Why the G20’s Missed Opportunity Still Hurts
By MICHAEL HODIN,
Posted: November 11, 2011
Last week, G20 ministers met in Cannes amid European chaos. Greece’s prime minister had been throwing stones at the EU’s bailout proposal; Italy sat teetering on the brink of bankruptcy; and some European leaders were secretly planning a new EU caste system that would separate member countries into two tiers based on economic strength.
This bedlam has a clear cause: the continuing insistence of applying policies from the previous century – namely, health and pension benefits – to today’s demographics. The world has changed, yet world leaders continue to resist the necessary steps to adapt. Consider Italy. More than 25 percent of its population is right now over age 60. That number will grow to almost 40 percent by the year 2040. How sustainable is that, or will it be, when such a large proportion of the non-working need support from those who are working?
As the miracle of longevity continues, tipped by the low fertility rates that are especially evident in G-20 countries, that dependency ratio will further explode into mid-century. The failure to reconfigure the “social contract” based on the shifting proportion of aging populations is at the heart of the fiscal turmoil currently reeling the markets.
Yet how did the G20 respond last week? Did they establish a set of strategic priorities or plot a course of action that takes a realistic view toward aging populations? Did they even raise the topic?
No. The biggest news to surface from the event was the badmouthing of Israel’s prime minister by Obama and Sarkozy. For its effort, G20 gets an F – for failing to account for the role a forward-looking strategy framed around the challenge of our aging populations could have in an economic recovery.
As recently as seven years ago, the McKinsey Global Institute did a study on the “demographic deficit” – their term for the imbalance that results from lowered birth rates and extended longevity. The report gives a global overview of the deficit but also has a specific chapter just on Italy. The research concludes that the growth of Italy’s aging population and the decline of its working-age segment will lead the country to “become increasingly less able to support wealth accumulation.” This will have “important implications for both households and the overall economy.” In fact, Italy’s GDP has been falling now for about the last 10 years.
More recently, there was the S&P 2010 “Global Aging: An Irreversible Truth,” a truly remarkable report in scope, data, and insight. While it was right about so many things, so far it’s been dead wrong about one. It argued that aging populations would “dominate public finance policy debates worldwide.” Yet so far – if the G20 is any barometer – the issue of aging populations isn’t more than a blip on the radar.
The G20 meeting was supposed to bring the world’s leaders together to forge a smart, sustainable fiscal path for the future. Instead, just a week after the meeting, Europe is much less stable than before. If Italy can’t learn from Greece, and if Europe can’t learn from Italy, chaos will only spread. It’s time we changed our economic policy debates so they put our new demographic realities front and center in the discussions.
Perhaps as the Mexicans now take over the G-20 leadership for 2012, they’ll collaborate with our country’s G-8 leadership and address this massive fiscal challenge – the structural shift of our aging populations. And with that, forge a new social contract that’s relevant to our era and responsive to this century’s demographic realities.