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Challenges posed by the ageing EU population for the financial sector - Economic and monetary challenges

Global Aging Trends: Addressing the challenges and opportunities

By Six Jean-Michel - Managing Director & Chief EMEA Economist, Standard & Poor's Ratings Services

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While global warming is a major potential threat to a country’s creditworthiness, the impact aging populations will have on sovereign debt and public finances poses an even bigger threat to the developed world. S&P considers these as the two “mega-trends” that dominate discussions about long term global economic challenges.

World Bank data show retirees are projected to grow to 18% of the population by 2050, from 8% of the worldwide population in 2014. In the absence of policy action to alter demographically driven budget trajectories, our analysis shows that the median net general government debt in advanced economies will rise by 2050 to almost 220% of GDP. Also, according to our simulation of hypothetical long-term sovereign ratings and credit metrics in a no-policy-change scenario, by 2050 nearly 60% of the 50 sovereigns we’ve analyzed would have credit metrics that we currently associate with speculative-grade sovereign credit ratings, against 20% currently.

We do not predict the “No-Policy-Change” scenario will actually unfold, given the low likelihood that governments would allow their debt burdens to increase without enacting policy reforms, but this demonstrates the scale of the challenge.

Number of sovereigns have adopted since 2010 budget-restraint strategies that include overhauls of public pension or health care systems–the two largest components of age-related programs that typically account for about 40% of government spending. That said, the accelerated changes to social security systems that are reducing budget deficits in advanced economies are being offset, to varying degrees, by ongoing economic weakness and diminished employment in some countries. Coupled with potential higher borrowing costs, such trends are hampering sovereigns’ efforts to stabilize debt dynamics.

This may be the start of a decades-long period of rising tension between seemingly conflicting priorities: the need to sustain public spending on pensions and healthcare for aging populations versus the need to hold down or reduce government budget deficits and debt.