April 22, 2018

Early Retirement?

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We all know that life expectancy has increased dramatically over the last fifty years, and if you believe this Guardian graphic produced from the recent UN report on population, it looks set to increase further across the world by the end of the century.

Because of this developed economies now have an increasingly large proportion of the population in retirement.  These retired individuals are big consumers, but they no longer produce goods and services. They also receive “large” retirement pensions ranging from 50% to 80% of their highest salary/wage when employed.

At the same time the size of the average family has fallen rapidly over the last 100 years, leaving a smaller proportion of the population willing and able to work.

Elderly People sign

Image by bensons via Flickr

But if we go back only 3 generations, large families were the norm.  My own Grandfather was one of 12 children. This would now be considered very unusual. Indeed some would even say that to have a family of 12 children is irresponsible, citing some of the Malthusian arguments discussed in the recent post on world population. Many families in developed economies now have 2 children or fewer.

The reduction in family size appears to be happening only in developed economies. This raises two questions: why, and what are the implications for the future?

First let’s address the why.

Suppose that we can classify all goods as either consumption or investment goods; where would you place children?  If you hope eventually to depend upon your children for support in your old age or suspect one may become a film star or sports icon then children are investment goods and the more you have the higher the probability of high returns in the future. This is one of the drivers of large family size in developing economies.

If on the other hand you consider your children consumption goods to be enjoyed then the “prices” of those goods will have a major impact on your choices.  As your income and wealth increase over time so will your opportunity costs.  Children consume lots of their parents’ time and income. These are scarce resources; save resources and have fewer children. Increased opportunity cost has been a major driver in the reduction of family size in developed economies.

Second, what does this mean for the future?

Medical innovations will continue to lengthen life expectancy, which in turn will increase the demands on resources for the care of the elderly. By the year 2030, 20 per cent of the population of the major capitalist countries will be over the age of 65 and a significant number will be 80 years of age or older. Nearly one in five children born in the UK in 2011 will live past the age of 100, and a substantial portion of National Income in 2030 will be required to provide for personal care of these people.

Who is going to generate this National Income? The shrinking labour force presents a problem. Consider the implications for potential output. Are there any offsetting factors that could compensate for smaller families? You might be well advised to do some financial planning now for your old age…