A Global Demographic Time Bomb

A shocking report released at the World Economic Forum lays out how aging and falling populations could slam world growth

It's no secret that demographic trends are working against the U.S., Japan, and Europe. But just how badly the combined effects of slower labor-force growth and aging populations could undermine long-term economic growth is underscored -- to shocking effect -- in a major new study by the World Economic Forum in partnership with consulting firm Watson Wyatt Worldwide.

The report, released at the WEF annual meeting taking place in Davos, Switzerland, Jan. 21-25, raises profound questions about labor participation and productivity, the cross-border flow of capital, the globalization of labor markets, and the financial viability of pensions and other social-insurance programs.

"Economic output is determined by labor-force growth and productivity rates," says Richard Samans, managing director of the WEF's Institute for Partnership & Governance. "In countries with significant projected labor shortages, the supply of goods and services may not meet demand and standards of living could fall."

Among the report's more shocking contentions:

• In Italy, where the total national debt is already more than 105% of GDP, retirees will outnumber active workers by 2030.

• Japan would have to increase immigration elevenfold from its current level to make up for the nation's low fertility rate and rapid decline in its working population.

• And assuming current demographic and economic trends continue, the European Union's share of total global output will shrink from 18% today to 10% in 2050. Japan's share would decline from 8% to 4%.

The U.S.'s outlook is brighter than Europe's and Japan's, largely because the American workforce is expected to increase by 31 million workers by 2030. By contrast, the report projects that Europe will have 24 million fewer workers and Japan 14 million fewer than they have today. Meanwhile, population growth elsewhere continues almost unabated. India will add more people to its workforce in the next 30 years -- 335 million -- than the total working-age populations of the EU and U.S. combined.


  More alarming, economic growth rates could falter as the proportion of retirees in developed countries increases and the cost of retirement systems significantly rises. Soon, state-sponsored "pay-as-you-go" schemes will no longer be financially viable. They need to be reformed and, at least partly, privatized. But many people in the workforce now fear they'll lose out if creaking state pension systems are reformed. Witness the fierce opposition to change in France and Italy.

Enticing more workers into the labor force of most developed nations won't be easy. A majority of women already work in most developed countries. And raising the pension age is politically unpopular. That's why John Haley, president and CEO of Watson Wyatt, wants to boost immigration to, and the outflow of investment capital from, aging societies. "While no single solution provides a magic bullet, it's clear that the flow of capital and labor across borders can be improved [to maintain economic growth and living standards]" he says. Exporting capital to more dynamic parts of the world could generate more money for the developed world's pension coffers, Haley contends.

That's one reason many delegates to the Davos powwow favor opening the West's doors wider to migrants. "Increased migration can be a win-win situation for the migrants and the citizens of the host country," says Brunson McKinley, director general of the International Organization for Migration in Geneva.

Maybe. But given the qualms many people in the U.S., Japan, and Europe have about increased immigration, defusing the developed world's time bomb is clearly going to take plenty of political courage.

By David Fairlamb in Davos

Edited by Thane Peterson

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