A Quick Dive into Ageing Populations – Part 1: The Ramifications

   Described as a “human success story” by the United Nations, the global phenomenon that is population ageing is both a blessing and a curse. Driven by an increase in life expectancy and a decrease in fertility rates, population ageing encapsulates the triumph of humanity in the arenas of economic development, public health and the fight against disease [1]. However, the proliferation of the global elderly population – estimated to be double today’s numbers by 2050 [2] – will present a whole new set of political, economic, and social challenges. The effect of population ageing is accentuated in Australia: the number of people aged 85+ has increased by 117% over the past two decades. In comparison, the total population growth rate over the same period is 34.8% [3]. Furthermore, it is estimated that by 2045, one quarter of Australians will be aged 65 and over [3][4]. But statistics aside, what implications does this all have on Australia and the world?

Figure 1: By 2045, around 1 in 4 people in Australia will be aged 65+. Source: Productivity Commission Research Report, Commonwealth of Australia.  

Ramifications of an Ageing population

On the Labour Market and Economic Growth

The ramifications of population ageing on the labour market are far more pronounced in advanced economies, particularly those belonging to the OECD, than in developing ones [5]. As a result of a younger median age in many developing countries, declining fertility rates will actually induce an increase in labour-force-to-population ratios as the shrinking share of young people offsets the skewing of adults towards older ages [6].

It is generally agreed that population ageing will have a negative effect on the labour market in advanced economies [4][5][6]. Ageing has reduced, and will continue to reduce, labour force growth in many developed countries at varying degrees of magnitude depending on the country. In Australia, a steady influx of migrants combined with a rise in the number of women in the workforce has largely mitigated the downward pressure exerted by ageing. However, overall labour force growth along with the labour supply will be stunted in the long run, all else being equal [5]. On the other hand, Japan, a country whose government once held conservative views on both immigration and female participation in the labour force, is fairing much worse. As depicted in the graph below, Japan’s labour force participation rate would be nearly 6 percentage points higher as of 2018 if the population share in each age cohort was unchanged from year 2000 (in other words, if ageing didn’t exist) [5]. In fact, a recent study conducted by the IMF estimates that Japan’s economic growth will decline by 0.8 percentage points annually as a result of demographic factors alone [7].

Whilst Japan is somewhat of an anomaly with regards to its ageing population, it nevertheless provides a glimpse into the potential economic havoc population ageing can wreak. All being said, the overall picture does not look as bleak. Population ageing will inevitably manifest itself in the form of slower economic growth in developed countries – one study concluded that ageing will slow economic growth by a “modest” 0.8 percentage points a year in OECD countries [6]. Furthermore, the effect of ageing on the labour force participation rate (and in-turn on the economy) will be somewhat mitigated by an increase in cohort-specific participation rates; for example, an additional increase in the participation rates of women and immigrants [5].

Political and Social

It is no surprise that population ageing will cause some significant changes to how our societies operate and, as a consequence, to our politics. One of the most significant social changes would be the duration of our working lives. As life expectancies increase, individuals will inevitably work longer. The reasons for this change are both behavioral and political:

1. Empirical studies have shown that the optimal behavioral response to increasing life expectancies is to extend the number of working years in proportion to the number of retirement years [6]. In other words, people will prefer to maintain the ratio of their working years to their retirement years, resulting in an increase in the number of years they choose to remain in the workforce.

2. Mounting fiscal pressure – largely stemming from the rising health care, aged care, and pension costs associated with ageing populations [4]– will make raising the retirement age an increasingly attractive political expedient in many countries [8][9]. In fact, in 2018, Prime Minister Scott Morrison was compelled to scrap a proposed plan to increase Australia’s retirement age to 70 after it raised a furore [9]. The UK is similarly increasing its stage pension age, with expectations that it’ll reach 67 in 2028 [8]. By the time you and I retire, it’s likely that the retirement age will be far higher than what it is today.

Another salient social change is the gender makeup of the workforce. A 2009 study by Bloom, Canning, Fink and Finlay demonstrates a negative correlation between total fertility rate and workforce participation [10]. It is believed that more women will enter the workforce as fertility rates decline over the next 4 decades, resulting in a “[sizable] increase in the female labour force participation rate” [6]. Hand-in-hand with social change comes political change. Political voting power in democratic societies will become even more concentrated in the hands of the elderly, and the policies that benefit this bloc – e.g., increasing social insurance contributions to support the pension system – will become increasingly entrenched. Scholars such as Bos and Weiszacker even posit the likelihood of generational conflict as a consequence of the “[frustration and discouragement]” that will arise in young people as a result [11].

Key Takeaway:  

While it is as clear as day that population ageing will have substantial and far-reaching consequences, it is by no means a catastrophe, nor should it be perceived as one. Rather, we should celebrate our ageing population as a hallmark of human progress; as the embodiment of our technological, medical and social victories as a species. Population ageing is ultimately a slow process, the ramifications of which are even slower to manifest. Provided we implement prudent solutions early, population ageing is a completely manageable problem. To quote one of the studies used in the making of this article: “population ageing can only be conceived as a crisis if we let it become one” [4].

References

[1] World Population Ageing 2019: Highlights. United Nations Department of Economic and Social Affairs. https://www.un.org/en/development/desa/population/publications/pdf/ageing/WorldPopulationAgeing2019-Highlights.pdf

[2] World Population Ageing 2020: Highlights. United Nations Department of Economic and Social Affairs. https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/undesa_pd-2020_world_population_ageing_highlights.pdf

[3] Australian Bureau of Statistics (2019). 3101.0 – Australian Demographic Statistics, Jun 2019. https://www.abs.gov.au/ausstats/abs@.nsf/0/1cd2b1952afc5e7aca257298000f2e76#:~:text=PEOPLE%20AGED%2065%20YEARS%20AND,1946%20and%201964)%20turn%2065.

[4] Productivity Commission. (2005). Economic implications of an ageing Australia. Productivity Commission, Government of Australia Research Reports.

[5] Brown, A., & Guttmann, R. (2018). Ageing and labour supply in advanced economies. Reporting Australia’s Foreign Reserve Holdings 1 The Reserve Bank’s Collateral Framework 7 Housing Accessibility for First Home Buyers 19 Underlying Consumer Price Inflation in China 29 Ageing and Labour Supply in Advanced Economies 371, 37.

[6] Bloom, D. E., Canning, D., & Fink, G. (2010). Implications of population ageing for economic growth. Oxford review of economic policy26(4), 583-612.

[7] International Monetary Fund. (February, 2020). Japan: Demographic Shift Opens Door to Reforms. https://www.imf.org/en/News/Articles/2020/02/10/na021020-japan-demographic-shift-opens-door-to-reforms#:~:text=This%20accelerated%20speed%20of%20aging,remain%20resilient%20at%200.7%20percent.

[8] Ketchell, Misha (July 1, 2020). Retirement Age is Increasing – but our new study reveals most only work 10 years in good health after 50. The Conversation. https://theconversation.com/retirement-age-is-increasing-but-our-new-study-reveals-most-only-work-ten-years-in-good-health-after-50-141227

[9] Yaxley, Louise (September 5, 2018). Scott Morrison scraps Government plans to raise pension age to 70.

[10] Bloom, D. E., Canning, D., Fink, G., & Finlay, J. E. (2009). Fertility, female labor force participation, and the demographic dividend. Journal of Economic growth14(2), 79-101.

[11] Bos, D., & Von Weizsacker, R. K. (1989). Economic consequences of an aging population. European economic review33(2-3), 345-354.