by Peter Zeihan
• The fiscal cliff and budget battles of the past few years will be with us for at least the next fifteen years. As the numerically massive Boomers retire, the government will stagger under ever higher pension and health care costs. Yet as the numerically tiny Xers become the primary taxpayers, the ability of the population to support the current tax load will shrink. There are only two ways to go: sharply higher taxes or sharply lower benefits. Xers will certainly have a strong preference on this decision, but Xers will not have the political voice to get their way. United in their retirement, the Boomers will be the largest voting bloc this country has ever known. And they can probably count on at least some political support from their kids—a.k.a. Gen Y—who probably don’t want Mom and Dad living with them. The Boomer/Gen Y solution will probably be simple: Suck Gen X dry.
• Perhaps the weirdest outcome is that despite a couple millennia of recorded history and twenty generations of global economic patterns, people became convinced that this brief twenty-year window of the Baby Boomers passing through the mature-adult stage had utterly changed how the world would work from now on. Most can be forgiven for that. It is just an issue of exposure. For Americans aged thirty-five to fifty-five—a group that includes nearly all of the U.S. Baby Boomers—the bulk of their formative experiences and professional careers were forged in the most distorted period of this extreme growth and capital richness: 1990–2005. The idea that extreme growth and extreme wealth and cheap credit is “normal” is a pretty easy trap to fall into.3 But that demographic bulge was unprecedented and will not repeat on anything less than a historic time scale. Likewise, the post–Cold War financial flight was a once-in-a-generation event. The “good ol’ days” of high growth and abundant and cheap capital should be more accurately thought of as a windfall. That magic mix will not return in our lifetimes. The soonest it might return would be around 2065 when Gen Z will be as old as today’s Boomers, and even that will only happen if the generation that starts being born in 2020 happens to be considerably smaller than Gen Z.
The transition is already well under way.
As of 2014, the Boomers have already aged sufficiently that consumption-led high-growth levels are no longer possible from American demographics alone. By 2020, the youngest Boomers will be fifty-five, the majority of their cohort will have retired, and all of them will be reshuffling their money out of risky investments such as stocks and foreign interests into risk-averse investments such as annuities and domestic government debt. Within a few short years the entire financial sector will be turned on its head. Instead of a huge generation providing capital, we’ll have a small one. Capital costs will skyrocket from the cheapest in history to something much closer to the most expensive in history, particularly once pension and health care costs for managing history’s largest retiree class are figured into the calculus.
Most disturbingly, this is not a purely American phenomenon. Across the developed world unprecedented demographic bulges among mature workers are generating massive capital surpluses now, driving down the cost of capital and the likelihood of high returns on investment.4 In every single developed country there is currently an American-style population inversion between the about-to-retire and the about-to-be-mature-workers age groups. Japan’s Boomers bulge is a decade older than the American equivalent, while Spain’s is roughly fifteen years younger. Everyone else falls somewhere in between. It dictates a period of chronically low growth and high credit costs, just not on precisely the same time frame.
Rage, Rage Against the Dying of the Light
So how does a country deal with aging populations? The short version is “badly.”
Here’s the longer version:
Some Boomers—and their international peers—may work longer to supplement their savings, and that may well provide a few extra bits of capital to help the overall system adjust. More working years certainly help the financial calculus both from an individual and a government point of view. But there are limits. Worker productivity—and consequently, income—typically falls off after age sixty-four, and the American retirement age is already sixty-seven. Every bit helps, but most workers who choose (or are forced) to work longer are delving deeply into a world of diminishing returns.
What is needed is heavy research into technologies that improve the ability of the old to work, rather than the ability of the old to live. That in turn would require a fairly sharp policy adjustment not just in pension programs, but also in health programs like Medicare and Medicaid. The current setup aims to maximize years lived, and as such encourages (high-cost) convalescence rather than (high-income) productivity. These are certainly policy items worth exploring, but there is the simple issue of time. The oldest Baby Boomers started retiring in 2007 and the youngest Baby Boomers are turning fifty at the time of this writing. Even if America’s various retirement and health programs were reformed today, and a mammoth research program into geriatric productivity were immediately funded and launched, it would be a decade before it could have a meaningful impact upon older worker productivity rates—just in time for there to be no Baby Boomers in the workforce to apply the results to. So should such efforts be considered? Absolutely. But they will have absolutely no impact on the unfolding problem until after that problem has fully manifested.
What about reversing the demographic decline? It is possible, but not very likely. Convincing young people to have kids when they don’t want them is not easy. Raising a child is one of the most expensive things that a young adult can do. Children carry with them the ultimate opportunity costs: day care instead of cars, diapers instead of trips, heartache instead of job advancement. What few countries have peered ahead and realized the demographic disaster before them have come up with some interesting methods of addressing the imbalance, but all have atrocious side effects.
Back in 2006, Russia attempted to address the financial aspect directly, offering women cash to have children. The amount varied based on how many children a woman had, with the payouts distributed across the first few years of the child’s life to help address expenses. Russia did indeed benefit from a reduction in its abortion rate—nearly the world’s highest—as well as a bump in birth rates. A few months later, however, the government realized that abandonments had skyrocketed. Women were having children that they would normally have aborted, collecting their government check, and then dropping off their unwanted children at the steps of the closest orphanage. Considering the appalling nature of Russian orphanages—very few Russian orphans are ever adopted and at age fourteen the children are ejected onto the street to join Russia’s million-strong population of street children—at best the Russian program was a wash.
What about in countries where the sense of societal well-being is stronger? Sweden is another illuminating case. In the Scandinavian heartland would-be mothers benefit from one of the most generous systems in the world: Parents can collectively take up to sixteen months of maternity leave, thirteen months of which are paid at 80 percent of their prebirth pay rate. These days don’t need to be all used at once, but can be saved and used at any time until the child turns eight. Additionally, a woman can choose to reduce her hours by a quarter at any time until the child turns eight, although those are unpaid hours. The best part is that those benefits stack if the woman has additional children. So a woman who has three children in three years would gain four years of maternity leave that would not have to be used until her youngest child was eight, and could voluntarily reduce her hours by three-quarters until her oldest child turned eight. Additional benefits were added in 2008 to encourage dads to get in on the child-care action.
Because of this policy, Sweden boasts the highest birth rate and the healthiest demography in Europe. But there is a very dark lining. If a young woman applies for a job, the employer must expect that she will be taking years of time off. That employer will nevertheless be legally required to keep her job open and to pay for years of maternity leave. The expected happens. Young Swedish women su
ffer from the highest unemployment and underemployment rates among the advanced countries, and Swedish women overall are far less likely to advance into the top ranks in management, corporations, universities, or even government sectors than their Western peers.
As the Russian and Swedish cases suggest, adjusting a people’s lifestyle is never easy, cheap, or free of unwanted side effects. But the need for change remains. Take a look at the population pyramid below and you get a sense of what is possible—and impossible.
Japan is both the oldest and the fastest-aging society on the planet. Fully one-third of the population of 126 million is sixty and over. Since 1900 median life expectancy in Japan has increased from forty-four years to over eighty-three.
For more than a quarter of a million of Japan’s elderly, there is a single, identifiable cause of their longevity: feeding tubes. The tubes are surgically inserted into the stomachs of primarily bedridden hospital or nursing home patients who average eighty-one years of age and stay on the tubes for roughly 2.3 years at a—largely state-subsidized—cost of about 5 million yen ($49,000) a year. The surgical insertion of feeding tubes has become so common in recent years that most families and patients aren’t even consulted before it’s done.
Feeding tubes are part of a phalanx of elder-care issues ranging from Alzheimer’s to diabetes to government outlay policy: Every dollar spent on such procedures that keep treasured relatives alive is one less dollar that can be used for education or roads. In needing a better solution to this problem Japan is hardly alone. Globally the fastest-growing demographic are over-seventies.
Addressing this at a demographic level is largely impossible. Even if Japan dedicated itself to a nationwide breeding campaign today, it would not reap the financial benefits of a more normalized demography until 2075.
Why would it take so long? Healing a demographic imbalance requires not just a lot of kids, but enough time to allow those kids to grow up and become mature workers so that they can generate capital. To actually regenerate a degraded demography you’re talking about a sixty-year process (the amount of time it takes to grow a mature worker to the height of his/her income and investing capacity). And even that assumes that you can actually generate the kids who will one day become those sixty-year-olds in the first place.
A far more likely outcome is that forty-somethings will continue to act, well, their age. And they just keep aging. In just ten years the youngest edge of the Japanese population bulge will be fifty, a point at which demographic recovery is biologically impossible.
Most likely, things are as good in Japan as they are ever going to be. Japan will never have more young people than it has today, so economic growth is as high as it will ever be. Japan will only have more retirees, so pension outlays are as low as they will ever be. Combined, that means that the country’s debt burden is as small as it will ever be and the ability to service that debt is as easy as it ever will be. And the Japanese are not alone. Europe and China, as we’ll discuss in chapters 11 and 14, are only a few short years behind the Japanese.
Even if Japan and the rest are able to adapt to their rapidly aging demographics and maintain economic and political coherence, the world is still slipping away from them rapidly. In part because there is one country out there that is both aging more slowly and has a demographic that is already healing.
The American Exception: Youth, Immigration, and Regeneration
For Americans the demographic inversion is only a temporary development.
First, Americans are younger overall than nearly every other major culture. The United States was a latecomer to urbanization, and its vast tracts of land meant that the American urbanization experience was more suburban single-family homes rather than tight-quarter apartments. Consequently, the shift toward fewer children in the United States was both delayed and not as intense, resulting in a younger demographic more capable of reversing demographic decline (for example, it is much more feasible for American thirty-somethings to raise kids than Japanese or German fifty-somethings).
Second, it has been far easier for the Americans to assimilate immigrants than most cultures. As a settler society, the United States is one of very few countries where the concepts of nationality and government are not inextricably linked. Let me spell that out a bit. In most countries the dominant ethnic group originated in a specific geography, such as the Thames valley for the English. Early government was forged by the people of that ethnicity who lived in that geography, to deal with the concerns of that ethnicity and the problems and opportunities of that geography. The concepts of nationality and government fused right at the beginning. Even today, while the United Kingdom is technically a multiethnic society, the English are very clearly in charge.
Settler societies—a group of countries that includes Canada, Australia, and New Zealand—are different. Even in their initial waves of settlement they were not monoethnic, and they were settled across a variety of geographies rather than concentrated into one. National government was formed to deal with common problems of all of the ethnicities and all of the geographies rather than the discrete issues of one group in one place. In such places governments tend to naturally split into multiple levels of authority—national, regional, and local—to reflect the different ethnic, geographic, and historical legacies when compared to Old World governments. One outcome of this is that the national government of such settler societies is not beholden to any particular ethnicity, the opposite of the Old World systems.
Regarding immigration, the impact of these different approaches to managing geography is night-and-day. In a traditional state anyone from the outside is seen as, well, an outsider. Even when citizenship is attained, it does not necessarily confer membership in the ethnicity. Today there are millions of ethnic Arabs who are second-class French citizens living in French cities whom mainstream French culture continues to regard as not French. As such, they live in ghettos—the infamous riot-torn banlieues—and have few paths to prosperity or acceptance, even though many of them are third-generation French citizens. In contrast, in settler societies no one ethnicity or geography controls the system, so it is fairly easy for an outsider to settle among the mélange. Just as the various groups who make up the system have chosen their nationality to be a pooled concept rather than an ethnic-based one, so can the newcomers. Actual citizenship isn’t even always required. The result is that the United States and the other settler societies can partially rely upon a flow of new arrivals to help them out of a demographic crunch, while places like Sweden or Taiwan cannot.
Third and by far the most important is that the American generational tightening lasts for only one generation. Behind Gen X is Gen Y, the Boomers’ kids. As you might expect from the kids of the country’s largest ever generation, there are a lot of them—35 percent more than the Xers. Because of these factors, the United States’ financial/demographic situation will repair itself with surprising speed (by demographic standards).
• In 2030, the oldest Boomer will be eighty-four. By then the Boomers will be passing on just as they retired: as a group. Dead people don’t receive pension checks (outside of Chicago), and so their disappearance will lift a great weight from the system’s financial commitments.
• In 2030, the oldest Gen Xer will be sixty-five, and the Xers will become the old fogies of American society. But just as there were not enough Xers to fund the country (much less the world) to the degree to which all have become accustomed, the financial load of the retired Xers will almost be comical in its smallness and manageability compared to the crushing omnipresence of aged Boomers.
• In 2030, the oldest members of Gen Y will be fifty, an age when they will start to seriously take over as large-scale contributors to the country’s capital stock. Their numbers will allow them to do what the Xers could not: sufficiently fund the system.
Generation Y will not be able to repair the demographic balance overnight, but as they mature and step into their parents’ current role as capital
providers, the American demographic pyramid will eventually take a more “normal” shape. It will still be a fairly strict capital system, but no longer an inverted one. Given time, American capital costs will return to a more normal level. After 2030, the Americans will have moved through “painful” and be merely at “uncomfortable,” and things will be improving by the year. By 2040, nearly all of the Boomers will have passed on, and all of Gen Y will be in the prime of their taxpaying lives. The Americans will have their financial feet firmly back under them.
But that will most certainly not be happening elsewhere. The United States is the only developed country to boast a widening generation like Gen Y. Throughout the rest of the developed world the Boomer equivalents simply didn’t have many kids—not even enough to replace their own numbers. So while the American financial world will be past its period of maximum stress by 2030, for the rest of the world 2030 will simply be another year of an ever-deepening imbalance between retirees and taxpayers, with smaller and smaller generations coming up the ranks generating less and less growth. For the developed world beyond the United States—and even large portions of the developing world—chronic capital poverty and permanent recession will be the new normal from which there is no return.
