Aging Populations have Cooled Economies in Japan and South Korea and may do the same in China

Posted by PITHOCRATES - January 12th, 2013

Week in Review

The dependency ratio is a measure of the burden of the unproductive population on the productive population.  We calculate it by dividing the number of people not of working age (typical those under 15 and over 64 years of age) by the number of people of working age (typically those between the ages of 15 and 64).  The higher this percentage the fewer people in the workforce paying taxes to pay for state-provided pensions and health care.  Two things can increase this percentage.  A baby boom.  Which isn’t a problem.  Or an aging population as the younger generation is having fewer babies that those leaving the workforce had.  This is a BIG problem.  As you have fewer and fewer people paying taxes to support more and more people in retirement.

This is why Social Security and Medicare are going bankrupt.  It’s not because the rich aren’t paying their fair share of taxes.  It’s because there just aren’t enough people working anymore to collect enough tax revenue to pay for the exploding pension and health care costs of an aging population.  This is why the Eurozone is suffering a sovereign debt crisis.  It’s why the UK is trying to find billions of savings in their National Health Service.  It’s why France wants to tax millionaires at 75%.  They have shrinking tax bases because their populations are aging.  So they raise tax rates on the fewer people working.

As governments use their monetary policy tools to help them spend money they don’t have their economies suffer.  In fact, there is a direct correlation between a rising dependency ratio and falling GDP.  As Japan’s and South Korea’s populations aged their GDPs fell.  Which should be sounding a lot of warning bells in China.  For their dependency ratio is now rising (see China Hits A Demographic Turning Point by Joe Weisenthal posted 1/11/2013 on Business Insider).

So the great economic miracle that was China may be coming to an end.  Unless they find some other way to address the costs of an aging population.  Something the other, older economic powerhouses have yet to figure out.

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