23

I'm thinking of countries with economic and social policies like Germany. We can easily observe that in most developed countries, the birth rates are dipping (surprisingly). To my understanding, it is the young who are working (and hence highly taxed) keeping the system afloat.

Suppose there is some point in the future where the age pyramid flips, that is old people become a majority; then, what type of policies and checks do countries and states such as these have to deal with such scenarios?

2

8 Answers 8

34

Lots of countries are facing the challenge of an aging population. Basically the whole northern hemisphere does (with some exceptions, the most notable one being India). The only regions of the world where the population is still growing are sub-Saharan Africa and the middle east.

Possible measures to mitigate the problem are:

  • Raise the retirement age.
  • Support and promote part-time employment for people beyond retirement age.
  • Lower retirement benefits and elderly care expenses.
  • Raise the amount of money working people pay into the retirement systems. Either by raising the mandatory payments into the government-managed pension system or by promoting private retirement funds.
  • Increase birth rate by removing financial and logistic obstacles to live a family lifestyle. This includes things like maternity and parenting leave, family-friendly employment laws, family-friendly urban planning, subsidization of daycare, schools and higher education and financial benefits for families with children.
  • Permit and promote immigration of young workers from abroad.

Most countries which face this problem use a mix of these techniques.

14
  • 3
    You do realize that basically none of these will both work and be accepted by the population of any country. Reforms of the system, for example, will get stomped on by the specific aging demographic that raises the issue. Increased birth rates cannot possibly work in time to rescue the system, since govt income would not rise for 20 to 25 years, and expenses would rise in the interval to cover things like schools, etc. Immigratiton of skilled workers who would make up the deficit could only come from other countries with the same problem.
    – Dan
    Feb 4 at 18:54
  • 4
    "The only regions of the world where the population is still growing are sub-Saharan Africa and the middle east." U.S. population is still rising. The U.S. gained a bit over 10 million residents as a result of immigration and another net 10-11 million from births - deaths between 2010 and 2020, for example. Of course, U.S. population isn't rising anywhere remotely close to the rates in India, Africa, the Middle East, the Philippines, etc.
    – reirab
    Feb 4 at 20:11
  • 26
    @Dan You do realize that some of these things are already implemented and working in some European countries (definitely not all of them). These trends are known for decades and some countries have implemented systems that remain financially sound for several decades into the future. Afaik Sweden is fairly future proof, Austria and Netherlands have honest plans for the future as well.
    – quarague
    Feb 4 at 21:11
  • 3
    A good answer, though I think increased automation and increased importation of manufactured goods have roles to play.
    – mikado
    Feb 5 at 9:25
  • 4
    @Zombo You do realise other countries than the US exist? In most EU countries and Canada, it's somewhere around 65.
    – Jan
    Feb 7 at 16:48
24

Change the tax system from labor to production

Along with an aging population, productivity is rising in many sectors, and the productivity increase is often outstripping the wage (and hence income tax) increases. Many proposals for a robot tax aim at preserving human employment, but they might just as well fund the welfare and retirement system. The German term is Wertschöpfungsabgabe, or value creation tax, a term very similar to VAT.

6
  • 2
    When larger and larger fractions of the population get their main income from govt sources, how will it work any better to tax the people who own robots than to tax the people who make stuff?
    – Dan
    Feb 4 at 18:58
  • 4
    @Dan: I believe a robot tax is misguided, since I'd find it hard to define fairly. It is much easier to tax added value (VAT). Still, I believe VAT is somewhat unfair towards smaller enterprises, due to implementation details like having to pay income tax, and only being able to deduct VAT later, which drive up liquidity needs and compliance costs.
    – danuker
    Feb 4 at 20:58
  • 10
    @Dan, taxing workers used to be a convenient means of taxing economic activity. If more and more economic activity happens without workers, then that base must change. Note that I'm not necessarily for a robot tax myself, but I recognize it as a possible answer to the problem raised by the OP.
    – o.m.
    Feb 5 at 8:52
  • 1
    @ItalianPhilosophers4Monica, I think you underestimate the "negotiating power" of having a large consumer base.
    – o.m.
    Feb 5 at 8:54
  • 3
    VAT has the big benefit that it's a sales tax, not a production tax. Production taxes favor imports and penalize exports - robots are even easier to move abroad.
    – MSalters
    Feb 7 at 8:21
18

Thinking about this problem in terms of taxation and welfare is something of a red herring; the problems occur regardless of the fiscal structure. Retirement is not about redistributing money but about redistributing production. Or, as user3067860 pointed out in the comments, sometimes output of production.

For everything a retired (or a working) person buys, somebody has to put in a corresponding number of hours of work, to produce it, distribute it, etc. When you have fewer working and more retired people, you have fewer hours of work available. Worse, you need most of those hours of work at nearly the same time the demand is there (you can't bake bread 20 years in advance!)

Importantly, this is true regardless of how the retirees pay for goods or services.

The underlying mechanism how this comes about varies. If you are using a US/German-style Social Security system, you simply have too few people paying in to pay out benefits.

If you rely on stock investments, you have too few working people buying stocks and too many retired people selling stocks, leading to a drop in stock values at the exact time the stocks are needed.

If you rely on plain savings, the same problem would come about through inflation.

Thus, the demographics problem cannot be addressed by shifting how people provide for their retirements.

Solution

There are several approaches to solving this issue, but each one of them tends to have problems of its own. That's why the demographic pyramid leads to such passionate political debates.

  • Flip the demographic pyramid back.

This can be done through increasing the birth rate, or through immigration. Increasing the birth rate is notoriously difficult, has a 20-year lag time, and many people feel that it has undesirable environmental consequences. Immigration tends to be politically problematic, and can negatively affect the source countries (brain drain).

  • Importing goods from other countries.

This is something most of the affected countries are doing on a large scale right now, but it only works due to huge wealth disparities between countries.

  • Increasing productivity.

This would usually mean, more automation. Aside from the increased energy use this would usually entail, this is probably the most long-term sustainable approach.

  • Accepting the problem, and living with it.

This is of course not a real solution. It means returning to a society with widespread poverty in old age.

  • Expecting young family members to provide for retired people.

Another approach we are currently taking. It reduces the productivity of young family members dramatically, and really shifts the burden from all young people to a relatively few of them.

Update: one important approach I forgot:

  • Increase retirement age. The challenge here is that this is often not possible for other reasons. In positions that involve hard labor (such as construction work), the human body often doesn't support a later retirement age. In other professions, we mandate early retirement for safety reasons (for instance, we do not allow pilots to fly past a certain age).
13
  • 2
    Why do you say that many people feel that increasing the birth rate has undesirable environmental consequences yet immigration does not? Do emigrants (and their families) to a country inherently have a smaller environmental footprint than people born in the same country?! Feb 5 at 16:08
  • 9
    @EllieKesselman environmental problems are global. For example the global carbon footprint increases with the global population, whereas in theory it does not increase whether people live in country X or Y. This is not completely true of course, since the carbon footprint of rich countries is much higher than poor countries.
    – Erwan
    Feb 5 at 17:01
  • 3
    Slight nitpick, it's not about distributing production, but rather output...if we invented a magical stasis field tomorrow, today's youth could "save" for retirement by baking their bread 20 years in advance after all. Feb 6 at 5:48
  • 3
    * a US/German-style Social Security system,* - you put two things into one sentence that are vastly different from each other. The US 401k has no equivalent in Germany, even though they've tried to press through various similar systems (which were such failures that there are now lawsuits about rolling them back). Health insurance is nowhere near comparable, neither is unemployment handling.
    – Tom
    Feb 7 at 6:20
  • 2
    @EllieKesselman "Once people emigrate to first world countries, they cease to give birth anymore?" No more than they would have anyway. In fact, they probably will have fewer children than they would have had in the country of origin (because generally people in wealthy countries tend to have fewer children, thus the demographic pyramid issue we are talking about here). Feb 8 at 7:05
6

Welfare is a rather broad term, as it includes income redistribution between high and low earners, helpt to handicapped, families with many children, etc.

Retirement benefits in many western countries are indeed based on the assumption of growing population (or at least non-decreasing population). A retired person of 60+ years old has their child (40+) and their grand child (20+) working and paying for their retirement, so that the income of two people is divided among three to guarantee everyone same level of life by giving away a third of their salary. If the population were doubling with every generation, we would have 6 earners (2 children and 4 grandchildren) working to support 7 people, that is the burden of the system would be much lower. (It is for this reason that some of the critics of retirement benefits refer to it as a Ponzi scheme - it depends on constant recruitment of new contributors. While there is some logic to this, the term is obviously charged.)

This system is already under strain in the last couple of decades, as the birth rates have been decreasing ever since the baby boom, and the baby boomers generation is retiring.

There are some possible adjustments (as briefly mentioned in the answer by @Philipp), the principled of which are:

Raising the retirement age
A glaring fact is that when the system was put in palce in many western countries, the retirement age was about the same as life expectancy. You may see that I cheated in the calculation given in the beginning, as I implicitly assumed that the retired person would live at least 20 years, till their children retire and take their place. In fact, if the retirement lasts less then a whole generation, the younger people needs to contribute even less than my simplistic calculation suggested. Thus, increasing life span in the western world puts as much strain on the system as the decreasing birth rates. E.g., the retirement age in France is 62, given the current life expectancy of 80+ - that is retirement does last a generation.

Raising the retirement age is an obvious adjustment, as most people at 60-70 today are in rather good physical shape to work and contribute to the social welfare. But this solution is obviously unpopular with those approaching retirement, who are effectively told to work for 5-10 years more than they expected. Fixing retirement age to the life expectancy (just as the welfare benefits or poverty income are fixed to the spending basket) could be a more subtle way to do it... but it also appears to be too radical a change to be seriously contemplated.

Immigration
The population decrease actually happens only in developed western countries, whereas the world population continues growing very fast. Allowing more young immigrants may alleviate problem - both because they are gainfully employed (substituting for the non-existent children), but also because they come from different cultures, where the birth rates may be not as low. (Contrary to the claims that immigrants and their chidlren rely on welfare and thus expand the national resources.) This is arguably one of the main reasons why most developed countries do allow constant influx of immigrants, despite the unpopularity of this in some quarters.

6
  • 7
    How helpful immigration is depends quite dramatically on the productivity of the immigrants, though. Immigration of well-educated, highly-productive people does help solve this problem. Immigration of under-educated people who are only qualified for unskilled labor and have only a small grasp on the language of the place to which they're immigrating will more likely be a net loss, though, as the cost of the social services provided to them will likely exceed the taxes they pay (which, in the case of the U.S. for example, would mostly be zero or negative, at least for federal income taxes.)
    – reirab
    Feb 4 at 20:18
  • 1
    Which is why almost every country tries to attract highly-educated immigrants, while more wealthy nations with large social spending tend to be more reluctant to attract less productive immigrants.
    – reirab
    Feb 4 at 20:20
  • 4
    @reirab I mostly agree with your remarks, but there might be high demand for unskilled labor as well, especially when the "natives" are reluctant to take certain jobs. Also, many benefits, such as unemployment in France, e.g., are awarded only after one has been gainfully employed for a few years. Feb 5 at 7:49
  • 2
    @reirab I wouldn't believe that considering all the food left rotting on US fields whenever there is an immigration crackdown. Even unskilled immigrants perform the equivalent of "robot labor" which raises the profits of those who are willing to exploit them. They, in turn, have to pay more taxes (presumably, and to varying degrees). Feb 6 at 0:56
  • 2
    @LawnmowerMan But they also tend to be heavily reliant on government assistance, which generally negates any societal benefit of the cheaper labor. And, if they have children, educating them costs the local school system far more per capita than average because most of them don't speak English, meaning the school systems need dedicated Spanish-speaking staff to work with them. That's not cheap, especially for areas that only have a handful of Spanish-speaking students. Granted, these problems didn't exist prior to the advent of the welfare state, but they do exist now.
    – reirab
    Feb 6 at 2:11
1

As Philipp♦ mentioned, living a family lifestyle/pronatalism can help.

I'm surprised nobody has mentioned Hungary. They essentially encourage families to have more children by offering tax breaks.

3
  • The impact of Hungary's policies has been marginal at best. It's TFR did hit bottom at 1.3 in 2003 and it is 1.5 now. But there is no indication that it will come anywhere close to replacement rate ever. No country has ever reversed the demographic transition of industrialization (at least without economic collapse to pre-industrial levels a la Afghanistan). See macrotrends.net/countries/HUN/hungary/fertility-rate
    – ohwilleke
    Feb 7 at 5:51
  • 1
    If you mention Hungary, it's probably good to also note that it suffers from a pretty bad brain drain. Its current government is aggressively anti-liberal, and EU membership makes emigration a real possibility for the educated elite.
    – MSalters
    Feb 7 at 8:27
  • @RodrigodeAzevedo: No. I describe a push factor (authoritarian government) and a pull factor (jobs available elsewhere in the EU for people with the right skillset), but I do not assume the two are aligned, and certainly not 100% aligned. But I can see where the confusion comes from. There is definitely an correlation between education and liberalism.
    – MSalters
    Feb 7 at 9:49
1

A welfare state that saved up money while the population was still young can survive when that same population has aged

Similar to how an individual can plan for retirement when one is young by saving up a portion of one's paycheck and investing it or saving it, a welfare state must save up a portion of everyone's paycheck starting at a young age, and the state can invest it.

All the money that is saved can be invested in ETFs, mutual funds, lent out with interest, or otherwise invested in something.

Imagine 20% of everyone's salary for decades has been put towards a savings fund for everyone's retirement. By the time the population has aged, there would be a cushion of saved wealth the aged population can rely on even though the country isn't generating new wealth.

Consider the following diagram that demonstrates the powerful effect of a single individual increasing savings by just 1% at a young age: increasing savings contribution from Fidelity

what about the countries that haven't saved??

This is a short term issue, and would need a short term solution. For example: reducing retirement benefits, raising retirement age, etc.

5
  • 5
    As @KevinKeene notes, what works at an individual level doesn't work macro-economically.
    – ohwilleke
    Feb 7 at 5:53
  • But investment growth is not a constant like some immutable law of nature: it is dependent on the economy, which is again dependent on the population pyramid. Say the retirement investments are in stocks (probably true in reality). If more old retirees cash out stocks for living costs, and less young people buy stocks for retirement, the value of stocks drop and retirees cash out less. Same with cash savings: inflation makes the value of your 1 dollar drop - you can buy less with it than when it was put into savings (barring interest, which now is also mostly tied to the stock market...)
    – frIT
    Feb 7 at 9:06
  • Wow, $60,000 annual income at 35? Well done Suzi, you've basically made it! */sarcasm*. (Note to Nick: this isn't directed at you but rather at the creator of the graph.)
    – Jan
    Feb 7 at 16:51
  • "Saving money" is a fool's errand. Money is a mechanism for (re)distribution and (selective) activity facilitation. Also, the state and/or private banks can increase or decrease the amount of money in existence. It's not that it's useless to "save money", it's actually meaningless.
    – einpoklum
    Feb 12 at 18:18
  • To clarify, I don’t recommend stashing money underneath a carpet. I recommended buying and holding “assets”, that can include real estate, land, factories, companies, property, intellectual property, harbors, stocks, bonds, gold, solar panels, automation, etc. Stashing cash is always a bad idea, but exchanging that cash to buy and hold a diverse portfolio of assets is a proven way to build wealth that can last into retirement. Feb 14 at 13:06
0

1. Some nitpicking of your presentation of context

I'm thinking of countries with economic and social policies like Germany.

Germany has been cutting back on welfare arrangements for decades now - like other EU kinda-social-democracies. But ok.

We can easily observe that in most developed countries, the birth rates are dipping (surprisingly).

Not surprising at all actually.

To my understanding, it is the young who are working (and hence highly taxed) keeping the system afloat.

While the young do more work than the older, people do many kinds of work, and important non-work activities, until a much later age than, say, the median.

But regardless of that - in most countries, wage distribution is skewed, so that the majority make (relatively) low wages and pay less tax, in both absolute and percentile terms, and an increasingly small minority pay increase larger amounts and fractions of tax, personally. This what it looks like in Germany (or looked like in 2008 anyway): the top 30% pay nearly 80% of all income tax.

In terms of age - young workers typically earn the lower wages and pay less tax per capita and per EUR earned than older workers.

No less important is the question of what gets taxed, which others have mentioned. Why should the majority of state income be tax on labor? Why not the tax on corporate profits? Or on existing capital/wealth? If the former is the case, that is because of the relative weakness of the working class vis-a-vis capital.

2. A sort of an answer

then, what type of policies and checks do countries and states such as these have to deal with such scenarios?

In itself, that's no trouble whatsoever. After all, productivity has increased tremendously over past years, and workers are made more redundant and obsolete with every passing day - with automation (e.g. think of driving, postal work, sales in shops and markets etc). So, instead of there being wider unemployment among the young, there will be more work, in relative terms, for them to take care of, with the elderly part of the population working less; plus care-giving. (Although TBH care-giving for the elderly is a real pain in the ass past the point of senility / inability to move; but never mind that.)

So, why is this a problem? Because of the problems with distribution of work, planning of production / services, and the distribution of products and services. To describe it vulgarly and simplistically: If the old rich people hog the power and resources, then the retirement benefits afforded to regular working people will be insufficient; there will not be enough demand for products and services to gainfully employ the young; and it will mostly be the needs of the rich minority which are met.

Naturally reality is somewhat more nuanced and there are a bunch of other factors. But still, this is only a problem to the extent capitalist societies - albeit with welfare state measures - like Germany, make it a problem.

-2

The solutions have always been there:

E.g. the concept of extended family as robust business unit.
Extended family is a microcosm, where needs and burdens are traceable and so controllable and so can be optimized towards independence from public registers, which would be essentially relieved.

In macrocosm we have the concept of a thin state: less taxes, self-organization, private education, ...
Living example are the Amish: They are rich, they own land, they understand, that we live from the things that grow and cannot eat money. So they don't fear inflation and surprisingly they overcame recent epidemics.

Seems like centralized attempts for balancing material needs are more cause than solution of problems on political scale; the aspect demography appears more as indicator of man made problems than being a problem.

Conclusion: The welfare state as central facility won't survive inside a democratic foundation; all historic examples with central welfare facility since industrialization were socialist from the beginning or turned into such.

6
  • 2
    Your answer could be improved with additional supporting information. Please edit to add further details, such as citations or documentation, so that others can confirm that your answer is correct. You can find more information on how to write good answers in the help center.
    – Community Bot
    Feb 6 at 7:35
  • The existence of an aging population, in this context, almost definitionally, implies a lack of robust extended family structures.
    – ohwilleke
    Feb 7 at 5:46
  • "Family values" for the traditional extended family means the head of the household (the man) using the other members of the household (wife and children, poor relations) as low paid or unpaid labour. This allows violence and abuse to flourish. It may sound good on paper to persons of a certain political bent, but for those at the bottom it is not a good life and people tend to flee to somewhere better.
    – RedSonja
    Feb 7 at 8:26
  • @ohwilleke hen and egg: Not clear, whether it is result of an agenda, but since the 60s we observe the loss of extended family as value, as obstacle for individual liberty, well summed up in RedSonja's comment. Remains the fact, that local balancing is more efficient and effective, so in quantity reduces the fatal dependency of the people from public registers, latter ones are unburdened, can focus on hard cases and also minimizes the damage of corrupt governments shifting tax money to their private sponsors. Basically we should get aware of what back then enabled the welfare state. Feb 7 at 10:06
  • 2
    Is this not the hit-and-miss solution that existed in Europe before welfare states? It worked in some families, in some cases, to some extent, it often failed and old people without relatives went poor, orphans went poor. Of course old people without relatives still go poor if they lack their own means in many places with a welfare state, as do orphans.
    – Ivana
    Feb 7 at 12:03

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .