Asian countries are in danger of getting stuck in the same rut that Western countries have got themselves into. By the year 2035, China will have a situation in which every five workers will be supporting two retirees.
In Taiwan, the population will start shrinking by 2030, at which point there will be one retired person for every three members of the younger generation. This younger generation will be burdened by an increasing dependency ratio coupled with a falling savings rate and decreased national competitiveness.
In essence, the nation’s slowing economic growth is dragging down tax revenues, a situation exacerbated by years of politicians’ promises to the electorate of more social welfare and lower taxes. Add to this the increased welfare payments required by the aging population and the fact that the National Pension fund, the pension fund for retired military personnel, public school teachers and civil servants and the Labor Insurance Fund are all facing impending bankruptcy.
All of this is taking away from the country’s ability to pay for public construction projects and is putting more strain on government finances, raising concerns that Taiwan could become another Greece.
Something needs to be done before it is too late.
Taiwanese do not want to find themselves in the same predicament facing Europe, the US and Japan. The US Federal Reserve has already implemented another round of quantitative easing.
However, the question is: What weapons does Taiwan have at its disposal to deal with a potential looming fiscal cliff?
Lee Wo-chiang is a professor in Tamkang University’s Department of Banking and Finance.
Translated by Paul Cooper