The demographic time bomb
Fresh from a giant victory in the EU referendum and a succesful - if not overwhelmingly so - parliamentary vote of confidence, the government of Prime Minister Lezek Miller has focused full attention on the problem of fixing the country's public finances. If Miller succeeds in reining in spending, he just might pull off a corporate tax cut that will stimulate economic growth without running the country into a debt spiral. But beyond the immediate problems of a soaring deficit and shrinking treasury revenues, and beyond the medium-term challenge of bringing Poland in line with the Maastricht criteria for entering the euro zone, the country is facing a long-term fiscal crunch that cannot be fixed just by tweaking with the budget. The problem stems from the demographic structure of the country itself.
Last month the Central Statistical Office (GUS) published a very alarming set of statistics on the composition of Poland's labor force. The number of people whose main source of income is employment fell from just more than 17 million in 1998 to around 12.5 million last year, meaning that only about 32% of the Polish population works for a living. The result is that the country has one of the lowest labor force participation rates of any country in Europe. Meanwhile, the number of persons collecting retirement pensions has increased from 3.5 million in 1998 to 5.3 million in 2002 - an increase of nearly 50 percent in the span of just four years. And the number of persons collecting disability pensions rose during the same period by some 400,000, to more than 2.5 million. This is several times higher than the European average, and the massive increase in recent years suggests that either there has been a tragic increase in the number of accidents and health problems in the country, or an equally tragic increase in the number of people committing fraud to get out of work. But wait, it gets worse.
Current population projections indicate that the number of Poles over the age of 60 will increase to more than 9 million by 2030, up from around 6 million today, but the total population of Poland is expected to shrink by several percentage points during the same period. The reason for this is simple: Poland's fertility rate, or the average number of children per woman, is 1.37 - well below the 2.0 replacement rate. If Poland's rate remains as is, the country's population will begin shrinking by 31.5 percent every generation, assuming the life expectancy rate remains the same. But the life expectancy rate is growing while the proportion of retired people is increasing. This means that, effectively, an ever-shrinking number of working-age Poles will have to support an ever-growing number of retirees. No amount of public finances reform will save Poland's social security system if the demographic trend plays out as the statistics indicate.
Several years ago the government of Jerzy Buzek introduced a three-pillar, partly-privatized retirement pension plan that has had a measure of success in dealing with the problem of a retiree boom, but it is unlikely that this regime alone will be enough to fix the problem. A shrinking population in the coming years and decades will result in a shrinking domestic market, which in turn will be reflected by shrinking returns on the retirement pension funds. Yet it's politically difficult to justify immediate action on the matter - with so many more obvious problems to deal with, the rather recondite and abstract issue of Poles not having enough children is hardly a matter of urgency for the country's politicos.
Poland is not alone in this problem. In fact, just about every industrialized state in the world has a fertility rate below the rate of replacement, the notable exception being the United States, where the fertility rate is 2.05. However, our corner of the world is a hot-spot of shrinking fertility rates. Of the many countries in eastern and central Europe, only the republics of the former Yugoslavia have fertility rates above 1.5, compared to fertility rates of around 1.7 for most western European countries. The Czech Republic ties with Italy for the lowest fertility rate in the world - an impotent 1.18. In those two countries, population decline has already set in.
In western Europe, many countries have instituted comprehensive immigration programs whose aim is to bring young foreigners into the labor force, thus offsetting the growing number of pensioners. In those countries that have large-scale immigration programs - France, the Netherlands and the United Kingdom - projections indicate no population decline in the coming decades. In the countries with limited or no immigration, population decline is inevitable.
In Poland the immigration solution could prove to be political suicide, as the general - and completely mistaken - perception would be that immigrants are taking jobs away from Poles. (This would be untrue, as immigrants increase the size of the internal consumption market, thereby actually creating jobs by their very presence.) If large-scale immigration cannot be instituted, there is the option to simply let the Catholic Church have its way, and remove condoms from store shelves. Another option would be to do nothing, and watch Poland's health and retirement schemes collapse.
And then there is one more - very draconian - solution to the problem. Europe would have faced the very same demographic crisis some 80 years ago, had it not been for the baby booms following World Wars I and II. In that context, immigrants don't seem so bad.
