The 'myopic' generation and its impact on the world economy

We live in a changing world. Changes affect our ways of life and occasionally threaten our very survival. Throughout history, human beings have shown an enormous capacity for adaptation, although occasionally certain groups did not react in a timely manner and endangered their survival.

Most of these changes were gradual and gave time for humanity to adapt. Climate changes associated with ice ages are an example of gradual processes.

In the last ice age the sea level dropped more than 100 meters and has been rising for 10,<> years. Obviously, these changes affected human location and behaviors.

Currently, 60% of the world's population lives within 100 kilometers of the coasts, and of the 183 cities with more than one million inhabitants, 68 are ports. The impacts of sea level rise will be significant, but relatively slow evolution will likely allow adaptation.

Sometimes the changes are violent. 74,<> years ago, the eruption of the Toba supervolcano in Indonesia almost wiped out the human race; However, recent evidence shows that humanity migrated and adapted in other regions.

Cultural and technological changes also take time, but compared to most natural phenomena they are much faster.

The human population remained relatively stable until the domestication of animals and plants facilitated the production of food and led to the construction of cities, allowing a great growth of the population that went from a few tens of thousands to a little more than 200 million, a level that remained relatively stable until the year 1000 of our era.

This number began to increase from the Renaissance and the Industrial Revolution, but the real "explosion" occurred in the twentieth century with the advance of medicine, which allowed to reduce infant mortality and increase life expectancy.

In this process the population went from 1500 million at the beginning of the century to almost 8 billion today. Life expectancy at birth went from 35 years in 1900 to more than 70 years, while the infant mortality rate fell from 165 to 7 per thousand inhabitants.

These changes show three clearly differentiated stages: a first stage where the infant mortality rate falls, life expectancy increases, but the birth rate does not fall and the population grows at a very rapid pace; a second stage where the birth rate begins to fall and the population grows less; and a third stage where improvements in infant mortality and life expectancy decrease, the decline in the birth rate is accentuated, the population "ages" and the total population begins to decline.

These trends are clear when examining the evolution of the world's population and its age composition. The growth rate of the world population went from an annual average of about 2% in 1950 to 1% today.

With respect to the distribution by age groups, the participation of children under 9 years of age in the world population originally increased from 24.39% to 27.16%, and then fell to 17.13%, while the participation of people over 65 years of age went from 5.13% to 9.63%. This trend is much more marked in developed countries.

The effects of these changes on the economy and on social security systems are notorious.

The first stage generates what is called the "demographic bonus"; By having to keep fewer children and grow the working-age population, the savings rate grows and the possibility of financing a higher investment rate grows (it does not always happen because many individuals prefer to increase consumption).

In the third stage, the problems begin: when the ratio between active workers and inactive people falls, the savings rate falls, the growth rate decreases and difficulties appear in financing the older population (boosted by health expenditures).

Historically, the basic unit of social security was the family, in which its "active" members kept their members inactive. With the emergence of state pay-as-you-go systems, there was a shift to a system in which workers from any family supported the inactive workers of any family (pay-as-you-go system).

The third stage is based on individual savings, ignoring that I have to lend that savings to someone who has to return it to me to finance my expenses when I am no longer active. The lesson is that it is always an active worker who finances an inactive person.

This is where the "myopic" generation appears, preferring to ignore the effects of these demographic changes, fighting to keep the benefits in force and arguing "I don't need to have children or anyone to finance me", without realizing that this is impossible. The recent events in France are a clear example of this "myopia".

The dependency ratio in France went from 71% to 81%, but these values do not take into account that the retirement age is 62 years (and not 65) and that the expectation of survival from 62 years is 24 years, so maintaining the current benefits would lead to a very severe economic crisis.

A person who saved between the ages of 20 and 62 30% of his income and wanted to obtain after his retirement income equivalent to 90% of his income when he worked would only save 58% of what he would need.

Within this context, the only alternatives are to increase contributions, lower benefits or raise the retirement age. The idea of using other resources to finance these expenditures would imply lowering the savings rate, reducing the investment rate and reducing the growth rate and living standards of the entire population.

I don't think there is any need to explain what the Argentine situation is.

Ricardo Arriazu is an economist.