Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / How Aging Populations Are Reshaping The Tax Base
Transcript
- Lucas: The most dangerous number in modern macroeconomics isn't inflation or interest rates. It is the ratio of workers to retirees. In thirty years, that ratio will be halved in many developed nations, and the mechanism we use to pay for society will break unless we change how we collect money. Luna: You mean the tax base? Because if you have fewer people working, you have less income to tax, so the government has to either raise rates or cut services. Lucas: Exactly. And most politicians avoid the hard choice until the math forces their hand. Look at Japan today in September twenty twenty six. They raised their consumption tax to ten percent back in twenty nineteen, but they kept lowering corporate taxes to attract investment. Now they are facing a deficit that is structurally impossible to fix with borrowing alone. Luna: So they are essentially asking older citizens who spend less to pay more, while trying to keep businesses happy with lower rates? Lucas: It is a tightrope walk. But here is the twist. Japan is actually seeing some resilience because their elderly population holds massive amounts of cash. They are not spending like millennials, but they are not defaulting. The real crisis is coming to Europe, specifically Italy. Luna: Italy has always been tricky with fiscal rules. What is different now? Lucas: The speed of the aging curve. Italy has one of the highest old-age dependency ratios in the world. Right now, the government is relying on high public debt to fund pensions and healthcare. But as the workforce shrinks, the denominator gets smaller while the numerator of beneficiaries grows. You cannot borrow your way out of a demographic cliff. Luna: So the only option left is to tax consumption more heavily, since that captures money from everyone, including those still saving? Lucas: Precisely. And this brings us to the donation part of our show. If walking through the economy with us has made something click about how these structural shifts work, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Luna: Yeah, it really helps keep the research sharp when we can focus on these deep dives without worrying about ad slots interrupting the flow. Lucas: Back to Italy. The government there has floated ideas about raising the retirement age further and increasing value-added taxes. But every time they propose it, the streets fill up with protests. The political cost of taxing a shrinking workforce is enormous. Luna: Because those workers are the ones voting, right? And they feel squeezed between paying for their parents' care and planning for their own. Lucas: That is exactly it. It is an intergenerational wealth transfer disguised as tax policy. When you raise consumption taxes, you are effectively taking money from current spending power. For a young family buying a house, that is ten percent more on every transaction. For an retiree living off fixed income, it eats into their purchasing power too, unless they get a rebate. Luna: Do any countries actually manage this without causing social unrest? Or is it just a matter of degree? Lucas: Sweden is the closest model we have. They link pension benefits directly to life expectancy. So as people live longer, the payout period extends automatically. It removes the political gamble. But even Sweden had to raise VAT to eight percent recently to fund the extra years of care. Luna: So automation is supposed to fill the gap? That is usually the argument. More robots, fewer workers needed, so productivity goes up enough to cover the costs. Lucas: Automation helps, but it does not solve the tax collection problem. Robots do not pay income tax. They pay corporate tax, which is easier to shift offshore. If the economy becomes driven by capital rather than labor, the tax base narrows further. We might end up taxing machines instead of people, but that is a completely new conversation. Luna: Which sounds like a nightmare for policymakers. How do you value a robot's contribution? Lucas: You try. And you fail. Currently, the US is looking at various forms of carbon taxes and digital services taxes, but nothing addresses the core issue: fewer taxpayers per beneficiary. Germany is another case study. They delayed their retirement age increases for years due to coalition politics. Now they are playing catch-up. Luna: And catching up usually means sharper, more painful adjustments. Like sudden spikes in insurance premiums or reduced service quality. Lucas: Right. And this creates a feedback loop. If people expect lower quality care or higher taxes, they save more defensively. That reduces aggregate demand. So the economy slows down, making the debt problem worse. It is a vicious cycle that traps developing nations that haven't aged yet. Luna: Wait, developing nations? I thought this was mostly a rich country problem. Lucas: Not anymore. China is aging faster than any country in history. They went from baby boom to super-aged society in forty years. The US took eighty. That compression means their tax system never matured before the burden hit. They are trying to build a safety net while the foundation is cracking. Luna: So their manufacturing advantage might erode not because of trade wars, but because they run out of workers faster than they expected? Lucas: Exactly. Wages go up, so production costs rise. Companies move out. Then you have no jobs and no tax base. It is a double whammy. India is the counter-example right now, with a huge young workforce. But even India is starting to see birth rates drop below replacement levels in urban centers. Luna: So the demographic dividend is temporary. Once the kids grow up, they start having fewer kids themselves. Lucas: That is the trap. Every successful development program lowers birth rates. Education, healthcare, women in the workforce — all of that leads to smaller families. So you get a brief window of economic boom, followed by a long era of demographic drag. Luna: Is immigration the solution? That seems to be the standard answer in English-speaking countries. Lucas: Immigration delays the problem. It adds workers to the base immediately. But immigrants age too. And often, they come from countries that are also aging. So the global pool of fresh labor is shrinking. You can import growth for a decade, but not for a century. Luna: So eventually, every country has to choose: lower benefits, higher taxes, or lower expectations for growth. Which one is least painful? Lucas: Lower benefits is politically impossible. Higher taxes is economically painful. Lower growth expectations is psychologically difficult but mathematically inevitable. We have to accept that the golden age of rapid expansion is over for the West. Luna: That is a sobering thought. Most investors are still pricing in three percent growth forever. Lucas: They are. And when the reality sets in, asset prices will revalue. Bonds will yield more, equities will trade at lower multiples. The whole financial architecture is built on the assumption of endless labor supply growth. Luna: So we are looking at a fundamental reset of risk premiums based on biology rather than policy. Lucas: Biology is the ultimate constraint. No amount of quantitative easing can print a worker. The question for the next decade is whether governments will adapt their tax codes early, or wait until the crisis forces their hand. Luna: Given how slow politics moves, I would bet on waiting. Until the day it hurts. Lucas: That is the historical pattern. But the pain will be deeper this time because the balance sheets are already full. We are entering an era where fiscal policy is dictated by demographics, and the ledger is closing fast. Luna: One last thing. Does this mean we should stop investing in countries with young populations entirely? Or is that just a bubble waiting to burst? Lucas: Young populations offer high growth potential, but also high volatility and institutional risk. It is a trade-off. You get the upside of expansion, but you pay for it with instability. There is no free lunch in demography. Luna: Just higher yields for higher risks. Okay, that makes sense. Lucas: It does. And as we head into the next quarter, watch how the bond markets price in these aging trends. The spread between German bunds and Italian btp spreads will tell you everything you need to know about where the tax base is heading. Luna: I will keep an eye on that. Thanks for breaking down such a heavy topic. Lucas: Always my pleasure. Let us see how the markets react when the voters finally wake up to the bill.