A “3-D hurricane” of “deficit, debt, and demography” is what fund manager Robert D. Arnott says the world will soon be facing.  Though the perils of ours and other nations’ debt and deficits are well known, awareness of the dangers of demography is now growing as we look for practical ways to deal with the first two “Ds”.

Demography, of course, is (according to the American Heritage Dictionary) “the study of the characteristics of human populations, such as size, growth, density, distribution, and vital statistics.”

What does demography have to do with debts and deficits?  It is because demographics tell us that the populations of nations grappling with debt are statistically heavy on older people.  This is going to become more pronounced in the years ahead, and will have a major impact on many nations’ finances.

Not that increased lifespans are bad, it’s just that they pose problems we haven’t faced before.  Today a good portion of the world’s debt problems revolve around pensions for the elderly. Americaisn’t the only country to have a “paygo” program like Social Security which taxes people during their working years to provide benefits to the elderly.  When a nation’s economy is booming, and especially when workers substantially outnumber retirees – as has been the case in this country since the baby boomers started working – paying benefits to the elderly isn’t a problem.  But with the first baby boomers now reaching retirement, that’s going to change.

Knowing that one will have retirement benefits provided by the government has been shown to influence people’s reproductive choices.  Traditionally, older people have relied on their children to help them during their declining years.  The fact that one can rely on younger people in general instead of one’s own children – coupled with the medical advances that have ensured most children will live to adulthood in developed countries – has led to substantially reduced birth rates.  For this and other reasons, baby boomers here and abroad have not replaced themselves.

To maintain its population a country must have a birth rate of 2.1 children per woman.  In this month’s edition of The Atlantic, author Megan McArdle suggests that because no European country has a birthrate this high and because the average age of the population is rising (in time one in three people in Europe will be retired), there simply aren’t enough younger workers to support both the retirees and pay off national debts.

McArdle points out that it isn’t just the numbers that are troubling – younger workers are different from older workers.  Younger workers have more energy and thus are more productive.  But they are also more willing to take risks.  And while many risks fail, the success of others makes up for it.  The innovation necessary to drive an economy largely arises from its younger workers.  As populations age, innovation dwindles.

Innovation also depends on the availability of capital.  As more and more people retire, more and more capital is lost as retirees begin using the money they invested while working.

The problems of aging populations, problems that have beset rural areas for decades, are now appearing in the rest of the world.  And this reminds us again of how vital it is to attract young people to rural communities.  Without their energy and innovation, small towns don’t stand much of a chance against the “1-D” hurricane of demography, let alone the inevitable problems the other 2-Ds are bound to bring…