Ageing Economies

Hassan Mansoor Khilji 2009-3-42-9548

Seminar in Economic Policy

Table of Contents
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Contents
Introduction Measuring Ageing Population Demographic Shift Reasons Behind Ageing Population Problems Confronting Ageing Countries Solutions Lessons for Pakistan References Appendices

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Introduction
Population ageing is a shift in the distribution of a country's population towards older ages, a decline in the proportion of the population composed of children (declining fertility rate) & a rise in the proportion of the population that is elderly (declining mortality rate). The ageing of population is often measured by increases in the percentage of elderly people of retirement ages. The definition of retirement ages may vary but a typical cutoff is 65 years, and nowadays a society is considered relatively old when the fraction of the population aged 65 and over exceeds 8-10%. Asia and Europe are the two regions where a significant number of countries face severe population ageing in the near future. In these regions within twenty years many countries will face a situation where the largest population cohort will be those over 65 and average age will be approaching 50. The economic effects of an ageing population are considerable. Older people have higher accumulated savings per head than younger people, but may be spending less on consumer goods. Depending on the age ranges at which the changes occur, an ageing population may thus result in lower interest rates and the economic benefits of lower inflation. Some economists (Japan) see advantages in such changes, notably the opportunity to progress automation and technological development without causing unemployment. They emphasize a shift from GDP to personal well-being.

Measuring Population Ageing

Researchers often describe population aging with measures such as proportion of population under 15 years of age, proportion of population 65 years and over, the aged/child ratio (a ratio of the first two measures), median age, and mean age. Investigators of cross-cultural gerontology, too, use such measures to compare population aging between populations. Elderly Dependency Ratio (EDR): The number of individuals of retirement ages compared to the number of those of working ages.

Ageing Index (elder-child ratio): The number of people aged 65 and over per 100 youths under age 15. By 2030 the aging index is projected to exceed 100 in all developed countries & 200 for several European countries and Japan. Median Age: The age at which exactly half the population is older and another half is younger. Since population aging refers to changes in the entire age distribution, any single indicator might appear insufficient to measure it. The age distribution of population is often very irregular, reflecting the scars of the past events (wars, depression etc.), and it cannot be described just by one number without significant loss of information. Were the age distribution to change in a very irregular fashion over the age range, for instance, much information would be lost by a singleindex summary. Therefore, perhaps the most adequate approach to study population aging is to explore the age distribution through a set of percentiles, or graphically by analyzing the Population Pyramids.

DEMOGRAPHIC SHIFT
The World is about to experience the greatest demographic change in its history. No other force is likely to shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world's population is aging. The graying of the baby boomers, increasing longevity, and low fertility rates is changing the age structure of the entire globe. The effects of demographic aging will also be felt acutely by families. The slowing of economic growth will mean stagnant wages and slower family income growth. Health costs, which have outstripped economic growth even in prosperous times, will continue to increase faster than family incomes. Families in need may face reduced benefits if programs are cut to address the problems of mounting federal debt. U.N. figures show the proportion of the world's population aged over 65 is set to more than double by 2050, to 16.2% from 7.6% currently. Over the next 30 years, the number of elderly in the United States, Europe and Japan will be more than double. By year 2050;    In UK, an estimated one in four people will be aged over 65. In China, an estimated one in three people will be aged over 65. In Japan, an estimated two in five people will be aged over 65.

The effects of demographic aging will also be felt acutely by families. The slowing of economic growth will mean stagnant wages and slower family income growth. Health costs, which have outstripped economic growth even in prosperous times, will continue to increase faster than family incomes. Families in need may face reduced benefits if programs are cut to address the problems of mounting federal debt.

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Reasons of Ageing Population

1. Increasing Life Expectancy 2. Declining Fertility

Increasing Life Expectancy

Life expectancy has risen dramatically over the past 60 years, driven in turn by better sanitation, medical developments, lower infant mortality, and over the past three generations, by increased longevity. In the middle of the nineteenth century, average life expectancy at birth in England was just 42 years, by 1911 it was over 50 years, and today it is over 75 years for men and 80 years for women. Not only do we live much longer lives than our forebears, but we also live healthier lives, and today the majority of people aged over 65 are healthy, fit and active. Our society has adjusted readily and enthusiastically to the new opportunities and challenges offered by longer and healthier lives, and it seems reasonable to believe that we will continue to adjust successfully to future increases in life expectancy which will occur in the 21st century.

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Declining Fertility
The last decades of the twentieth century witnessed profound and continuing changes in fertility. Between 1970-1980 and 1994-2005, the median level of total fertility in the world fell by half, from 4.6 to 2.3 children per woman and the reduction of fertility was even more marked in some countries or regions.

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The main causes for the decline in fertility rate are; 1. Inclusion of women in the workforce in the name of liberation, elevation & empowerment. (The Second Sex by Simone de Beauvoir & Feminist Movement) A modern woman is far more a self-respected and a stronger being than the old stereo typed one, independent of making her own moves and exercising her own free will. But the indispensable question is whether all these external liberties have really succeeded in freeing her or has it involved further complexities as a by-product of her much craved liberalism. 2. Single Child Policy. Demographers estimate that a total fertility rate of 2.08 births per woman of childbearing age is required to maintain the population in the long run at its current size. 3. Population Control Theories presented by Malthus & idealized by Paul Ehrlich in his various books suggests that resources grow arithmetically while population grow geometrically. The concept of population control has been aided by the rise in contraceptive techniques & legalization of abortions. Population control might have helped countries to grow economically but in the longer run has presented very serious problems both economic & social.

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Problems Confronting Ageing Economies

1. Ageing Boomers Unlike the economy, which tends to fluctuate up and down within a fixed range, the aging of society is inescapable As the Baby Boomers continue to enter retirement, the U.S. faces one of the most dramatic demographic shifts in its history. The baby boom ran from 1946 to 1960, during which time the fertility rate in the United States was nearly twice its 20th century average. Because a high proportion -- slightly under a quarter -- of the current population was born in that period, their age has a strong influence on the average of the population. Thus the U.S. is, on average, growing older because of the baby boomers. This shift has strong implications for factors that depend on the age distribution of the population, like per-person productivity, health care costs, the savings rate, and social security funding. 78 million of us will begin turning 65 in 2011. Over the next 18 years between 3 and 4 million of us will do so each year. Our investment philosophy will change, like a ship at sea, slowly and inexorably from growth to income. The nearly $6T that we control in investments will become driven by our need for income to support our retirement lifestyle. A further $7T of inherited wealth will move to our generation over the same time frame. Those who manage their portfolios to support their income needs with a more Graham-like approach will succeed. Those who choose to speculate will have less chance of success. Dividends at a reasonable price will supplant growth at a reasonable price for at least two decades.

2. Entitlements

There are serious concerns about the affordability of an aging society, and particularly those programs most directly benefiting older populationSocial Security, Medicare & Medicaid. These trends will, in the view of many experts, cause federal spending and budget deficits to rise rapidly, driving up federal debt at a rate beyond our capacity to sustain it. In the worst-case scenario, the United States would be like a family living on credit cards and paying off debt with one card while running up spending faster with another, with insufficient income to ever pay down or get control of its debt.

The measure most often used to gauge the size of entitlement spending is its ratio to GDP, the total output of the economy. This measure provides a rough index of the burden of entitlement spending on the overall economy. Figure below shows the ratio of total entitlement spending and the three largest entitlement programs (Social Security, Medicare, and Medicaid) to GDP from 1962 to the present and projected out to 2050.
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3. Tax Burden
According to economic analysis, paying the elderly their promised benefits will require large tax increases, including sharply higher payroll taxes. The shift to a much older population will severely damage the macro economies of the developed world. According to our simulations, paying the elderly their promised benefits will require large tax increases, including sharply higher payroll taxes. For example: In order to finance elderly benefits in the United States, the payroll tax will have to climb from 14 percent (the current pure pay-as-you-go rate) to 23 percent over the next 30 years, while the average income tax on wages will rise from 10 to 14 percent. Thus the total tax on wages will rise from 24 percent to 38 percent by 2030 and to 40 percent by mid-century. Higher taxes mean lower after-tax income for workers. But they also have another, highly damaging effect. Less disposable income means less saving; less saving means less capital formation; less capital formation means lower labor productivity; and lower productivity means lower real wages. Ordinarily, one would expect an economy that is short of capital to turn to international capital markets. However, because the capital shortage in Europe and Japan will be even more severe than that in the United States, the other two regions will bid capital away from our country. Over the course of this century, the international capital shortage will raise real interest rates. By 2030, the total tax on labor in Japan will approach 60 percent, and Japanese workers will face a one-fourth reduction in their take-home pay. In Europe, where the total tax on wages is already above 40 percent, the tax burden will rise to 60 percent by 2030 and approach a staggering 70 percent by mid-century. In making these estimates, it is assumed that the fall in fertility rates will reverse over time and that women will eventually have enough children to replace the current population the exact opposite of recent trends. It is also assumed that the growth of health care costs per beneficiary will match the rate of growth of per capita real wages even though they have grown many times faster in recent years. As a result of these very conservative modeling assumptions, the results reported here are on the side of optimism. Reality is likely to be far worse.

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4. Consumption Pattern
Peoples consumption habits change with age. This is true of both the goods and services people buy and the places in which they buy them. Some of the changes are connected with preferences and needs, and others are dependent on circumstances. Elderly people spend lesser on automobiles & brown goods as compared to the younger generation. A particular problem that confronts some older people is the location of shops. To the extent that shops are concentrated in places that require access by motor cars, this will produce difficulties for those who can no longer drive, and will make them dependent on others. The problem is exacerbated if in rural areas, for example, local shops are disappearing and public transport is infrequent or non-existent. Supermarkets often sell a wider range of products at lower prices than independent high street shops, and in so far as older people find access to out-of-town supermarkets difficult, they are likely to face a higher overall cost of living than that of the population at large. Given the restricted mobility of some older people, a matter of greatest importance to them is the possible disappearance of local retail pharmacies, to be replaced by pharmacies in supermarkets.
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5. Social Problems
The Family structure is disintegrated in the developed countries. The Household sector is vanishing from the economy. Lonely Child Syndrome. The phenomenal increase of families with onliesan only child without any siblingsbiological or adopted, could make a host of words like brother, sister, nephew and niece obsolete in the near future. The child will be selfish, self-absorbed, aggressive, bossy, lonely and maladjusted. Japan has the highest suicide rate in the World despite being one the most developed countries. (Meaninglessness in life) Somewhere in America, a woman is raped every 2 minutes, according to the U.S. Department of Justice. (Despite being so advanced, liberal & just system)

The paradox of our time in history is that we have taller buildings, but shorter tempers; wider freeways, but narrower viewpoints; we spend more, but have less; we buy more, but enjoy it less. We have bigger houses and smaller families; more conveniences, but less time; we have more degrees, but less sense; more knowledge, but less judgment; more experts, but more problems; more medicine, but less wellness. We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get angry too quickly, stay up too late, get up too tired, read too seldom, watch TV too much, and pray too seldom. We have multiplied our possessions, but reduced our values. We talk too much, love too seldom, and hate too often. We've learned how to make a living, but not a life; we've added years to life, not life to years. We've been all the way to the moon and back, but have trouble crossing the street to meet the new neighbor. We've conquered outer space, but not inner space; we've done larger things, but not better things. We've cleaned up the air, but polluted the soul; we've split the atom, but not our prejudice. We write more, but learn less; we plan more, but accomplish less. We've learned to rush, but not to wait; we have higher incomes, but lower morals; we have more food, but less appeasement; we build more computers to hold more information to produce more copies than ever, but have less communication; we've become long on quantity, but short on quality. These are the times of fast foods and slow digestion; tall men, and short character; steep profits, and shallow relationships. These are the times of world peace, but domestic warfare; more leisure, but less fun; more kinds of food, but less nutrition. These are days of two incomes, but more divorce; of fancier houses, but broken homes. These are days of quick trips, disposable diapers, throw away morality, one-night stands, overweight bodies, and pills that do everything from cheer to quiet to kill. It is a time when there is much in the show window and nothing in the stockroom; a time when technology has brought this letter to you, and a time when you can choose either to make a difference, or to just hit delete. Dr. Bob Moorehead

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In summary: The generational storm approaching the shores of the developed world is much more threatening than is commonly believed.

Solutions
1. Increased immigration is an often recommended solution, yet our simulations indicate it will offer little help. Although additional workers would increase payroll tax revenues, more immigrants would also mean more spending on education, infrastructure and a host of other public goods. Moreover, immigrants would become entitled to benefits in their own right; and since they are disproportionately low-wage earners, they would receive more benefits per dollar of tax payments than do typical native workers. 2. Lower the individual cost of rearing child by increasing child allowances, study grants & child care so as to bring the fertility rate to its optimal level. 3. Women should be encouraged to work part time & stay home. 4. Governments should reduce old-age incentives to discourage early retirement and establishing incentives for continuing to work. 5. Robots are seen as a potential solution to the population problem rather than immigrations in Japan. (transition from organic to mechanistic society) 6. Increase the retirement age beyond 67 or abolish retirement concept altogether. 7. Promote individual saving opportunities for low- and moderate-income households.

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Lessons for Pakistan

1. Population control is not the road to success. A child is not born with a belly but with two hands and a brain. Instead of reducing the population, means should be sought to increase the opportunities for the younger generation. (education & health facilities, employment opportunities) According to Bloom, Canning and Sevilla (2001), while the population growth has a negative impact on per capita income growth, this effect is counteracted by the positive effect from growth in the share of the population that is economically active. 2. Pakistan has entered the demographic bonus phase; child dependency is declining and youth share in the total population is rising. The demographic situation in Pakistan has opened a window of opportunity to invest in young people who will be the next generation of workers, entrepreneurs, and parents. This investment, like in East and South East Asia, will enable the country to grow faster and reduce poverty. 3. Educated youth has faced difficulties in finding a suitable job during the last one and half decade, leading to relatively higher levels of unemployment among them. Inability to find employment for long period creates a sense of vulnerability, uselessness and idleness among young people and can heighten the attraction of engaging in illegal activities. 4. The integrated family structure exercised in Pakistan is an asset. The women choosing to stay at home rather than entering the workforce may not be adding quantity to the economy (GDP) but surely are adding a lot of quality to individual families in particular & society in general.

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References
1. 2. 3. 4. 5. 6. 7. Ageing World Economy and the Coming Generational Storm (Laurence Kotlikoff) Low Fertility & Population Ageing (RAND Corporation) Global Ageing 2010: An Irreversible Truth (Marko Mrsnik) Social Security in an Ageing World (Sarah Harper) Population Ageing, Entitlement Growth & the Economy (John. R Gist) Creative & Ageing Societies (EVA & Keizai Doyukai) World Population Ageing 1950-2050 (UN Report on Ageing)

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