What’s worrisome about the current global fiscal situation is that it’s unprecedented in peacetime for so many large economies to be under such extreme fiscal duress and indebtedness. And part of the reason they are in such a fiscal black hole resides in the explosion in their structural, age-related liabilities.
According to the IMF, the net present value of pensions, health care and long-term care out to 2050 dwarfs the costs of the banking crisis everywhere.
Based on policy commitments in mid-2009, it is over 600% of GDP in Spain and Greece, 500% GDP in the U.S., 335% in the UK, and between 200% and 300% in other major EU countries. The precise numbers are less important than the orders of magnitude, and the implications for public policy.
It is no accident that this year, in Greece, Spain, France, the UK, and several U.S. states, for example, budgetary pressures have forced governments to implement or consider a variety of demographically driven policies.
These include an increase in the retirement age, a temporary freeze on pensions, higher public employee contributions to pension schemes, and schemes to get citizens to pay more towards health care, or to specific conditions.
Showing posts with label demographics. Show all posts
Showing posts with label demographics. Show all posts
Monday, July 19, 2010
Friday, July 16, 2010
Why Rates of Return on Equity Are Likely to Drop Going Forward
As the world economy and financial system struggle to regain their footing, they must contend with a number of problems. One of these is a negative change in demographics.
The population is aging rapidly and the proportion of retired to working people is rising sharply. Although demographic projections of population, life expectancy, and fertility are not free from error, the nature of aging means that for all intents and purposes, demographics are our destiny.
As each year passes, there are proportionately fewer young people, and more older people in the work force. As a long-term trend, the unique combination of rising life expectancy and weak fertility rates will define the economic and asset environment. Unless the effects of population aging are offset by purposeful shifts in micro and macro policy, we are losing an important driver of economic growth, and therefore, of top-line revenues.
The loss of growth drivers arising from labor supply and labor market developments doesn’t mean that equity values are going to decline absolutely and persistently, but it does suggest that the rate of return on equity will drop compared with previous decades.
The population is aging rapidly and the proportion of retired to working people is rising sharply. Although demographic projections of population, life expectancy, and fertility are not free from error, the nature of aging means that for all intents and purposes, demographics are our destiny.
As each year passes, there are proportionately fewer young people, and more older people in the work force. As a long-term trend, the unique combination of rising life expectancy and weak fertility rates will define the economic and asset environment. Unless the effects of population aging are offset by purposeful shifts in micro and macro policy, we are losing an important driver of economic growth, and therefore, of top-line revenues.
The loss of growth drivers arising from labor supply and labor market developments doesn’t mean that equity values are going to decline absolutely and persistently, but it does suggest that the rate of return on equity will drop compared with previous decades.
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