future, budget lacking for investment
– After a while people will probably lose trust in central bank and currency causing inflation among other things

4. “Market solution”
– Default of pension funds, insurance companies, maybe even governments
(=> Savers (=mainly elderly), but also some workers pay the bill)
Problem:
– Kills jobs, turns economy down, time of fear and uncertainty
– Disadvantageous for pensioners, who worked their entire life expecting their promised pension (“the pensions are safe” [of course, they promised it to themselves and didn’t raise enough kids to support their claim])
– 70+ already biggest voting bloc, soon electoral majority of pensioners and public sector workers (even when not considering voter turnout)

5. Running/galloping inflation
– Keeping the pensions “stable”, while inflation will diminish real purchasing power at the same time
(=> Most citizens will pay the bill)
Problem:
– A way to “secretly” cutting pensions, hence, again, mainly elderly are targeted
– It’s not so clear if politicians will get away with blaming central banks, wars and markets for the inflation (see voting power above)
– All other nasty problems coming with inflation

6. “Bargaining solution” (as I call it) between the different groups in society a.k.a. “the big challenge for western democracies”
a) Fiscal situation
– Cutting pensions, raising retirement age and participation rate among elderlies
– Raising work participation of women
– Supported by voluntary work by the elderly (esp. in the health care and child care sector)
– Redistribution of capital income and wealth (?) by the means of capital taxes, robot taxes, inheritance taxes and the like to finance pensions
– Modest raise of labour taxes and modest inflation
b) Political power
– Electoral reform, pensioners give up their voting power:
– Voting rights with variable weights (e.g. pensioners only 50%)
– Or maintaining one man, one vote, but parents can vote for their children
(=> All pay the bill according to the focus of the measures)
Problem:
– Elderly can vote out every government cutting their pensions (see voting power above)
– Capital also has significant political power

7. Enormous productivity gain from remaining private sector workforce
– It’s estimated that total workforce must become 4-4,5 times more productive
(=> Workers (and companies) pay the bill with great efforts)
Problem:
– Hard to achieve, even if with the help of technology and if one assumes that some of the older workers weren’t productive anymore
– Simultaneously shift towards healthcare (to look after the elderly), where productivity is hard to raise
– Industry has to become even more productive to offset healthcare sector

8. Heavy and new taxes on labour and companies, stricter tax enforcement, probably accompanied by stagflation
(=> Mainly workers (and companies) will pay the bill, to some extend pensioners [inflation])
Problem:
– Less investments, less innovation, potential downward spiral
– Workers have to work more/harder while their standard of living is plummeting

What will we “choose”? Four future scenarios for an ageing democracy

1. A bit from everything (democracy does what it should and finds a way)
– Different nations will find a different mix
– Germany is a candidate for higher debt (buys time to tell the population “the plain truth”), a bit immigration, significantly higher taxes, raising pension only moderately with noticeable inflation (as hidden way of cutting pensions), some voluntary work and some productivity gains by technology

2. Elderly (and public sector workers) will use their voting power to prevent any significant change, private sector workforce (and companies) is forced to bear most of the load
a) “Flock of sheep”
– Workers will grudgingly accept this and work madly to keep the system running as it is
b) “Digital autocracy”
– Workers will be forced accept tax increases and their loss of prosperity with the help of digital control technology and digital nudging turning democracies step by step into a digital autocracy
c) “Revolution”
– Workers will try to vote for change without success (against pensioners and public sector workers)
– Government will not turn into a digital autocracy, instead angry workforce, which is not able to change the system by voting will call for revolution (and a new vision, a new political system?)
=> What would “revolution” mean in 15-30 years?
– By no means an armed civil war (at least not in Germany, there are simply not enough resources, including labour, that could be wasted for that)
– It also won’t be 1968 reloaded, because the demographic situation was different then
– But what will it be like then? Really interesting question…

Further reading/sources:
https://www.iab-forum.de/wie-sich-der-demografische-wandel-auf-den-deutschen-arbeitsmarkt-auswirkt/
https://de.statista.com/statistik/daten/studie/1130193/umfrage/bevoelkerung-in-deutschland-nach-generationen/
– Goodhard/Pradhan –  The Great Demographic Reversal

Interesting turn of events: Digital tracking is giving MORE freedom.

In Japan, they are promoting programs using surveillance techniques to monitor those suffering from dementia. Security cameras, tracking devices, QR codes and so on could support or alert caregivers.

This gives many elderly a choice. Suddenly, they can „age in place“, instead of aging in a nursing home. That could significantly improve their quality of live.

Full story: https://www.nytimes.com/2022/02/02/business/japan-elderly-surveillance.html