Many people work hard at improving their diet, fitness, health and lifestyle to boost their longevity; however, old age can also leave us more vulnerable to various ailments and care issues. Furthermore, ageing is also important because it’s essentially a huge macroeconomic problem for which there’s no user guide. The fact that people are living longer isn’t so much the issue – rather, it’s a rising life expectancy versus weak or low fertility rates.
Low fertility rates mean that, ultimately, we won’t have enough people to replace those workers nearing retirement. The knock-on effect is that the size and growth rate of the working-age population, typically said to be in the 15–64 or 20–64 age brackets, is going to ebb or deteriorate.
We can gauge the ‘support ratio’, or the number of workers per retiree, by making the link between the working age and older population numbers. (The inverse of this is the ‘old-age dependency ratio’.) The support ratio in Japan is 1.8, which is the lowest in the world. A further 29 countries, mostly in Europe and the Caribbean, have support ratios below 3. By 2050, 48 countries, predominantly in Europe, Northern America and Eastern and South-Eastern Asia, are projected to have support ratios below 2. China’s support ratio, now 7.7, is predicted to drop to just under 2.5.3
From a macroeconomic point of view, ageing and stagnant working-age populations will directly and negatively impact economic growth. They will influence how much people put away, and will affect investment and interest rate levels. Historically, we have assumed that the elderly would save less, and so real interest rates would increase. However, longer life expectancy and weaker finances for many older people could see people saving more than we expect, and real interest rates might go down.
An ageing population will also result in labour and skills shortages, which could push up inflation, subject to the effects of automation and robotics. It has already begun to have a detrimental effect on the balance sheets of some governments due to their pledges to pay for healthcare, pensions and residential care. By the same token, institutions are encountering defined benefit pension liabilities, while only a small share of older citizens have sufficient savings for 20 or more years of non-working life.
The Organisation for Economic Cooperation Development (OECD) has determined that pension, healthcare and long-term care costs will push up public debt as a share of GDP in G20 countries by 180% by 2060 – this may mean offsetting tax increases of between 4% and 12% of GDP.4
The three Ps
People, participation and productivity – these are essentially the only three main ways to take aim at the macroeconomic effects of ageing, to try to compensate for the hit to the working-age population.
Immigration can play a part in growing the size of the working-age population, easing labour and skills shortages. On the other hand, persuading women and older workers – both often under-represented in the labour force – to return to work or extend their careers would be more valuable.
The way to encourage more women into the workforce is basically about removing the hurdles they encounter in their lifetimes – for example, securing the provision of affordable childcare. Higher participation from older workers necessitates a range of changes to workplace and attitudes as well as a higher pensionable age.
Progress has been made in Japan in recent years in bolstering female labour force participation. In the meantime, government policy will mean an increase in retirement age in over half of the OECD economies, including in the UK, Germany, Australia, the US and Italy, in the coming years.
The hardest, but the most successful, strategy is to strengthen higher productivity growth – in this way, a smaller workforce becomes more effective at providing the resources required to support an older population. This, however, is the aspiration that we all hold onto.
The US National Academy of Sciences produced a paper in 2013, in which authors produced an index, including productivity and engagement (participation rates, retirement age, volunteering and retraining); well-being (life expectancy and satisfaction); equity (poverty risk and educational attainment); economic and physical security; and intergenerational cohesion (income, assets, public provision, social support and transfers from children), to evaluate how well 18 OECD countries were adapting to ageing.5
Norway and Sweden came out first and second respectively, followed by the US, the Netherlands and Japan. The UK ranked 11th, with four central and eastern European nations in the lowest slots. No country came out top in all index components. The main benefit for Nordic countries was equity, while most European countries recorded high marks for social cohesion, neighbourhood support and financial transfers and housing support between generations.
The US scored highly on productivity and engagement, and on cohesion, average on well-being, but very low on equity and security. The Netherlands had a high score for equity, security and well-being, but low on productivity and engagement, and cohesion. Japan was high on well-being and life expectancy. The UK came out second on cohesion, but mid-table on productivity and engagement, and in the bottom half in wellbeing, equity and security.
Time to acclimatise
Pre-COVID-19, many countries were and now continue to be in the midst of trying to create more opportunities for individuals to extend their working lives and for women in the workplace. Older worker participation rates have risen, but are still quite low, and the divide between male and female employment rates has narrowed to less than 10% in many countries, although there are larger gaps in Italy and South Korea, and across many emerging markets.6
The pandemic turned up little more than 10 years following the financial crisis, quickly exposing the world economy to two substantial shocks that have compromised stability, productivity and the ageing agenda.
The next decade will be a significant period for faster-ageing economies in the northern hemisphere – as well as Australia and New Zealand – because their rising age structure will turn on the heat for pension and healthcare systems, reinforcing the need for stronger coping mechanisms – China included.
The challenge of ageing is no more pressing in China than for most other emerging and developing countries, yet all face a major issue that advanced economies have thus far been lucky to swerve – getting old before they get wealthy. For emerging and developing countries, the rise in age structure in the next 20–25 years will equal the rise in advanced nations that took place over 50–75 years. These economies have much lower levels of income per head and far less sophisticated pension and healthcare systems, which further aggravate the problem. They have little time left to adjust.
1, 2 World Population Prospects, United Nations, 2019
3 Calculated from United Nations World Population Prospects 2019, using working-age population and older age cohort data
4, 6 ‘Fiscal challenges and inclusive growth in ageing societies’, OECD, September 2019
5 ‘Multidimensional comparison of countries’ adaptation to societal aging’, National Academy of Sciences, June 2018