As you get older, your productivity will, eventually, decline. If you live long enough, you will reach a point when you can no longer provide for yourself.
You cannot bake bread when you are young, bury it in the ground, and then dig it up and consume it when you are old. In your golden years, you must rely on someone younger and fitter to bake bread for you.
In every society, the old have some claim on the resources of the young. Only the nature of the claim varies.
The oldest form of claim is kinship: children bake bread for their aged parents.
Over time, other methods of caring for the elderly have evolved:
Charity: religious or volunteer organizations can give the elderly bread.
Government: the state can tax the young, and use tax revenues to provide bread for the elderly.
Accumulate assets that last: people can buy gold when young and bury it in the ground. When they're old, people dig up the gold and exchange it for bread.
Capitalism: people can invest in bakeries, and receive bread in their old age in exchange for their capital investment.
Each one of these strategies is vulnerable to demographics.
Imagine what happens, under each scenario, when there is a large increase in the number of old – by which I mean people who are unable to bake their own bread – relative to the number of young.
Kinship breaks down. China is a case in point. Think about the caregiving responsibilities of a Chinese woman born under the one child policy. She must look after her own parents if they become sick or infirm (who else will?). If she marries, she is also expected to look after her mother- and father-in-law. Plus she must care for her husband, and any children they have. No wonder The Economist is writing about the Asian flight from marriage.
Charity – well, it was never a reliable source of support in old age anyways.
Tax-financed supports for the elderly are also vulnerable to demographics. Yes, taxes can be raised to provide bread for large numbers of elderly folks, but there is a limit to how much revenue can be raised from a given tax base. Eventually bread rations may have to be cut.
Accumulating assets — burying gold in the ground– doesn't protect one from demographic forces either. If you're a member of a large generation, then everyone else will be digging up their gold and trying to exchange it for bread at the same time as you are. The price of gold will fall, the price of bread will rise. (Substitute housing for gold if you wish).
Investing in productive assets — buying shares of Husky Oil, say – may a better strategy than burying gold in the ground. More money invested in the Canadian stock market could lead to higher levels of capital investment, and raise the productivity of younger workers, so there is more bread to go around for everyone.
But if everyone tries to exchange their Husky Oil shares for bread at the same time, the price of shares will go down. More generally, with greater availability of capital, the returns to capital would be expected to fall, while the returns to labour — and the wage rate — would be expected to rise. Higher wage rates make it expensive to hire someone to bake bread for you.
Now with perfect capital mobility one should be able to achieve a return on capital equal to the world interest rate. Unless the entire world is experiencing a demographic crisis at the same time, it should be possible to maintain a decent rate of return on capital. Yet even if every Canadian senior can achieve a reasonable rate of return on investments, the fact remains: there aren't many young people around to bake bread. You can't import it – it gets stale. With lots of people looking to buy bread, the wages of younger workers will get bid up – again, it's impossible to escape demographics.
Individuals can do a few things at the margin to improve their position – move to some place with more favourable demographics, adjust the timing of labour market entry by staying in school for longer or graduating more quickly,working out and trying to keep on baking your own bread as long as possible.
But inevitably some generations will do better than others. Barring substantial technological change, Canadians who retire in the 2030s, when the number of old relative to the number of young is at its peak, are unlikely to enjoy as high a standard of living in retirement as people who retired in the 1990s, when there were few old relative to the number of young. (Though technological change does happen. Think about Wii Bowling, for example).
The point is: there's no cure for demographics. You can't escape. There's no point in whining about Ponzi schemes or "I'm getting a lousy return on my social security investments." It's happened. The first generation of Social Security recipients enjoyed a massive windfall gain. There's nothing that can change that fact. It's over.
Quit whining and deal with it.
Worthwhile Canadian Initiative 
Bryan Caplan says that historically it is the old who supported the young. As they became less productive, they consumed less. They also died earlier than they do now:
http://econlog.econlib.org/archives/2009/10/was_having_kids.html
Frances: “labour markets are monopsonies”
I was more thinking of a long run Malthusian catastrophe. As long as there is high growth there is a disequilibrium short run demand for skilled labour. But as long as wages exceed subsistence (labour rents) the supply of humans will grow until we reach the long run marginal price=marginal cost equilibrium. Now that we appear to be essentially out productivity growth (or so the RR bonds would have us believe) we should be able to get to that equilibrium shortly.
First, I wanted to say how much I enjoyed this discussion. It kept me occupied on two skytrain rides and in a starbucks line today. Thanks all.
Second, I’ve been trying to think about what it all means for commercial office space demand–and perhaps what office space demand tells us about the meaning of the demographic statistics. One current observation is that employers are far more focused on making their talent more productive. Better air, light, and locations are sought after, in part, to bring out the best in people–and attract and retain the best people. So, the productivity needed to help solve the demographic crunch may be coming if you believe the office space demand tea leaves.
“Kinship breaks down. China is a case in point. Think about the caregiving responsibilities of a Chinese woman born under the one child policy. She must look after her own parents if they become sick or infirm (who else will?). If she marries, she is also expected to look after her mother- and father-in-law. Plus she must care for her husband, and any children they have.”
Huh? Don’t you live in the West and are part of the same generation that I am. We may have proportionally more parents to look after but
1. they are richer and can pay other people to help.
2. we have fewer children and grandchildren to look after.
Besides which, I think when the demographics really pinch – we will return to 60s rates of unemployment and productivity growth. Not a bad thing at all, in my view.
reason: “Besides which, I think when the demographics really pinch – we will return to 60s rates of unemployment and productivity growth. Not a bad thing at all, in my view.”
But not 1960s levels of poverty rates for the elderly?
The point about kinship was a general one, about the impossibility of substituting “family responsibility” for other systems, that any system faces stress.
Wendy, thanks for those comments. I don’t know much about office space demand – in Ottawa it’s largely driven by the federal government, and many of the buildings are getting a bit older (not that a royal portrait can’t give them a quick and much needed facelift 😉 )
Frances:
Point of pedantry: NAFTA only applies to professionals. The agreement did not create anything like Europe’s free movement of labour policy.
A NAFTA work visa (Category TN) in Canada can only be for temporary work, it must be for one of the 63 designated occupations listed here: http://www.canadaworkvisa.ca/info/nafta1.php and you cannot be self-employed. You must also have an offer in hand before you apply for the visa.
This is not a free lunch and it is very narrow. Hence why they are not commonly seen.
“the wages of younger workers will get bid up – again, it’s impossible to escape demographics”
I really enjoy the thoughtful and well-reasoned posts on this blog. However, I find this post, and reasoning, an interesting contrast to futurist concerns regarding technological change and increased global competition undermining the value of labor.
Personally, I am not so sure that the demographics of a decreasing young labor force is going to even come close to offsetting the diminishing need for labor caused by technological progress. Obviously, however, this viewpoint has a Western slant. Although I can’t foresee a scenario where the median income in developed countries begins to take off, I can easily imagine significant gains in median income worldwide (although it seems likely these will be paired with stagnant or decreasing median income in the developed world).
JCD “Personally, I am not so sure that the demographics of a decreasing young labor force is going to even come close to offsetting the diminishing need for labor caused by technological progress.”
Thanks for your comments. Do you remember Nick’s old post “Of horses and men”? If not, you must, it addresses exactly this point.
I’m one of the young ones who is supposed to be supporting the old. The problem is, I am struggling to find any work at all. (Despite a science degree and a lot of hard work) Opportunities for young people today are not as good as for the baby boomers, which makes it very hard for us to support an aging population.
It is also frustrating when I see that I’m supposed to be saving for my future and I can’t because I don’t have money coming in. I try not to think too hard about when I’m old because until I find work there isn’t a thing I can do about it.
Elizabeth: the first boomers ( born from 1946 to 1954) had it good but those who really made out like bandits were the lucky few born during the 30’s. Few in number and just the right age to catch the Golden Thirties 45-75 . My parent’s generation. See details in my older posts…
I strongly empathise with you. In part because I fear for my retirement plan…