Why the ageing population is driving the debt crisis

Filed in archive risk on May 8, 2010

The tumultuous trading in the US which saw the Dow Jones shed a massive 1000 points was driven partly by a typo - where a trader hit an "M" instead of a "B" while trading Procter & Gamble shares, selling a billion shares instead of a million, and on the fallout from Greece .

But the latest report from the Bank of International Settlements puts the global stock market meltdown in perspective.

Look at Table 1 on page 3. US government debt will explode from 62% of GDP in 2007 to an estimated 100% in 2011. Over the same time, Britain's will double from 47% to 94%, Greece's level will go from 104% to 130%, Spain's will rise from 42% to 74% (and unemployment there is 20%), Portugal's will go from 71% to 97% in the next two years and Japan will end 2011 with a debt ratio of 204%.

Growing fears that the Greek fiscal mess is just the tip of a sovereign debt crisis have spooked markets for weeks.

More to the point, the report shows how ageing populations are driving the crisis. An ageing population reduces state revenue and generates more unfunded liabilities to pay for health care and pensions. With less revenue, paying back debt becomes more difficult and that creates chaos for banks and governments. Trouble is many countries haven't even realised the extent of the problem.

"Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody's guess. As far as we know, there is no definite and comprehensive account of the unfunded, contingent liabilities that governments currently have accumulated,'' the paper says. "As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population."

This means the only forward is to encourage older workers to stay in the workforce longer, to either put off retirement or even abandon it. If they are working, they will be paying taxes and won't be drawing pensions and that will contain debt levels.

In that sense, the crisis has the potential to transform society and business forever.