The impact of an aging global population is well documented. The culprits fingered by forecasters usually include rising healthcare cost and shrinking labor pools. The McKinsey Global Institute (MGI) worries about another issue: shrinking savings rates. A McKinsey study of Germany, Italy, Japan, the United Kingdom, and the United States shows accelerating retirements will reduce savings rates, with a resulting enormous impact on household wealth. Solutions, McKinsey argues, are hard to come by: “MGI argues that the policy changes fashionable today—promoting immigration, raising the retirement age, and encouraging households to have more children—won’t mitigate the crisis. Yet a sustained effort to allocate capital more efficiently, boost savings rates, and close government deficits could.”

The Federal Reserve and others have pointed often to federal budget deficits and low household savings rate as a looming U.S. economic issue. In a speech last Fall, Fed Chairman Ben S. Bernanke stressed the need to boost savings rates in the face of an aging population and rising entitlement costs:

Although some adverse effect of population aging on future per capita output and consumption is probably inevitable, actions that we take today, in both the public and the private spheres, have the potential to mitigate those effects. One such action would be to find ways to increase our national saving rate. If the extra savings were used to increase the nation’s capital stock–the quantity of plant and equipment available for use by workers–then future workers would be more productive, ameliorating the anticipated effects on per capita output and consumption.

Some legislators, by the way, don’t agree with McKinsey’s conclusion that delayed retirement won’t help mitigate the problem. A bill kicking around the U.S. Senate would reward employers who establish flexible work schedules for older employees with tax credits.

Earlier McKinsey work on this issue can be found in The McKinsey Quarterly.

This entry was posted on Thursday, April 19th, 2007 at 8:27 am and is filed under Economy, Federal policy, Financial Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.