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An increasingly large proportion of the world's population is living longer than ever before. The nu

The Age of Aging: How Demographics Are Changing the Global Economy and Our World

George Magnus

John Wiley & Sons, 256pp, £18.99

With the ageing of the world's population, the numbers of those aged 65 and over is due to double in the next 25 years in most countries. The most rapidly expanding age group will be those over 80 years of age, which will multiply sixfold by 2050. The ageing effect will, of course, be greater in countries, such as Japan, that have low birth rates and little immigration. Japan's population is expected to shrink from 130 million to fewer than 100 million by mid-century.

Such population forecasts have to be treated with care, as they project current trends. Forecasting the numbers of a population cohort, where its size today is already known, relies on fewer assumptions than forecasting what proportion of the overall population it will comprise. After nearly half a century of increasing life expectancy and falling birth rates in a large number of countries, some aspects of the ageing trend are unavoidable. The over-65s and over-80s I have referred to are already born - and, equally, the smaller size of younger age-group cohorts is a given. Because only cohorts yet unborn could be larger, it would still take three decades or more before a sharp increase in the birth rate began to enlarge the labour force. Although the ageing trend is most pronounced in the developed world, it is a global phenomenon.

The rise in life expectancy has extended the trend by two years in each decade, reflecting greater prosperity, less hazardous environments and medical advances. Actuaries who predicted a slowing of the pace have been proved wrong, but one of these days the curve may begin to dip. There are also small signs that where the birth rate has fallen most - in Europe and China, for example, where women are having fewer than 1.5 children on average - there may now be signs of the rate rising a little (though it is still well below the 2.1 children needed for the population to reproduce itself without immigration).

The drop in the birth rate shows that couples - and especially women - have had more control over fertility. It also reflects the considerable cost of having children. This is not just the expense of bringing up a child, but also the cost to the mother of lost earnings and promotion. On average, a middle-class mother in Britain will forgo about a quarter of a million pounds if she has a baby. Often the mother-to-be wants to have children one day but postpones it; she then ends up having one child rather than two or three. Free childcare and better maternity benefits would change such considerations, as Sweden has shown (with its birth rate of 1.7 children per woman), but this still leaves an ageing trend.

Ageing is not like climate change or global pov­erty or militarism. In principle, it is good that we are living longer - and that those in their eighties are becoming a little more healthy. Nevertheless, as George Magnus rightly insists, the costs of ageing need to be reckoned with if this is to be a "good news" story. These costs are not modest. If the over-65s comprise 20 or 30 per cent of the population, then their income, if they are not to become impoverished, will have to be at least ­between 10 and 15 per cent of GDP, and one hopes a little more - enough to share in any rise in national prosperity. Then there are the likely medical and care costs. At present, annual medical expenses of those aged over 60 are four times those of people under 60 (a Canadian statistic, but relevant elsewhere as the order of magnitude).

George Magnus's book is a welcome attempt to address the problems of ageing societies. While he has something to say about policy solutions, much of The Age of Aging (as the US spelling has it) is concerned to lay out the shape of the problems. The author is an economist who an objective approach and stresses that government and public schemes are vital if the problems of ageing are to be addressed properly. When Magnus warned of bubble economics in 2006, he showed himself to be an independent voice. While avoiding scaremongering about the costs of ageing, he is probably a little too optimistic about what can be achieved by relatively small-scale changes.

Ageing is not a problem like climate change or global poverty. Nevertheless there are costs to reckoned with

For example, there is great scope for reducing age discrimination in employment and reducing unemployment among older workers. But, for the next few years, we are most unlikely to see huge changes. Indeed, Magnus's own account emphasises that there may be a deflationary impetus in the ageing society that compounds the sort of downturn through which we are now passing. He points out that ageing factors have intensified Japan's problems over the past two decades. On the one hand, older employees become cautious spenders; but on the other, as they retire, dis-saving replaces saving. So Japan has had relatively weak demand combined with a lowered level of saving (roughly only 3 per cent of GDP in recent years).

Some economists (Andrea Boltho of Magdalen College, Oxford, for example) have already identified such an awkward mixture in Europe, and the United States is showing signs of the same ailment. The baby boomers were urged to save in the 1980s and 1990s, and at least some of them did so. But as they retire, they are likely to draw down their savings, enough to constrain investment but not enough really to boost consumption. Naturally, if ageing boomers postpone their retirement, we could avoid the deflationary trap, but will they find that possible, when so many employers are downsizing?

Magnus is aware that governments face qualitatively new challenges and that the free market and deregulation have left us in an impasse. Yet he is uneasy about the pressures facing the state. He asks whether it is wise to encourage or oblige employees to put their savings in the stock market: "Is this the right way to go? Does it mean that governments' economic and social policy will have to take into account stock-market valuations to make sure employees will be properly protected in retirement?"

Over the past decade and a half, as Magnus points out, about 30 countries - mainly in Latin America and eastern Europe - opted to abandon public pension schemes and rely instead on commercial delivery and funding. The present outlook is dire. The problem goes beyond today's collapsing markets, though these are scary enough. It turns out that the commercial fund managers had poor yield ratios and often took sizeable commissions up front. The new regimes also have poor coverage; those outside the system, with next to no savings, are even more exposed to poverty in old age. (An excellent study by Mitchell Orenstein - Privatising Pensions - published too late to have been considered by Magnus, shows how the World Bank and the IMF made desperately needed loans conditional, in a process he calls "resource leverage", on governments accepting commercial pensions.)

The conventional pay-as-you-go schemes and public-sector pension funds may have their problems, but they have generally outperformed the alternatives. There are two reasons for this. First, their costs are low, because they don't need expensive marketing. Second, they may develop a shortfall - so that, say, only 90 per cent of the promised pension is funded - but this is modest compared to the huge hits taken by commercial pension pots, many of which have lost half their value.

Magnus claims that pay-as-you-go systems are simply Ponzi schemes, but we have just seen the collapse of a real Ponzi scheme - Bernard Madoff's - and it did not at all resemble the sorts of manageable strain that changing cohort size brings to a public pension system. For one thing, governments, unlike Ponzi merchants, can raise taxes, and, for another, their workings are tolerably open and subject to debate. Critics often charge that the US social security system works like a Ponzi scheme, yet public opinion has repeatedly rallied to save it from privatisation.

The Age of Aging is informative and well written, but is too timid in its conclusions. A way will have to be found to oblige employers to again make a serious contribution to retirement systems, and governments need to replace means-tested benefits that discourage saving and weaken public support (note that US social security is not means-tested).

We live in an epoch when the commercial organisation of finance and saving is failing, and needs to be replaced by a financial regime geared to public utility. Magnus is worried that central governments may take on too much, but the solution here is to decentralise public finance via a regional network of funds, not to return to a bankrupt business model. While The Age of Aging does not take us into this terrain, it supplies a helpful outline of the demographic challenges that will have to be met.

Robin Blackburn teaches at the University of Essex and is the author of "Age Shock: How Finance Is Failing Us" (Verso, £19.99)

This article first appeared in the 26 January 2009 issue of the New Statesman, Nixon went to China... Will Obama go to Iran?