An unprecedented challenge for the global economy…

An unprecedented challenge for the global economy…

Much has been made recently about proposed changes to the pension age for those currently in their thirties and forties.

And whilst it’s not much fun to find out that you’ll have to work for longer before you claim can claim a state pension, we have to realise the current state of affairs is not this government’s fault.

Rather it is the collective responsibility of every administration since the state pension was first introduced almost 109 years ago, in August 1908.

The thing is, successive administrations have taxed workers through the combination of income tax and national insurance on the pretext of raising money to pay for future pensions, but they’ve never invested that money to help meet their future obligations.

Preferring instead to kick the can down the road to future generations, in what to an outsider looks little better than a glorified ponzi scheme.

To give you some context as to the scale of those liabilities, the Office for National Statistics calculated in 2012 that the total unfunded state pension liabilities were the equivalent of -£146,000 per UK household, with an additional -£33,000 of unfunded public sector pension cost accruing to each UK household.

That’s quite a sobering thought and speaks to just how badly mismanaged the whole pension issue has been by the state.

But it also reminds us that only we ourselves have our own self-interest at heart and that we can’t rely on others to provide for us in later life.

Because it’s genuinely quite possible there won’t be any money left to pay a state pension in 30 years’ time.

Whatever the merits of the UK state pension scheme and its finances, or rather the lack of them, the UK is not alone in facing issues with the older generation…

This is a global issue and will be an unprecedented challenge over the longer term.

The scale of the issue has been brought starkly into focus in an impressive piece of thematic research from Bank of America, entitled The Silver Economy.

The report is a comprehensive look at the challenges and opportunities presented by rapidly changing demographics out to 2050.

The global population is set to boom to some 9.7 billion individuals by 2050. This growth will significantly test our ability to feed, fuel, clothe and care for everyone, simply because the planet’s resources are finite – none more so than water and land suitable for cultivation.

To some extent the population growth figure has hogged the headlines, but the Bank of America report drills down into the data to highlight some subtle but equally important trends and predictions…

Including that life expectancy is increasing annually, so if you are alive today you are likely to live longer than every generation before you. By 2050 the average global life expectancy will be 77.1 years, compared to just 48 years in 1950.

What’s more, life expectancy is predicted to increase by an additional year in every five that pass thereafter, such that in 2100 we could have added ten years to the average human lifespan.

That simple progression means that as a species we have reached or even passed ‘peak youth’. That is, the point where the number of older people in the population starts to outweigh the numbers of young people.

This is a problem because it’s been the younger majority joining the workforce who have been paying for the social care of the elderly.

As the percentage of younger workers in the economy falls a larger proportion of that burden falls on a smaller number of individuals.

The image below, sourced from the Bank of America report, highlights some of the key changes and challenges we can all expect to face out to 2050:


Click image to enlarge.

The world will see the growth in the numbers of elderly people (aged 60+) explode from 900 million in 2015 to 2.1 billion in 2050.

Eight out of 10 of these elderly citizens will live in the developing world at that time, placing an enormous strain on infrastructure and resources in the emerging markets.

Developed economies will also feel the strain, but in some cases for different reasons…

Japan and Germany are amongst the oldest countries in world when measured by average population age, but they also have some of the world’s lowest birth rates. This combination means their native population will start to decline rapidly and have an ever increasing average age.

On current trends Japan’s population could fall to 87 million by 2060, from its current 128 million today, with its workforce expected to decline more than 40% over the same period.

Remember that Japan already has the highest debt to GDP ratio in the developed world at around 230%. The demographic changes that the country will go through over the next thirty years make it very difficult to see how that debt can be repaid.

We will look at some of the opportunities presented by global ageing in tomorrow’s article.

Until then, here’s a quick overview of what else has been happening in the markets so far this week…

German car manufacturers under investigation…

European equity markets have started the week on a downward note, led lower by the German Dax which at one stage was down by 80 points on the day yesterday.

That weakness was caused by a stronger European single currency alongside news that German automobile makers were to be investigated about a possible diesel emissions cartel.

If the cartel is proven to have existed the manufacturers could expect to face big fines from European and US regulators, as well as class action law suits from vehicle owners and perhaps even their own shareholders.

Of course this could all prove to be a red herring with no collusion found but for now at least, sentiment is against VW, Daimler and the other German car manufacturers.

The FTSE 100 was also weaker yesterday and some of that move was sympathetic towards the Dax.

A downgrade to UK growth forecasts from the IMF won’t have helped the situation and I note that the domestically-exposed FTSE 250 index was also weaker across the day.

The FTSE 100 finished -1.1% lower and the 250 fell by -0.68%. The FTSE 100 volume was above average too, giving the move lower additional weight.

But at 7377 the index remains a further one percent above the key support level (7300) I recently highlighted.

I’ll be keeping an eye on these levels and will let you know if they fall further.