As a Bear, I much enjoyed the period in the early ’80s when the two top economists on Wall Street, Henry Kaufman of Salomon and Albert Wojnilower of First Boston, were known as Dr. Doom and Dr. Death. Their writings, like those of James Grant (“Grant’s Interest Rate Letter”) more recently, are a refreshing contrast to the facile paid-by-the-trade optimism that still emanates from the rest of the Wall Street analytical community.

However, Friday’s meeting at the Center for Strategic and International Studies, on the subject of Europe’s demographic time-bomb, was even jollier for Bear fans. The essential theme was that the absence of Death was, in continental Europe, about to produce economic Doom.

Demographic projections are the hidden killers of economics. They are unnoticeable day to day, yet their effect is inexorable. While almost absolutely certain for 20 or even 50 years in advance (because the birth part of the equation has already happened), their effect is sometimes unpredictable. Certainly simplistic projections, such as that which had the U.S. stock market rising steadily till 2008, as the baby-boomers saved for retirement, after which the boomers would live off their stock market gains, are generally wrong — in that case, the problem is, when cashing in, to whom will the boomers sell their shares?

The featured speaker at the meeting was Dr. Kurt Biedenkopf, in his third term as minister president of the German state of Saxony-Anhalt, and thus about as close to the policymaking “sharp end” as it’s possible to get — German state governments are considerably more powerful than their U.S. counterparts, and Saxony-Anhalt, in former East Germany, has undergone considerable changes over the last decade, to say the least.

In continental Europe, and in Germany in particular, it became clear by the late ’70s that there was a substantial demographic problem as the birthrate sank to 1.3-1.4 children per couple and stayed there, far below the replacement level of 2.1 or so. Poland, Germany, Italy and Spain have the lowest birthrates, calculated on this basis, and will hence have the greatest demographic difficulty in the years to come. It is thus inevitable that, within the next 20 years, the age distribution in most of continental Europe will “gray” to an extent never seen before in human history. No doubt this will have unforeseen consequences, but it will also have some unpleasant ones that are all too predictable.

The biggest demographic problem arises when the older, larger generation starts to retire, and ceases contributing to the national economy. Traditionally, retirement occurred only shortly before death, so the funding problem of old age pensions was not great. However, in Germany, for example, the age base of the population will have moved from one-third under 20 and one-sixth over 60 in 1950 to one-third over 60, one-sixth under 20 in 2050. Hence, since continental European pension systems are funded by the state on a “pay-as-you-go” basis, rather than being funded in advance on an actuarial basis, as are private pension funds in the United States and United Kingdom, there is a serious funding problem as the demographic bulge hits retirement, particularly as modern medicine is continually extending life further into old age.

There are two possible solutions, both of them political poison. One is to reduce sharply the retirement benefits people will get. The other is to raise the retirement age towards 70. It should be noted that Britain’s first Old Age Pensions scheme, in 1908, offered pensions only from the age of 70. Given Britain’s 1908 mortality tables, it thus, in spite of being ’pay-as-you-go’ showed a very high degree of fiscal responsibility. Ideally, either solution should be accompanied by a shift towards private pension provision

Either solution, however, needs to be adopted at least 25-30 years before the demographic change takes place because of citizens need to plan their savings patterns. Indeed, court decisions in Germany have recently held that accrued pension rights must be treated as property, and cannot be alienated. Britain and the United States faced with this problem , albeit in a less extreme form than in continental Europe, grasped this nettle in the Reagan-Thatcher 1980s, with Britain reducing the state pension benefit in relation to earnings, and the U.S. delaying the retirement age for young workers from 65 to 67. France, Germany and Italy, faced with the same problem, but with stronger labor unions and a more entrenched consensus-social-democrat politics, did nothing — indeed all three countries, faced by the high unemployment of the late ’80s exacerbated the problem by lowering the retirement age for many workers instead of raising it.

All three countries hence have an unfunded pension problem, which will become a day-to-day cash flow problem in 2015 or so as the postwar generation retires. Italy’s problem is the worst. Prior to recent partial reform the unfunded pension liability was an astounding 500 percent of GDP; after an immensely unpopular reform, which was sold to the populace as absolutely solving the problem, it is down to 250 percent of GDP, but rising again year by year.

There are a number of other implications of the graying age distribution. It was thought that health care costs would explode, but with the latest techniques of less intrusive care, this may not entirely be the case, although control will require retirees in their 60s to care for their 85+ parents. This in itself may prove a goad to delayed retirement; there is little joy in early retirement if it simply involves a change from working at a presumably fulfilling job to undertaking unpaid geriatric daycare.

Another problem related to that of demographics is the change in the economic structure of Europe. Traditionally, pensions were funded by contributions from the full-time employed, with the self-employed, or part-time workers, getting a complete or partial “free ride” (this is not the case in the United States where the self-employed pay tax equivalent to Social Security contributions). However, in Germany for example fulltime employment has gone from close to 100 percent of the workforce in the 1960s to about 62-65 percent now. Hence, to fund the pension system it will be necessary to tax capital as well as paid labor.

However, this directly cuts against the need to increase capital formation, so that the small pool of younger workers can be deployed to produce the maximum output. Higher taxation, of capital or labor, also tends to increase the gray economy, which is now estimated at 15 percent of GDP in Germany and 20-25 percent in Spain and Italy.

It has been suggested that immigration, which has kept U.S. demographics close to balance, can help the problem. Certainly it is true that immigration of Third World cognitive elites, such as the United States has experienced in Silicon Valley, can greatly alleviate the skilled labor shortage. However, such immigration is developmentally highly unethical — it forces the poorer countries to educate their elites to a high level, only to lose them to the West. It is thus unlikely to be politically acceptable in the long run. As for mass immigration to re-balance the demographic curve, it would have to be so great as to be politically and socially catastrophic in societies which, unlike the United States, do not have an immigrant tradition. The inexorable rise in violent crime in the U.K. during the 1990s to a level well above that in the United States is only one example of the sort of damage that rapid immigration can do.

There are also intellectual and political implications. It will be necessary to introduce schemes for re-education of older workers, to preserve creative freshness as far as possible in an aging population. Politically, in 25 years time, one-third of the electorate will be older, and without children; how, if at all, can one expect such people to consider the long-term future in their votes? I regard that, at least, as a purely theoretical problem — the average voter doesn’t consider it now.

If the fertility rate remains at present levels, then the problem is continual not short term, as each generation will be smaller than the previous one. In Italy, for example, there will be a 30 percent decline in home buyers in the next 20 years, by 2050 there will be more people over 80 than under 20, and the number of productive workers (and hence Italy’s potential GDP) is expected to decline by 47 percent by 2050. Milan Stock Exchange, anyone?

Of course, there will be partial solutions to the pension problem, immigration will solve part of the demographic problem, and European education and skill will solve some of the economic problems. Pro-natal social policies, and Calvinist retirement policies, are urgently needed and no doubt to some extent will be adopted. Nevertheless, EU stock exchanges and real estate are not where I’m putting my money over the next few decades.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.