The Population Crisis will cause an Economic Crisis

Philip Booth FAITH MAGAZINE September - October 2015

Most developed countries have set up systems of welfare that depend on population growth to sustain them. Unfortunately, we are destined for population contraction and an age of government austerity that could last for a generation. To put it simply, the Catholic Church is right about the importance of children and has been right in its warnings about the welfare state. The next generation will reap the whirlwind.

It is difficult to find a clearly articulated case in Catholic social teaching for modern-style welfare states involving huge government intervention in the lives of families combined with enormous transfers totalling around a quarter of national income. Certainly, Pope Leo XIII’s great encyclical, Rerum novarum, was pretty clear, at one point arguing that the government should come to the aid of families only as a last resort: “True, if a family finds itself in exceeding distress, utterly deprived of the counsel of friends, and without any prospect of extricating itself, it is right that extreme necessity be met by public aid...”. Pope Leo then went on to praise the independent welfare associations which developed quickly in the late nineteenth century. These were especially common in Britain. By 1910, there were seven million members of registered friendly societies alone in the UK.

The growth of the modern welfare state: a warning

Forty years after Rerum novarum, Quadragesimo anno made explicit something which had always been implicit in Catholic social teaching – the principle of subsidiarity. In other words, the state should not take over the functions of the family, civil society and lower levels of government. There is no doubt that the state did take over these roles at the time of the creation of modern welfare states. Indeed, on the 100th anniversary of Rerum novarum, Pope John Paul II warned us directly about the growth of state welfare. Distinguishing carefully between “state” and “society”, he argued that the modern state had taken over functions that belonged with society.

Strangely, just as welfare states are drowning in a sea of debt whilst also increasingly being seen as at least partly responsible for lower levels of family formation and employment, the Church has started to question welfare states rather less. In 2009, the encyclical letter Caritas in veritate praised government social security systems. And our own Bishops Conference pre-election letter not only called for the government to ensure that all had access to healthcare but specifically called for the NHS to be supported. Supporting a system of providing healthcare, which is the most centralised, bureaucratic and government-dominated in the developed world (with the possible exception of Canada), is hardly in accordance with the principle of subsidiarity. And the outcomes of our NHS are poor, as Catholic social teaching might predict.

Discriminating against the family 

Welfare states are not the same everywhere. Some – like our own - discriminate against marriage and family formation more than others. Continental European welfare models, on the other hand, are often much more ‘anti-work’ than the UK system. But a further, very worrying feature of welfare systems which is shared right across the developed world is that they are “anti-young”. They are piling up trillions of pounds of debt. Unless, there is radical reform, the next generation will face much higher taxes, much reduced government spending or – quite likely in some countries – complete economic breakdown. 

It is strange that no Catholic social teaching documents have commented on this issue given its seriousness. It is especially strange because there are two causes of the problem. One is the development of the government-backed systems of welfare that involve the transfer of enormous resources between generations. The other is the lack of children. Welfare states have shown a lack of respect for the principle of subsidiarity in Catholic social teaching and the population at large has shown a lack of respect for the teachings of Humanae vitae. The combination is toxic.

The problem

What precisely is the problem?

In generations past, the family was the main vehicle for welfare provision in old age. This would be supplemented – even amongst the lowest paid – by saving and sometimes by formal pension provision. In other words, people would have children or set aside the economic resources which would provide for old age or both. Just as parents looked after their young, when the time came the young looked after their parents.

When state pension systems were introduced, it was thought that the older generation could have a bonus. Pensions were to be paid for not by saving, but by the taxes of the current workers – thus enabling the post-war pensioners to have higher pensions immediately. Because of the baby boom, there was, at first, a high number of workers relative to pensioners making the system easy to finance. It was assumed that, in future years, when it came to the turn of the younger generation to receive their pensions, the taxes of the workers would look after them too. This is sometimes called – especially in France – ‘inter-generational solidarity’. However, in reality, the system represents a pact between today’s workers and a group of people who have not even been born – and, indeed, may not be born. 

In theory, this system can go on forever. But, in practice, it requires a healthy birth rate. The problem arises when birth rates fall and life expectation rises so that pensions are being paid for longer and there are relatively fewer workers paying taxes.

The same problem arises with healthcare. The majority of health spending occurs near the end of life. Again, as populations age and the working generation shrinks in absolute or relative terms, health care funded only through taxes, rather than partially through saving during a person’s working life, become very difficult to sustain. 

The result has been much higher taxes to fund a growing elderly population from the shrinking (at least in relative terms) working population. This then damages employment. On average in the EU, taxes paid by the employer and employee sum to a total equal to nearly 70 per cent of take-home wages for low paid workers. When people move from unemployment into work the amount of additional income they receive after taxes is very low. It is, sadly, not surprising that youth unemployment rates are a shocking 22 per cent in the EU. Perhaps even more shocking is that, at the height of the pre-crisis boom, youth unemployment was over 15 per cent: the bankers are not to blame for this! 

Vicious Circle

And then there is a vicious circle. At least to some extent, people vote in elections to promote their own interests rather than to promote the ‘common good’ as the Catholic Church teaches. This means that, as pensioners become more numerous relative to workers, the more numerous older generation will tend to vote to protect its benefits. We have seen this reflected in almost every action of the current government and its predecessor. Between 2007 and 2014, the incomes of pensioner households rose by 10 per more than inflation whilst the incomes of those of working age fell by 4 per cent after inflation. David Cameron has quite deliberately and transparently protected pensioners – even better-off pensioners – from welfare cuts and is increasing pensions much faster than inflation.

The problem is set to get worse – much worse. Germany’s population is projected to fall by 11 million in less than 50 years with nearly all of this fall concentrated within the working population. This is even after allowing for inward migration. You might think that Catholic countries would fare better. They don’t. On average, families are having only slightly more than one child (for example, 1.4 in the case of Italy) and populations are in danger of collapse with far fewer workers supporting more pensioners and paying for increased healthcare costs. Catholic strongholds such as Portugal, Poland, Slovakia and Croatia are projected to see population falls of up to a quarter within the lifetime of today’s forty-year-olds. Outside the EU, Russia and Japan may see population implosion.

Economists have tried to calculate the total value of all the healthcare and pensions obligations that governments have promised to future older generations. In round numbers they amount to five-to-seven times governments’ official debt figures. To put it another way, to balance the books over the long term the figures suggest that most Western countries would have to reduce total government spending by about one-quarter or reduce social insurance (including health) spending by a half. It does not matter how you try to add up the numbers, they don’t add up.

The future

Where do we go from here? Systems of social insurance more firmly based on the family, saving and mutual associations would be a good start. In the UK, a priority must be more savings for pensions and an end to discrimination against marriage in the tax and benefits systems. It would help if the problem was recognised in those parts of the Catholic Church which are supposed to show an interest in issues of economics and politics. Economists have been talking about these problems for well over 25 years and yet you never even hear any recognition of the problem from the Church’s Justice and Peace Commission. Given the near-bankruptcy of many EU states and the appalling levels of unemployment in Europe, this is a terrible omission. This is especially so given that the answer to the problem lies in re-examining and applying Catholic social teaching on the welfare state and Catholic teaching on marriage and family life. 

Philip Booth is  Editorial and Programme Director, Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics, St. Mary’s University, Twickenham

 bring about an economic crisis

Philip Booth 

Most developed countries have set up systems of welfare that depend on population growth to sustain them. Unfortunately, we are destined for population contraction and an age of government austerity that could last for a generation. To put it simply, the Catholic Church is right about the importance of children and has been right in its warnings about the welfare state. The next generation will reap the whirlwind.

It is difficult to find a clearly articulated case in Catholic social teaching for modern-style welfare states involving huge government intervention in the lives of families combined with enormous transfers totalling around a quarter of national income. Certainly, Pope Leo XIII’s great encyclical, Rerum novarum, was pretty clear, at one point arguing that the government should come to the aid of families only as a last resort: “True, if a family finds itself in exceeding distress, utterly deprived of the counsel of friends, and without any prospect of extricating itself, it is right that extreme necessity be met by public aid...”. Pope Leo then went on to praise the independent welfare associations which developed quickly in the late nineteenth century. These were especially common in Britain. By 1910, there were seven million members of registered friendly societies alone in the UK.

The growth of the modern welfare state: a warning

Forty years after Rerum novarum, Quadragesimo anno made explicit something which had always been implicit in Catholic social teaching – the principle of subsidiarity. In other words, the state should not take over the functions of the family, civil society and lower levels of government. There is no doubt that the state did take over these roles at the time of the creation of modern welfare states. Indeed, on the 100th anniversary of Rerum novarum, Pope John Paul II warned us directly about the growth of state welfare. Distinguishing carefully between “state” and “society”, he argued that the modern state had taken over functions that belonged with society.

Strangely, just as welfare states are drowning in a sea of debt whilst also increasingly being seen as at least partly responsible for lower levels of family formation and employment, the Church has started to question welfare states rather less. In 2009, the encyclical letter Caritas in veritate praised government social security systems. And our own Bishops Conference pre-election letter not only called for the government to ensure that all had access to healthcare but specifically called for the NHS to be supported. Supporting a system of providing healthcare, which is the most centralised, bureaucratic and government-dominated in the developed world (with the possible exception of Canada), is hardly in accordance with the principle of subsidiarity. And the outcomes of our NHS are poor, as Catholic social teaching might predict.

Discriminating against the family 

Welfare states are not the same everywhere. Some – like our own - discriminate against marriage and family formation more than others. Continental European welfare models, on the other hand, are often much more ‘anti-work’ than the UK system. But a further, very worrying feature of welfare systems which is shared right across the developed world is that they are “anti-young”. They are piling up trillions of pounds of debt. Unless, there is radical reform, the next generation will face much higher taxes, much reduced government spending or – quite likely in some countries – complete economic breakdown. 

It is strange that no Catholic social teaching documents have commented on this issue given its seriousness. It is especially strange because there are two causes of the problem. One is the development of the government-backed systems of welfare that involve the transfer of enormous resources between generations. The other is the lack of children. Welfare states have shown a lack of respect for the principle of subsidiarity in Catholic social teaching and the population at large has shown a lack of respect for the teachings of Humanae vitae. The combination is toxic.

The problem

What precisely is the problem?

In generations past, the family was the main vehicle for welfare provision in old age. This would be supplemented – even amongst the lowest paid – by saving and sometimes by formal pension provision. In other words, people would have children or set aside the economic resources which would provide for old age or both. Just as parents looked after their young, when the time came the young looked after their parents.

When state pension systems were introduced, it was thought that the older generation could have a bonus. Pensions were to be paid for not by saving, but by the taxes of the current workers – thus enabling the post-war pensioners to have higher pensions immediately. Because of the baby boom, there was, at first, a high number of workers relative to pensioners making the system easy to finance. It was assumed that, in future years, when it came to the turn of the younger generation to receive their pensions, the taxes of the workers would look after them too. This is sometimes called – especially in France – ‘inter-generational solidarity’. However, in reality, the system represents a pact between today’s workers and a group of people who have not even been born – and, indeed, may not be born. 

In theory, this system can go on forever. But, in practice, it requires a healthy birth rate. The problem arises when birth rates fall and life expectation rises so that pensions are being paid for longer and there are relatively fewer workers paying taxes.

The same problem arises with healthcare. The majority of health spending occurs near the end of life. Again, as populations age and the working generation shrinks in absolute or relative terms, health care funded only through taxes, rather than partially through saving during a person’s working life, become very difficult to sustain. 

The result has been much higher taxes to fund a growing elderly population from the shrinking (at least in relative terms) working population. This then damages employment. On average in the EU, taxes paid by the employer and employee sum to a total equal to nearly 70 per cent of take-home wages for low paid workers. When people move from unemployment into work the amount of additional income they receive after taxes is very low. It is, sadly, not surprising that youth unemployment rates are a shocking 22 per cent in the EU. Perhaps even more shocking is that, at the height of the pre-crisis boom, youth unemployment was over 15 per cent: the bankers are not to blame for this! 

Vicious Circle

And then there is a vicious circle. At least to some extent, people vote in elections to promote their own interests rather than to promote the ‘common good’ as the Catholic Church teaches. This means that, as pensioners become more numerous relative to workers, the more numerous older generation will tend to vote to protect its benefits. We have seen this reflected in almost every action of the current government and its predecessor. Between 2007 and 2014, the incomes of pensioner households rose by 10 per more than inflation whilst the incomes of those of working age fell by 4 per cent after inflation. David Cameron has quite deliberately and transparently protected pensioners – even better-off pensioners – from welfare cuts and is increasing pensions much faster than inflation.

The problem is set to get worse – much worse. Germany’s population is projected to fall by 11 million in less than 50 years with nearly all of this fall concentrated within the working population. This is even after allowing for inward migration. You might think that Catholic countries would fare better. They don’t. On average, families are having only slightly more than one child (for example, 1.4 in the case of Italy) and populations are in danger of collapse with far fewer workers supporting more pensioners and paying for increased healthcare costs. Catholic strongholds such as Portugal, Poland, Slovakia and Croatia are projected to see population falls of up to a quarter within the lifetime of today’s forty-year-olds. Outside the EU, Russia and Japan may see population implosion.

Economists have tried to calculate the total value of all the healthcare and pensions obligations that governments have promised to future older generations. In round numbers they amount to five-to-seven times governments’ official debt figures. To put it another way, to balance the books over the long term the figures suggest that most Western countries would have to reduce total government spending by about one-quarter or reduce social insurance (including health) spending by a half. It does not matter how you try to add up the numbers, they don’t add up.

The future

Where do we go from here? Systems of social insurance more firmly based on the family, saving and mutual associations would be a good start. In the UK, a priority must be more savings for pensions and an end to discrimination against marriage in the tax and benefits systems. It would help if the problem was recognised in those parts of the Catholic Church which are supposed to show an interest in issues of economics and politics. Economists have been talking about these problems for well over 25 years and yet you never even hear any recognition of the problem from the Church’s Justice and Peace Commission. Given the near-bankruptcy of many EU states and the appalling levels of unemployment in Europe, this is a terrible omission. This is especially so given that the answer to the problem lies in re-examining and applying Catholic social teaching on the welfare state and Catholic teaching on marriage and family life. 

Philip Booth is  Editorial and Programme Director, Institute of Economic Affairs and 

Professor of Finance, Public Policy and Ethics, St. Mary’s University, Twickenham