NCPA - National Center for Policy Analysis

Watch Your Wallets: the Baby Boomers Are Beginning to Retire

April 22, 2011

The demographic picture has changed now that the baby boomers are starting to retire.  In 1950, there were 7.2 people aged 20-64 for every person age 65 and older in the Organization for Economic Cooperation and Development.  By 1980, the ratio had dropped to 5.1. Now it is around 4.1, and by 2050, it will be just 2.1.  In short, every couple will be supporting a pensioner, says The Economist.

Europe and Japan are facing the biggest problems:

  • The average dependency ratio in the European Union is already down to 3.5, and is heading for 1.8 by 2050.
  • In Italy it is forecast to be nearly 1.5 and in Germany nearly 1.6.
  • Japan is on track for a startling 1.2 by 2050.

Since the average pensioner currently draws a total of about 60 percent of median earnings, from government and private sources, the system is likely to become unaffordable.  In a sense, it does not matter how the benefits are paid for.  If they are unfunded, they come from workers' taxes; if funded, they come from investment income.  But the income has to be generated by someone, says The Economist.

There are ways of reducing the burden.

  • The current generation of workers could save more now.
  • If they put more money into funded pension schemes, the extra saving might encourage more investment and thus boost economic growth.
  • A wealthier society would find it easier to afford paying pensions.
  • In addition, countries with PAYGO schemes could raise taxes now, reducing the deficit and thus the debt burden on the younger generations.

Source:  "Too Much, Too Young," The Economist, April 7, 2011.

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