STOP thinking for a moment about deep recession, trillion-dollar rescue packages and mounting job losses. Instead, contemplate the prospect of slow growth and low productivity, rising public spending and labour shortages. These are the problems of ageing populations, and if they sound comparatively mild, think again. When the IMF earlier this month calculated the impact of the recent financial crisis, it found that the costs will indeed be huge: the fiscal balances of the G20 advanced countries are likely to deteriorate by eight percentage points of GDP in 2008-09. But the IMF also noted that in the longer term these costs will be dwarfed by age-related spending. Looking ahead to the period between now and 2050, it predicted that “for advanced countries, the fiscal burden of the crisis [will be] about 10% of the ageing-related costs” (see chart 1). The other 90% will be extra spending on pensions, health and long-term care.
The rich world’s population is ageing fast, and the poor world is only a few decades behind. According to the UN’s latest biennial population forecast, the median age for all countries is due to rise from 29 now to 38 by 2050. At present just under 11% of the world’s 6.9 billion people are over 60. Taking the UN’s central forecast, by 2050 that share will have risen to 22% (of a population of over 9 billion), and in the developed countries to 33% (see chart 2). To put it another way, in the rich world one person in three will be a pensioner; nearly one in ten will be over 80.
This is a slow-moving but relentless development that in time will have vast economic, social and political consequences. As yet, only a few countries with already-old populations are starting to notice the effects. But labour forces are now beginning to shrink and numbers of pensioners are starting to rise. By about 2020 ageing will be plain for all to see. And there is no escape: barring huge natural or man-made disasters, demographic changes are much more certain than other long-term predictions (for example, of climate change). Every one of the 2 billion people who will be over 60 in 2050 has already been born.
The reasons why
What is making the world so much older? There are two long-term causes and a temporary blip that will continue to show up in the figures for the next few decades. The first of the big causes is that people everywhere are living far longer than they used to. This trend started with the industrial revolution and has been slowly gathering pace. In 1900 average life expectancy at birth for the world as a whole was only around 30 years, and in rich countries under 50. The figures now are 67 and 78 respectively, and still rising. For all the talk about the coming old-age crisis, that is surely something to be grateful for—especially since older people these days also seem to remain healthy, fit and active for much longer.
A second, and bigger, cause of the ageing of societies is that people everywhere are having far fewer children, so the younger age groups are much too small to counterbalance the growing number of older people. This trend emerged later than the one for longer lives, first in developed countries and now in poor countries too. In the early 1970s women across the world were still, on average, having 4.3 children each. The current global average is 2.6, and in rich countries only 1.6. The UN predicts that by 2050 the global figure will have dropped to just two, so by mid-century the world’s population will begin to level out. The numbers in some developed countries have already started shrinking. Depending on your point of view, that may or may not be a good thing, but, as this special report will argue, it will certainly turn the world into a different place.
The temporary blip that has magnified the effects of lower fertility and greater longevity is the baby-boom that arrived in most rich countries after the second world war. The timing varied slightly from place to place, but in America—where the effect was strongest—it covered roughly the 20 years from 1945, a period when nearly 80m Americans were born. The first of them are now coming up to retirement. For the next 20 years those baby-boomers will be swelling the ranks of pensioners, which will lead to a rapid drop in the working population all over the rich world.
As always, the averages mask considerable diversity. In the richer parts of Asia the populations of Japan, South Korea and Taiwan are already old and will rapidly get even older. Europe is split several ways: Germany, Italy and Spain, for instance, now have tiny families and are therefore ageing fast, whereas France, Britain and most of the Nordic countries have more children to keep them younger. In eastern Europe, and particularly in Russia, birth rates are low and life expectancy has also taken a knock. America, thanks to a resilient birth rate and high immigration, will still be fairly youthful by mid-century.
Most developing countries do not have to worry about ageing—yet. Although birth rates have dropped, populations are still young and will remain so for a few decades yet, even though HIV/AIDS has killed off many active adults. But in the longer term the same factors as in the rich world—fewer births, longer lives—will cause poorer countries to age too. And even before that happens, the absolute numbers of older people there will swell alarmingly, simply because these countries are so populous. They already have 490m over-60s, and that total is due to more than triple by 2050. Since most poor countries have little or nothing in the way of a state-funded welfare net, those numbers will be hard to manage.
Alone among developing countries, China is already ageing fast. This is mainly because for the past 30 years it has been keeping a tight lid on population growth. This did not quite amount to a “one-child policy”, as it is often called (the average number of children per woman was closer to two), but it was highly effective in stabilising numbers. The population will peak at about 1.46 billion in 2030 and then decline gently. Although China has seen stupendous economic growth in recent years, it is still some way off being rich, so it will have trouble absorbing the cost of this rapid ageing. This special report will take a closer look at what it is doing about the problem, but will otherwise confine itself mainly to the developed world.
Fewer hands make heavy work
Macroeconomic theory suggests that the economies of ageing populations are likely to grow more slowly than those of younger ones. As more people retire, and fewer younger ones take their place, the labour force will shrink, so output growth will drop unless productivity increases faster. Since the remaining workers will be older, they may actually be less productive.
In most rich countries the ratio of people of working age to those of retirement age will deteriorate dramatically over the next few decades. In Japan, for instance, which currently has about three workers to every pensioner—already one of the lowest ratios anywhere—the number will halve by 2050. True, there will be fewer young people to maintain, but children cost less than old people and the overall burden will be much heavier than it is now. The OECD has estimated that over the next three decades the age-related decline in the labour force could cut growth in its member countries by a third compared with the previous three decades.
Ageing will affect financial markets too. According to Franco Modigliani’s and Richard Brumberg’s life-cycle theory of savings, put forward in the early 1950s, people try to smooth out their consumption over the course of their lives, spending more in their youth and old age and saving more in their middle years; so as populations age, savings in the economy as a whole will be run down and assets sold off. This has led to fears of an “asset meltdown” as everyone sells at the same time. But a number of academic studies have so far failed to find much evidence of this. Older people in America, for instance, do save less than those in their middle years, but as a group not much less.
James Poterba, an economics professor at MIT, says America has three kinds of retirement households: the least well-off, perhaps a quarter of the total, who will maintain something close to their previous standard of living on Social Security and Medicare, even with few savings; the richest 10-15%, who hold significant assets and may not need to draw them down; and the large majority in between, who will have to rely on their own, often inadequate, savings in retirement.
For the public finances, an ageing population is a huge headache. In countries where public pensions make up the bulk of retirement income, these will either swallow up a much larger share of the budget or they will have to become a lot less generous, which will meet political resistance (and remember that older people are much more inclined to vote than younger ones). Spending on health, which in most rich countries has been going up relentlessly anyway, is likely to grow even faster as patients get older. And because of a huge increase in the number of over-80s, a lot more money, and careful thought, will be needed to provide long-term care for them as they become frailer.
What can be done? As the IMF puts it, “the fiscal impact of the [financial] crisis reinforces the urgency of entitlement reform.” People in rich countries will have to be weaned off the expectation that pensions will become ever more generous and health care ever more all-encompassing. Since they now live so much longer, and mostly in good health, they will have to accept that they must also work for longer and that their pensions will be smaller.
Will the recession make it easier or harder to introduce the required reforms? If people are feeling poorer, they may think that their government should do more for them, not less. Yet some say that if everything is in a state of upheaval already, change becomes easier to bring about. They cite a phrase currently much used in the Obama White House: “Never waste a good crisis.”
Mitul Choksi
September 10, 2009
