The Wednesday Letter #228 - 7/10/2024
The Wednesday Letter #228 - 7/10/2024
THIS WEEK: Retirement Age and Dependency Ratios; Shanghai Cooperation Organization Summit; Nike's Wings of Lead; 52-Week Lows.
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RETIREMENT AGE AND DEPENDENCY RATIOS
The Nouveau Front Populaire, the leftist coalition that came first in France’s legislative elections, has among its several constituents the far-left party La France Insoumise (LFI, literally France unbowed or France rebellious). Among LFI’s demands is a lowering of the retirement age to 60, an age that is two years lower than it was in early 2023 before a new pension reform law raised it from 62 to 64.
When modeling the viability of public pensions, demographers look at the dependency ratio of a population, which is the ratio of dependents to workers. Dependents are children and the elderly. Workers are everyone else in between. A shorthand way of calculating dependency ratios (DR) is to use population sizes at different cutoff ages. Some DRs are calculated using the ages of 15 and 64 as cutoffs, with all who are younger than 15 or older than 64 considered dependents. Other DRs count older teenagers as dependents and use cutoffs at 18 and 64.
The profile of the dependency ratio over time is important because a falling ratio is viewed as broadly beneficial to the economy, and a rising ratio can be detrimental. The LFI’s desired shift of the retirement age from 64 to 60 alters the DR significantly, as is shown in the chart below. The red line shows the DR with cutoff ages 18 and 64. And the blue line is what happens to the DR if the retirement age is dropped to 60 starting in 2025. The step jump is massive and lifts the DR in 2025 to a level that it would only reach in the late 2060s if the retirement age remained at 64.
All this has to be taken with a grain of salt. The fact that the official retirement age is 64 (or 60) does not mean that everyone will in fact retire at that age. But it does mean that everyone would be receiving their promised pensions starting at that age. Most people would likely resume employment at a different job, thereby drawing on at least two source of income, the pension from the old job, and the wages from the new job. Needless to say, this near-doubling in income is extremely attractive to a lot of people.
France is in a tight fiscal situation that is expected to get worse because of the aging of its population. The country cannot afford a retirement age of 60, unless it raises taxes on a large scale. That is another proposal by LFI, to set the marginal income tax rate at 90% for any income above €400,000 ($430,000). LFI also proposes a new wealth tax, and higher inheritance tax rates. The more extreme of these taxes have little chance of becoming law under the new French government.
For comparison, see below the dependency ratios of the United States, China, Russia and India. China’s DR had a very large drop between 1980 and 2010. Its decline of more than half was an important catalyst for its economic development (see How China Realized a Demographic Dividend). Russia’s DR also fell until 2010, while India’s will continue to drop until the early 2030s. The DR for the US, China and Russia will climb for decades to come, creating headwinds for these economies. In the case of the US however, the DR as shown in the chart may not fully capture the impact of immigration. It is possible that the US DR will climb more slowly than is shown, or that it will remain close to flat.
