A Feb. 27 speech by FederalReserve Chairman Alan Greenspan focused on the growing challenges presented by an aging global population. He warned that the major industrialized nations may lose control over government finances, private investments, and productivity trends unless action is taken soon.
Over the next two decades, the Group of Seven nations will see their citizens aged 65 or older account for a larger share of their populations (table). Yet, as Greenspan noted, these countries have done little to address the funding of care for the elderly. The governments of the U.S., Japan, Germany, France, and Italy already face huge deficits, and this burden will constrain their finances further.
Less noticed -- but equally important -- is the fact that the G-7 nations may find it harder to boost their rates of business investment and productivity growth. As the elderly retire, they stop saving and spend down their retirement funds. This collective shift toward consuming more and saving less leaves a nation with less money for private investments, limiting the increases in productivity needed to improve standards of living.
Moreover, the effect of aging populations on private funds available for investment is not a risk lodged in the distant future. Consulting firm Towers Perrin studied the defined-benefit pension plans of Australia, Canada, the euro zone, Japan, Britain, and the U.S. It found that the stock market losses of the past three years have drastically cut the assets available to pay pension liabilities. The cumulative reductions range from 26% in Australia to 42% in the euro zone.
Towers Perrin says some companies will soon have to shift more cash into their pension funds in order to address the shortfall, leaving less money for capital spending in the short run. Alternatively, companies may redesign their pension plans altogether. But if that means less money for retirees, governments worldwide will be forced to use more public money to support these growing elderly populations.