Published: September 20, 2010

Every few years, demographers raise their estimate for human longevity. Whereas 70 years old once signified a rapidly ageing body and the early signs of mortal illness, now 70 year-olds run marathons, chop wood and settle for long retirements. Ninety is the new 70. And who could complain about that?

Well, investors might complain. In a number of countries, a rapidly aging society is creating financial burdens that will start to bite within a few years. Fewer young workers paying into the retirement system, coupled with explosive growth in the elderly population looks set to wreak havoc on government balance sheets. And since many governments already carry large debt burdens and will need to roll over their expiring debts with new ones, bond buyers are likely to demand far higher interest rates once they see how difficult it will be for some of these countries to live beyond their means.

Japan serves as a prime example of the demographic time bomb. According to the United Nations' Population Division, Japanese households are having an average of 1.4 children (well below the 2.1 replacement rate), and when this is coupled with restrictive immigration policies, it has led to a steadily rising average age in Japan. Japan's life expectancy, already among the highest in the world at 83 years, could approach 90 in the next few decades, according to the U.N.

As this chart indicates, the United States is on track to have the highest percentage of workers under the age of 65 by 2050, compared with China, Europe and Japan.

Immigration and births are key
One of the main reasons that the U.S. is expected to have an ample percent of its population in 2050 below 65 is its relatively open immigration system and reasonable family size. Yet some countries are likely to suffer from small family sizes (much of Europe, Japan) or restrictive immigration policies (Japan, Australia). In Russia, a combination of small families and a high incidence of premature mortality (often due to alcoholism or environmental factors), is leading to an outright shrinkage in its population, which has already dropped from 150 million to 141 million in the last 15 years and could drop to 130 million by 2030 according to demographers. A shrinking population makes it harder to handle rising government debt loads.

Markets look ahead
But it won't take until 2050 for this time bomb to go off. Government finances are already starting to feel the heat, and the deficits will only deepen unless their economies sharply rebound and we see major entitlement reform in many nations. And few are expecting either of those factors to happen, let alone both. So as debts get rolled over the next few years, look for rising interest rates on government bonds. Which makes matters worse. And as bond concerns arise, equity markets are likely to grow even more skittish.

Taking a look at the countries with the largest stock markets, here's a quick list of countries that have large government debts as a percentage of GDP:

(These tables don't reflect 2010 and projected 2011 debt levels, and these numbers are likely higher for most of these countries now. U.S. debt levels appear higher, but benefit from a currently over-funded Social Security program).

Now, let's cross-reference those government debt levels with median population ages:

One of things you'll notice when comparing this table to the one earlier, is that median ages are rising quickly. In Japan, the figure was 42.9 in 2005, and is now 44.6. Conversely, countries such as Israel, Brazil and India all have a median age below 30, which will be a real long-term asset -- if they can maintain strong education systems that ensure a productive workforce.

Germany is going to be an especially interesting test case. The country's industrial economy is at the heart of its society, and an ageing workforce is less capable of manning the assembly lines.

Low birth rates
As noted earlier, it takes 2.1 children per family just to keep populations stable (immigration notwithstanding). Surprisingly, more than 100 countries fail to meet that threshold, according to the U.N. The dearth of children is especially notable in some of the fast-growing economies in Asia.

The risky 7
In light of these trends, these economies could be headed for real trouble -- unless drastic action is taken.

1. Japan. A combination of restrictive immigration, small families and large government debts is toxic. It's unclear how Japan can avoid the tough times ahead since the country has been unable to show cohesive government leadership to tackle existing economic problems in the last two decades.

2. Greece. By the time that Greece has dealt with its current economic problems, it may find itself with a far smaller economy. Moreover, the country's best and brightest may start a wave of emigration that leads to a brain drain.

3. Italy. In many respects, it's amazing that Italy hasn't already entered into the debt spiral seen in Greece. The country's median age is high, debt loads are massive and the company's key textile and shoe industries are being overtaken by Asian countries. Italy is notorious for its inability to reach political consensus to make the necessary sacrifices. Time is running out.

4. South Korea. This is an unusual choice in that Korean economic growth has been very impressive in the past two decades. But the country has reached the stage where Japan was in 1990 -- relatively affluent and less equipped to provide competitively-priced manufactured goods. Korea's banking system is every bit as opaque as Japan's, and its government is equally disinclined to force its major conglomerates (Chaebols) into important changes that reduce vulnerability on mountainous corporate debts and encourage small business entrepreneurship.