The Pension Gap

by Skye Campobello

Photo: Corporate Finance Institute

Throughout modern history, global population has been growing exponentially. However, as population growth slows, industrialized economies across the world are having trouble adjusting. Modern, first-world economies rely on a limited percentage of people to perform all labour for a society–the youngest of us are in school, and the oldest of us are deemed to be too frail to continue to work. If the economy does not have a sufficient number of people working, it can experience some difficulties, such as not having the tax revenue to be able to supply pensions for the retired or, on a more general level, not having enough labour resources to care for the nonworking parts of the population. The part of this phenomenon that often gets publicized is called the “pension gap,” named after certain governments’ inability to obtain the funds necessary to pay off the pensions of the elderly, though the general phenomenon could be called “demographic decline.”

Wealthier countries undergo the least natural population growth, tending to be below the two babies per couple needed to replace the population.  A popularly held belief is that the world is overpopulated; though this may be true, the vast majority of the world’s population growth lies in third world countries, and due to the way the economies of developed nations function, first world countries could actually use more fertility.

To avoid the problems associated with the pension gap and overall demographic decline, it is best to have somewhat more population growth, lest everyone in a society be too elderly to work. Certain societies have this worse than others–Japan and South Korea, for example, have fertility rates of 1.4 and 1.3 births per couple, respectively, fertility rates so slow that these countries will not only have trouble paying pensions, but also will slowly wane in international power, relevance, and cultural influence over the coming century.

It’s not just about paying for the elderly–it’s about how many workers there are to keep an economy afloat. With too rapid of population decline, economies will steadily shrink, rather than steadily grow, which will likely mean a decline in the quality of life of affected areas.

Thankfully the USA has this problem less than other first-world countries. Though we do have a less than preferable fertility rate–1.8 births per couple–we also have something that Japan and Korea don’t: immigration. The Far East has historically been xenophobic in attitude and policy, and therefore few young workers arrive to carry out the labour necessary to run these economies. The USA and some Western countries continue to attract labour from around the world and welcome it at least to some degree. Whether that labour be unskilled or skilled, it fills the state’s coffers and provides the necessary resources upon which a thriving economy can be built.

Pause a moment to appreciate the ramifications of this information. The forces at work here can make or break nations–population growth could mean a thriving economy that dominates the world stage, and demographic decline could spell the decline of whole countries on the world stage, the slow and painful death of something once great. In our lifetimes, Japan, South Korea, and Taiwan will cease to be at the forefront of cultural influence, technology, and economic clout, and will instead begin to fade into a more impoverished and less relevant state of being, while countries that fair better demographically will not so quickly fade into irrelevance, such as France and the good ‘ol US of A. Demographics will decide who is great and who is weak in the future affairs of our world.

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