IMF identifies the options as demographics change

IF life-span increases by three years, pension-related costs could increase by 50 per cent in both advanced and emerging econmies, according to the Managing Director of the IMF, Christine  Lagarde . . .

Forty years from now, the world’s population will have grown from 7.5 billion today to 10 billion, with the growth coming from South Asia and Sub-Saharan Africa.
By contrast, populations will continue to shrink in many parts of the developed world, led by Japan and Germany.
In an address to the Massachusetts Institute of Technology, Christine Lagarde, Managing Director of the International Monetary Fund (IMF), said fiscal policy has an important role in times of demographic change to maintain global economic well-being.
She said the populations of Japan and Germany started to decline some time ago, and even the world’s most populous country, China, has been facing a declining working-age population since 2012.
In most cases, she said, population shrinkage and rapid ageing go hand-in-hand. “This is a demographic double-whammy that will have major implications for economic growth, financial stability, and the public purse.”
IMF research suggests that the combination of ageing and shrinking will reduce potential growth in advanced economies by about 0.2 per cent in the medium term – and by twice as much in emerging economies. “This may not look so bad, but it would be a severe blow to those countries that are already facing very low growth and high debt,” Lagarde said.
If everyone lived three years longer than expected, pension-related costs could increase by 50 per cent in both advanced and emerging economies.  “This would heavily affect private and public sector balance sheets, and could also undermine financial stability.”
She said IMF research showed that, in advanced economies alone, age-related spending is projected to jump from 16.5 per cent of GDP to 25 per cent by the end of this century – unless policy action is taken.
If countries were to fund spending through borrowing, this would lead to an explosion in public debt — rising from an average of 100 per cent of GDP today to 400 per cent by the end of the century.
If Governments chose to finance higher age-related spending through taxes, this would mean lifting goods and services taxes by roughly 20 per cent, or increasing social security taxes by about 25 per cent.
If neither of the options is palatable, then pensions and health benefits on average would be cut by about a third.
Largarde said that, without action, China’s spending on pensions and healthcare is projected to increase by 13 per cent of GDP by the end of this century, compared to 15 per cent in the US. The worsening fiscal position can be arrested or reversed if countries reform healthcare entitlement.
The IMF suggests increasing competition among insurers and service providers, supplemented by a range of other measures. Lagarde spoke of primary and preventive healthcare; promoting healthier lifestyles; and more effective use of information technology.
She also suggested lifting retirement ages to match longevity gains. Lagarde noted that the Japanese system automatically slows the growth of benefits to offset increases in life expectancy and changes in the labour force.
Lagarde said countries have to look at broadening the base of value-added taxes, improving taxation of multinational corporations, and strengthening tax compliance – to ensure that everybody pays their fair share.
On spending, she singled out global energy subsidies, which amounted to US$5.3 trillion last year – or 6.5 per cent of GDP.
“This staggering number needs to come down so that these resources can be better used. Doing it now, when energy prices are low, makes it that much easier.,” she said.
Countries can also try to lift potential growth through increased female participation, as is now being promoted by the Abe Government in Japan. IMF research indicates that raising female labour participation rates to those of men could increase GDP by five per cent in the US. The numbers are even higher for many other countries.
Immigration is another source of additional labour, but this is associated with political and social issues. Harnessing smarter technology to raise labour productivity would help increase the economic pie.
Lagarde said technological innovations, such as artificial intelligence, robotics, genetic engineering, 3-D printing and quantum computing are only a few of the technologies that could profoundly affect the world’s economic well-being in the 21st century.
She again referred to IMF research which shows that, if advanced economies were to ramp up private research and development by 40 per cent, on average, they could increase their GDP by five per cent in the long term.
”We all know that we must address a huge demographic challenge so we can leave our economies and societies better than we found them,” she said. “We owe this to our
children and grandchildren.”