Why does the economy need to continue to grow, especially in countries such as Japan where population is declining?
In: 56
Generally, it isn’t the economy that needs to grow, but the tax base to pay for the aging population.
Every social safety net scheme generally depends on a pyramid of young workers supporting the older and retiring workers when they cease being productive and able to support themselves.
In the US, the social security system was set up so you don’t collect benefits until you’re just about to die(actuarily), and we had an “ever growing” workforce paying into the scheme so it sustained itself. It was cashflow positive for a long time, but the population growth slowed and we were less a pyramid and more a column or obelisk. The same thing is happening in Japan, but worse because they limit immigration. Japan is starting to become an inverted pyramid.
If the workers aren’t growing in numbers, then some other part of the tax collection scheme must grow to make up for the shortfall. That means efficiency in the economy or higher taxes. At some point, the scheme falls apart.
Also note we kept these social security funds in the general budget to balance the books, which means we basically spent the money collected on other things (in addition to the outflows of the SS system). Now that SS fund is cashflow negative and general revenue/taxation isn’t keeping up, we’re showing huge deficits. The only way to fix that is raise taxes AND raise the retirement age to try to make the SS fund closer to self sustaining. But if you raise taxes, you’ll slow the economy, raise it too much and you’ll damage the economy badly.
in short: the government (not capitalism!) has been banking on future growth of the population/economy to pay for the services of today. When it stops growing, the un-sustainability of the policies becomes apparent.
Latest Answers