The Debt Burden of the Next Generation

Recently released population data from Japan has me thinking about the future, particularly as it relates to the social safety net and the growing levels of government debt.

According to e-Stat, Japan's statistics portal, the estimated population of Japan was 127,520,000 on December 1, 2012.  This is roughly even with the July 1, 2012 estimated population of 127,561,000.  Looking at the country's population distribution is even more interesting as shown on this table:

You will notice that 24.3 percent of the population or 30.99 million people are over the age of 65 and 12 percent of these or 15.3 million people are over the age of 75.  Less than 74 million people or 58 percent of the population would be considered "working age", between the ages of 20 and 64.  It is these people that are generally considered to be supporting those who are over the age of 64.  This means that for every retired Japanese citizen, there are less than 2.4 workers paying into the social support system and, by extension, into sovereign debt servicing.  In fact, the working age population for Japan is expected to fall to the same level that it was at in the 1950s by 2050, a scenario that is groundbreaking for demographers as it sets an example of what will likely happen to other developed economies in the world.

Here is a bar graph showing the population and population growth rate for Japan since the 1920s from the 2010 census:

Excluding the post-World War II high point in the early 1950s when Japan's population grew by nearly 16 percent, the population growth rate peaked at just under 7 percent in the mide-1970s.  Since then, the population growth rate has steadily declined and is now at its lowest rate since the 1920s.

Here is a graph showing that Japan has, by a relatively wide margin when compared to Canada and the United States, the highest percentage of the population over the age of 65.  Coming in second and third place are Italy and Germany with 20.4 percent.  Both Canada and the United States have roughly 13 percent of their population 65 years old and older, however, as you will see, that age group is growing and will continue to grow in both nations:

Now, let's look at some data for the United States.  Here is a graph showing past and projected population growth rates, birth rates, death rates and net immigration rates for the United States noting that the population growth and birth rates have fallen since the 1950s are are likely to continue to fall modestly into the future:

Here is a table showing past and projected population sizes by age group for the United States:

Here is a table showing the same population data in percentages:

Like Japan, by 2050, more than one in five Americans will be over the age of 65.

Here are three final graphics showing the population pyramid for the United States in 1950, 2000 and the projection for 2050 keeping in mind that the younger a country's population, the more the population pyramid resembles a typical, broad-based Christmas tree:

Notice, as in the case of Japan, the number of older Americans increases as the number of younger Americans decreases relative to each other.

Now, let's take a look back at a series of population pyramids for Japan:

The pyramid for both the United States and Japan looked very similar in 1950 with a very broad base and a very narrow top.  By the time we get to the new millennium, the pyramids for both countries look somewhat different but in both cases, the base of the pyramid is relatively small compared to the 1950 data; in fact, Japan's 2007 pyramid looks relatively similar to America's 2050 projection.  At some point past 2050, it is quite likely that the population pyramid for the United States will look similar to Japan's 2050 pyramid, more closely resembling an upside-down Christmas tree as a result of a relatively low birthrate and a lowered death rate.  A study by the United Nations Population Division estimates that 44 percent of the world live in countries with a fertility rate that are below the population replacement rate (i.e. they will ultimately have an inverted population pyramid like Japan's).  This means that the average age of the world's population will continue to rise and that the world's population will eventually begin to decline.

Unfortunately, in both Japan and the United States, ever-growing government debt loads will prove to be a problem as fewer and fewer working age people provide tax revenue to their respective governments.  We already know that this will impact entitlement programs in the United States but the issue of generational debt is rarely addressed.  Right now, Japan is the world's second-highest sovereign debtor with a current gross debt-to-GDP level of 234.5 percent and outstanding nominal debt of 983.3 trillion yen or $12.29 trillion.  With the $16.4 trillion debt in the United States growing by roughly $2.7 billion every day, this burden will eventually fall on the shoulders of fewer and fewer working Americans if population growth follows the Japanese model as it most likely will.  This is why it is particularly critical that Washington put their overspending ways behind them as soon as possible.  Right now, all we are doing is putting an unbearable burden of growing debt on the shoulders of those who haven't even started working and remitting payroll taxes yet.