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The economy

The growing cost of an aging world Add to ...

More than two centuries ago, economic theorist Thomas Malthus issued a famously grim forecast that population growth would outstrip the capacity of the world to feed itself, and that the result would be widespread famine and a sharp rise in mortality rates.

He was wrong on that count. But he was right about demographics becoming one of the most worrisome - and prohibitively expensive - challenges on the global stage.

"The new Malthusian nightmare is approaching," U.S. economist Edward Yardeni said in a note to clients yesterday. "Today's much more realistic and dismal demographic scenario is that the number of older people will grow faster than younger ones almost everywhere in the world."

This, in turn, is putting enormous pressure on governments, already stretching their fiscal capacity to the limit to cope with the fallout from the global financial crisis and ensuing economic slump. United Nations estimates show that birth rates have fallen below replacement levels in more than 70 countries, including most of the developed world, at a time when ever larger numbers of people are living well into old age.

No wonder alarm bells are beginning to sound in policy-making circles from Beijing to Washington.

The International Monetary Fund warned in a report yesterday that governments must contrive clear exit strategies from their massive stimulus packages because the exorbitant costs of supporting aging societies are breathing down their necks.

The costs associated with aging are 10 times larger in the Group of 20 countries than the tab for the current crisis, the IMF said in a document attached to its latest world economic assessment.

The fatter that governments allow their debts to grow as they try to put an end to the recession, the harder it will be to cover those costs in coming decades, the IMF said.

"Action is all the more critical, in that progress in one key pillar of a strategy to address these pressures - reducing budget deficits and lowering public debt levels in the short-term to make room for future entitlement spending increases - has been undermined by the crisis," the IMF said.

In Canada, Finance Department officials are already crunching numbers to figure out how soon the big bills associated with aging will hit, and how much time Ottawa has to get spending and revenues back in balance. The aging argument is expected to figure prominently in Finance Minister Jim Flaherty's plea to balance the budget sooner rather than later, insiders say.

Canada's ratio of aging costs compared to crisis spending is probably considered one of the highest in the world by the IMF partly because the crisis costs have not been huge, compared with those of other countries, said William Robson, president of the C.D. Howe Institute.

But it's also because the cost of aging is expected to rise sharply, according to calculations Mr. Robson has made.

"The transition will be large and abrupt," he warned, because Canada's fertility rate plunged after the baby boom. The dependency ratio - which shows the number of people over the age of 65, compared with those younger than 65 - will rise from about 20 per cent today to about 40 per cent over the next two decades, he said.

He figures the added costs to health care, Old Age Security, government pensions and other age-sensitive spending to amount to about $1.5-trillion in today's dollars - a burden that will mostly be borne by the provinces, particularly in Eastern Canada.

But compared with the likes of rapidly aging Japan, Russia and a handful of Western European countries such as Italy, Canada is in relatively good shape, economists say.

"Some countries have a bigger issue than others," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. How big depends not only on the size of their demographic challenge but on how bad their debt situation was to begin with, he said.

Canada has the lowest net government debt-to-GDP ratio among the leading industrial countries and more favourable demographics than most, thanks partly to a large immigrant population.

Another plus for Canada is that since the mid-1990s, a growing number of people past the age of 55 have been staying in the work force. The participation rate for this age group has risen 12 percentage points to a record 35 per cent, a trend that may help the Canada Pension Plan stay above water, BMO says.

The IMF expects most developed countries will see their debt loads explode by 36 percentage points by 2014 (as a percentage of gross domestic product), because of the costs of huge stimulus packages, the rising demand for automatic stabilizers such as employment insurance, falling revenues and asset prices, as well as higher interest payments.

"It is essential to prepare the ground now for an orderly withdrawal of stimulus once signs of recovery have firmed, particularly as key reforms - for example, to pension and health care systems - will take time to bear fruit," the IMF said.

If governments fail to design and communicate sound exit strategies, concerns about inflation will prompt interest rates to rise further, exacerbating the debt burden and making it even harder to support an aging population.

The conundrum is weighing heavily on policy makers, who don't want to withdraw stimulus too soon - or even talk too much about it - for fear of destabilizing a fragile recovery that has barely begun to take hold.

Aging will also have a marked impact on geopolitics.

Based on their growing economic power fed by the large, expanding pools of young people under the age of 25, countries like India and Brazil will soon wield considerably more clout in global affairs, while Russia's influence, with its rapidly falling birth rate, will be diminished.

It's also an issue for China, where the one-child policy has spawned both a lower birth rate and a higher ratio of males to females.

"Demography is very rapidly going to change power relations," said Mr. Yardeni, president of New York-based Yardeni Research.

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