The financial crisis will hit our aging agenda hard

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D. Murali

Chennai: Financial fire-fighting has become a daily occurrence, at almost every level. While at the household point awry budgets seem to find solution in shrunken menus on the dinner table, the macro scene has the central bankers manning every conceivable checkpoint of the economy, be it in the form of interest rates or liquidity gates.

Alas, the worst to suffer may be the aging. “No financial crisis is benign or comes cheap. The global financial crisis of 2008, and what promises to be the worst global recession since the 1930s, are particularly dangerous and unpleasant,” observes Mr George Magnus, author of ‘The Age of Aging: How demographics are changing the global economy and our world’ (

Navigating our way through to the other side without falling into a slump will be slow and require more extraordinary policy measures by governments, central banks and global organisations like the IMF and the World Bank, he adds, during the course of a recent email interaction with Business Line.

Mr Magnus is positive that these crises will pass, with good fortune, wisdom and, hopefully, a new enlightened American leadership. Not so, one of our next major and imminent challenges, namely the consequences of rapidly aging societies, especially in the West, he rues. “From this standpoint, the financial crisis and recession couldn’t have happened at a worse time.”

Mr Magnus is the Senior Economic Adviser at UBS Investment Bank since 2005. Prior to this appointment, he was Chief Economist at UBS Investment Bank, leading a team of professional economists. He has published research on demographic change, the deployment of petrodollars, sovereign wealth funds and the commercial renaissance of the Silk Road between China and the Middle East and Africa.

Excerpts from the interview.

On how long the impact is going to be.

In some important respects, the financial crisis is leaving some negative legacy effects which are going to cause hardship to those now nearing or just past the age of retirement, and complicate the adjustment process we have to experience as aging societies evolve.

Some of these effects are immediate, others will become apparent during 2009 and as we move into the following decade.

On the key economic effects of aging.

Essentially, the combination of low or falling fertility and rising life expectancy is producing some critical changes in the population and in the labour force.

In some countries, for example, Japan, Germany and Russia, the population is falling. In most advanced nations, the population aged over 65 is now starting to double or triple over the next several years, while the population of those aged under 15 years is going to decline or stagnate.

In all of them, the working age population, aged 15-64, will also fall, stagnate or grow very slowly.

Consequently, aging societies carry two major threats. First, the appearance of labour and skill shortages lowers long-term economic growth and therefore reduces living standards. Second, the resource transfer – away from a stagnant labour force, that produces, to a rapidly growing population of retirees, who consume – is going to place many significant financial demands on both private and public old-age care provision.

On wealth destruction.

The most immediate effect of the financial crisis is the destruction of housing and financial wealth, especially in the equity markets.

It is estimated, for example, that US employees with 401k pension plans may already have lost $2,500 billion in the retirement accounts since the start of 2008.

And the defined benefit pension plans run by companies, especially in countries such as the US, the UK and the Netherlands, will have suffered losses of hundreds of billions of dollars as a consequence of the bear market in equities.

This is not just a problem for employee pensions, but if the funding implications end up bankrupting the companies, it is a much bigger problem for the economy.

Those in the 30s and 40s may not be affected immediately, but to older employees and those just past retirement, these developments will have been shocking.

On the likely outcomes.

Since there is considerable doubt about how many years it might take for equity markets and house prices to reach their old highs, and since too many people have not saved enough in their working lives for retirement, financial hardship or having to work longer than intended are now both highly likely outcomes.

Moreover, as inflation is now declining quickly – and could potentially turn into a deflation in 2009, in which broad measures of prices, like the consumer price index decline – the consequences for interest rates are clear.

In the US, the Federal Reserve has already lowered its policy rate to 0.5 per cent, and significant cuts in interest rates are expected in many other countries in the next half-year. This is essential crisis-fighting policy, but it does no favours to those in retirement or living off predominantly cash- or fixed income-based retirement savings.

On the nature of recession.

The recession, itself, is likely to be neither short nor shallow. Such is the nature of what we call ‘de-leveraging’ recessions, when economies have to dismantle the complex debt burdens and structures that thrived in the previous boom.

This means much higher unemployment and cutbacks in business investment. These two outcomes go to the heart of the kind of things we have to pursue to adjust to aging societies, namely to augment the labour supply and raise productivity.

In most countries, the principal ways of augmenting labour are to facilitate much stronger participation in the labour force by women and by those aged over 55 years. Sadly, a large proportion of women and older persons work in the unskilled or semi-skilled sectors of the economy, and they will be especially vulnerable to being made redundant.

On whether immigration can help.

Immigration, assuming it is a politically realistic option, can make some difference, but in bad economic times, immigrants may not come or, more likely, they might go home.

On the rise in public debt.

The financial crisis and the unusual lengths to which governments have been compelled to go to underpin the banking system is going to cause a sharp rise in public debt and in public borrowing over the next few years.

America’s public debt may already have doubled this year to about 80 per cent of GDP, and deficits of $1,000 billion or more are likely over the next 2-3 years. In Europe, the same trends are unfolding and the EU’s well-known fiscal stability rules will have to be suspended.

But all of this is occurring just as the relentless and large escalation in publicly-funded pension and healthcare spending is about to take off.

On the age-related spending.

In the OECD countries, on average, age-related spending is expected to rise by 7 per cent of GDP by 2050, but much will take place in the next 1-2 decades. In the US and some other countries, the rise is as much as 10-12 per cent of GDP.

And age-related spending isn’t the only priority on the public agenda. How will governments finance the crisis-related deficits and debt, let alone some of the immediate fiscal consequences of aging? Clearly, governments will face complex and politically difficult decisions about taxation and spending over the next 5 years.

On what can be worse fears…

The global economic crisis, if poorly handled, could involve a much more serious economic recession around the globe and result in a major jolt to the process of globalisation.

To address the financial crisis properly, not to mention co-ordinate our efforts in the longer term to deal with the consequences of aging, we actually need globalisation to work – and work better.

If we don’t do that and retreat behind protectionist walls to trade and capital flows, we will throw away the best chance we have of trying to manage the aging transition collectively and constructively, since emerging and developing countries will be where the West is today by the 2030s.

To this end, the outcome of the US presidential election is all the more important, as is the case for full and inclusive engagement over global monetary and economic issues between a new enlightened US leadership and the aspirant powers in Asia and Latin America.


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