The Best Country For Young People

In most Western Democracies, the young are what you could call an oppressed minority.

In societies shaped by the voting weight of the oversized baby boomer generation, they are burdened with high taxes, and the task of paying back -or at least paying interest on- high levels of debt as well as pensions.

Just take a look at Italy, a country where pension spending sits at 14% of GDP, or Spain which announced an ‘additional solidarity contrubtion’ from high earners to help pay for its pension system.

Young people and workers are effectively paying a boomer tax – as a larger and larger share of the economy ends up financing pensions and elderly care.

And it is putting pressure on the social contract across the West, as young workers are being asked to finance welfare states that are increasingly geared away from them and towards the elderly.

Fully aware of these difficulty some countries like Denmark have started advertising themselves as the best country for young people – and trying to get me and young people like you and I to move there.

So I wanted to understand how aging is affecting Western societies, how big this boomer tax actually is – what it might mean for young people as in the coming decade as we reach peak Boomer- the moment when all the Baby boomers enter retirement age, and what are actually the best countries in Europe for young people.

How Old people finance their consumption

Age Dependency Ratio

So over the course of a lifetime people first consume more than they produce, then as they reach their prime working years, they produce more than they actually consume, and as they age, they once again consume more when they stop working.

When we are children, much of the ‘cost’ is born by our parents who provide shelter, food and clothing, though society tends to make it easier on them by reducing their taxes and providing public services like daycare and free education.

In fact when the boomers were growing up they posed a similar problem to the one they are posing now: their outsized generation needed to be paid for by a small population of workers.

One way we can look at this is through the Age-Dependency Ratio – which gives us an idea of how many workers there are by country, that number was sky-high in the 1960s, and fell as the Boomers came of age in the 70s and 80s- before ticking back up since the late 2000s across the Developed world as they started to retire.

But while parents mostly are responsible for their Children, we can ask ourselves –

Who is Paying for all these old people?

In other words, how then do the elderly get by in different countries?

Well for most wealthy countries, the main source of elderly income is actually in the form of public transfers in the form of pension pay-outs.

For most European countries, where public transfers make up an overwhelming majority of the income per capita of old people- whereas in Anglo Saxon countries and the Netherlands, there was a significant contribution from private pension funds – while Asian countries like South Korea and Japan, as well as the US saw a higher share of income from work- as the elderly are pushed to work longer.

In fact the public transfers are so generous that average per capita consumption for seniors in some rich countries -like France, Portugal, Greece, Spain or Iceland is actually higher than for prime age adults on a per capita basis.

And so the first way we can take a look at the boomer tax is by looking at how much

Social Spending is given out to the Elderly.

And public pensions are not the only way that governments help old people get by: healthcare expenditure is often directed primarily at older people who are much more likely to need it.

So we can basically hone in on to social spending for old people by looking into pensions and healthcare expenditure.

The reason we can also include government health expenditure here is because most of that spending happens is for the 50+, which is the age after which health really starts to decline.

If we plot this on a graph this is what we get.

The Netherlands and Switzerland actually do pretty well in this since they shifted they mostly privatized their healthcare system, while others like CEE pay out less due to smaller pension pay-outs.

While at the far end of the spectrum, we have France, Italy and Austria, with the largest transfers to old people out of any country of the OECD.

But I know what you might say, what if there are more old people- then it would be normal for us to pay more for their healthcare and pensions right?

Well we can actually adjust for this by taking into account the share of people aged 65+.

We end up with this scatter plot.

On the other hand of the spectrum are again France, Italy and Austria, who despite having smaller old populations than other countries spend record amounts on pension spending – in part due to lower retirement ages.

Japan on the other hand comes out as the champion of pension spending moderation- despite the over 65 making up 28% of population it spent only 18%- in part due to high employment rates amongst the elderly.

This is a burden that is basically paid for through taxes on younger workers.

So the boomer tax is quite significant, but we can actually take this a step further and anticipate

How much young people are expected to pay out in the future

Since most of the pension financing in Europe is from, we can see that the Spanish households actually are entitled to Pay-outs of 500% of GDP, where Austria, Italy and France are pretty high as well.

Whereas the Netherlands, Sweden and Denmark, with their partially privatized pension systems are actually doing quite a bit better than other European countries on paper.

Rather than their pensions being financed exclusively from taxes – they are paid for from pension fund investments in stocks and debt.

In fact because of their diversification, these countries routinely top pension system sustainability rankings.

Though it has to be said that the sustainability of their private system also remains to be seen.

The economic slowdown that accompanies an ageing population is reducing the returns on their pension funds investments.

But the thing is we can take a look at how much money is actually headed to pensioners relative to the rest of the population

Pensioner Income

I ran the numbers with some OECD data, and found that in some countries like France, Italy or Spain, the median income for the population above the age of 65 relative to the working age population, was near 100% – in other words – they had nearly the same income – though without working.

In others like South Korea, Japan, the Netherlands or Scandinavia, particularly Denmark, these were a more reasonable 70%.

But with growing elderly populations, and significant pension entitlements to be paid out, it means that the burden will increase for the forseeable future, and we might ask ourselves, when we will reach

The Peak Burden for the Baby Boomer generation

Well here we once again have to turn to the Old-Age Dependency ratio as well as the projections of the OECD – but do keep in mind that these are estimates of population over the course of decades, and are subject to a lot of change.

It estimates that the share of people over the age of 65 is actually set to keep increasing in Germany and Poland up until 2075 while it will decline in countries like Italy and Japan after reaching a peak in the 2050s.

However all of these countries will end at a higher base level than countries that have more favourable demographics like the United States, France, the United Kingdom – which by 2050 will have an old age dependency ratio similar to that of Japan today.

But does that mean that the boomer tax will be the as heavy on Western societies as it has been for Japan?

And to answer that question, we have to understand that

The Boomer Tax is a societal choice

That’s because in a democracy, government spending can increase pretty quickly as a result of elections, with for example governments promising to raise pension spending in order to attract the votes of the elderly.

In Switzerland for example pensioners out-voted young people to increase their own state pensions by a 13th month every year.

But alternatively, societies could decide to ease the burden on the younger generation by decreasing pension spending or raising the retirement age – something that the older generation in some countries have volunteered to, while others met these changes with protests.

Japan is the example of a country that is ageing gracefully – it is spending more money on healthcare for its elderly population, but in return it gets an elderly population that continues to contribute to the economy, sometimes into their late 70s.

Others like Denmark have automatic rachet clauses to increase their retirement ages mathematically- and avoided protests in the process.

So what is the best country for young people?

Well according to all these graphs I just showed you, a young friendly country is one that is aware of the burden of an ageing population and tries to lessen it by moderating pension sizes, and pushing back the retirement age.

And by that metric, the Scandinavian countries like Denmark, as well as the Netherlands, would come out on top, having lower living standards for their elderly, and smaller pension contributions.

Meanwhile Italy, Spain and France with their rich pensioners, and high boomer tax are relatively bad for young people.

Conclusion

But you might ask: so what?

After all, it seems inevitable that as our societies age, spending on the elderly is bound to increase no matter what as a result of pensions, but also of them cashing in the assets they have built up over the course of their lives.

Well this video is a ranking it basically a list of countries according to solidarity between generations.

If a country has a large young population but choses to tax them to let the elderly retire early instead, the boomer tax will be far heavier than an older country, where older workers limit their pensions by working longer.

It also means that comparatively, if your country keeps taxes on young people and workers reasonable – in other words moderates the boomer tax in claims- it could poach young people from other countries, looking to escape the heavy tax burden.

But that is a story for another time.

This was Into Europe, thanks for watching, if you liked this video, make sure to like comment and subscribe for the latest updates and analyses on European news.

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