Lessons for an ageing world

Even before the coronavirus pandemic, the challenge of ageing populations around the world was one in need of urgent attention.

The hares – or the faster-ageing countries – comprising advanced economies such as Japan, Germany and Italy, and a handful of emerging nations such as China, South Korea and Russia, were already seeing the effects. The tortoises, which include India and a swathe of developing nations in Asia, Latin America and Africa, hoped to have another 20-year-plus window. Then along came the pandemic. COVID-19 has not only cast a spotlight on the vulnerability of older people, it has impacted on policy, throwing into disarray the tenuous preparations for ageing by governments, pension fund and asset managers, and individuals.

To put the issue into context, the proportion of the world’s population older than 65 will increase from 9% in 2019 to 16% by 2050, according to UN data. A quarter of the population living in Europe and Northern America (which the UN essentially defines as the US and Canada) will be older than 65 in 2050, up from 18% in 2019.1

In Africa, Asia and Latin America, the share of the population that is 65 or older is projected to increase from 7% in 2019 to about 14% in 2050. This shift is heavily influenced by China, the fastest-ageing country in the world. The number of Chinese older than 60 will more than double from the 2019 level to nearly 490 million by 2050, lifting their share of the population from 17% to 35%, a higher proportion than in the US.2

Spillover effects
Longer life expectancy is mostly something we celebrate, even though it also exposes us to an array of ailments and care issues in old age. Yet ageing also matters because it is fundamentally a huge macroeconomic problem for which we have no template. It arises not so much because people are living longer, but because of the problematic combination of rising life expectancy and weak or low fertility rates.

Low fertility rates mean we aren’t having enough children – who later will become workers – to replace those workers reaching retirement. As a result, the size and the growth rate of the working-age population, typically defined as those aged 15–64 or 20–64, is going to stagnate or decline.

Linking the working age and older population numbers, we can calculate the ‘support ratio’, or the number of workers per retiree. (The inverse of this is the ‘old-age dependency ratio’.) In Japan, the support ratio is 1.8, the lowest in the world. Another 29 countries, mostly in Europe and the Caribbean, have support ratios below 3. By 2050, 48 countries, mostly in Europe, Northern America and Eastern and South-Eastern Asia, are expected to have support ratios below 2. China’s support ratio, now 7.7, is predicted to fall to just under 2.5.3

From a macroeconomic viewpoint, therefore, ageing and stagnant working-age populations will have a direct and detrimental effect on economic growth. They will affect how much people save, and this will influence investment and the level of interest rates. Traditionally, we have thought that older generations would save less, so real interest rates would rise. Yet longer life expectancy and weaker finances for many older people could mean people end up saving more than we expect, and that real interest rates might fall.

Ageing will lead also to labour and skills shortages, which could push up inflation, subject to the effects of automation and robotics. It has already started to impact, in a negative way, the balance sheets of some governments because of promises to pay for healthcare, pensions and residential care. At the same time, institutions are facing defined benefit pension liabilities, while only a minority of older citizens have adequate savings for 20 or more years of non-working life.

The OECD has calculated 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, and this could require offsetting tax increases of between 4% and 12% of GDP. 4

Coping mechanisms
There are really only three main ways to address the macroeconomic effects of ageing, which are all about trying to compensate for the hit to the working-age population. They relate to people, participation and productivity.

Immigration can help to increase the size of the working-age population, mitigating labour and skills shortages. That said, encouraging women and older workers, both often under-represented in the labour force, to go back to work or extend their careers would be more productive.

Getting more women in to the workforce is typically about removing the barriers they face during their lifetimes – for example ensuring the provision of affordable childcare. Higher participation from older workers requires a variety of workplace and attitudinal changes in addition to a higher pensionable age.

Japan has made strides in recent years in boosting female labour force participation. Meanwhile, over the coming years government policy will see the retirement age increase in over half of the OECD economies, including in the UK, Germany, Australia, the US and Italy.

The most effective – but also the hardest – strategy is to encourage higher productivity growth, so that a smaller workforce becomes more efficient at producing the resources needed to support an older population. This, though, is the holy grail for which we are all searching.

In a paper published in 2018 by the US National Academy of Sciences, authors created an index, comprising productivity and engagement (participation rates, retirement age, volunteering and retraining); wellbeing (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 assess how well 18 OECD countries were adapting to ageing.5

Norway and Sweden ranked – first and second, followed by the US, the Netherlands and Japan. The UK ranked 11th, with four central and eastern European nations filling the lowest slots. No country ranked top in all index components. The principal advantage enjoyed by 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 score was high on productivity and engagement, and on cohesion, average on wellbeing and very low on equity and security. The Netherlands was high on equity, security and wellbeing, but low on productivity and engagement, and cohesion. Japan was high on wellbeing and life expectancy. The UK ranked second on cohesion, but mid-table on productivity and engagement, and in the lower half in wellbeing, equity and security.

Readjusting after a shock
It’s fair to say that many countries are in the throes – or were before the pandemic – of trying to create more opportunities for individuals to extend their working lives and more opportunities for women at work.

Older worker participation rates have climbed but are still relatively low, and the gap 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 arrived slightly more than a decade after the financial crisis, subjecting the global economy to two major shocks very quickly that have undermined stability, productivity and the ageing agenda.

The next decade will be critical for faster-ageing economies in the northern hemisphere – plus Australia and New Zealand – because their rising age structure will pressure pension and healthcare systems, underpinning the need for stronger coping mechanisms. This goes for China too.

For China, the challenge of ageing is more urgent than for most other emerging and developing countries, but all of them face a major problem that advanced economies have been fortunate to avoid – namely, getting old before they get rich. For emerging and developing countries, the rise in age structure in the next 20–25 years will match the rise in advanced nations that occurred over 50–75 years. Compounding the problem is these economies’ much lower levels of income per head and far less sophisticated pension and healthcare systems. There is still time for them to adapt, but not much.

Sources:
1,2World Population Prospects, United Nations, 2019
3Calculated 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

The full version of this article first appeared in issue 106 of the St. James’s Place Investor magazine.

George Magnus is a former Chief Economist of UBS Investment Bank, Research Associate at the University of Oxford China Centre and the School of Oriental and African Studies, University of London, and author of The Age of Aging: How Demographics are Changing the Global Economy and Our World