The dependency ratio: it is changing governments

It’s impressive to see how the great minds of the 18th century understood today’s more pressing problems. In his opening chapters to the Wealth of Nations,[1]The Wealth of Nations Adam Smith explains in detail how the proportion of economically active people to those who are inactive is an important determinant in the wealth of a nation. Those who are active make it wealthier, those who are inactive do not. Today, that proportion is called the dependency ratio.

The demonstrations in France and the change in government in Finland are all about the dependency ratio, a growing crises in the developed world.

Let’s take France where the demonstrations are about President Macron’s solution to the dependency ratio problem, increasing the retirement age from 62 to 64. By delaying the retirement age, it has a positive effect on the dependency ratio. This is particularly important in France, where the taxes are high in keeping with the social benefits.

The dependents are classified as people under the age of 15 and those who are above 64. Those who have yet to join the economically active and those who have left.

There is an important distinction between the two groups. Money spent on the young is an investment in the future. At 108.92. Niger has the the world’s highest dependency ratio[2]What Is the Dependency Ratio, and How Do You Calculate It?. The vast majority are young people, so at some point the country can expect a demographic dividend, provided that those people can find active employment. 

In the developed world, the majority of the people who are dependents are above 64 years old. The social benefits for this group are government pensions, caring facilities, and healthcare.

In most developed countries, the people above 64 are also the wealthiest. They don’t rely on the government to survive or for care, and healthcare. Except for those who cannot afford it. That group is getting bigger, and as the economy stalls, it will get bigger still. As that happens government revenues drop, expenses increase, the burden on taxpayers becomes unaffordable, and governments change.

Smith spelled all of this out over two hundred years ago. Government myopia means that we are still battling with the problem.

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