Globalist Analysis

Population Aging: A Human Triumph

What economic and social adjustments will governments have to make as a result of population aging?

Takeaways


  • Population aging raises serious questions about the financial viability of pension and healthcare systems for the elderly.
  • How to prevent the coming of a "red ink society" is a major economic and political challenge for governments.
  • For much of the past, children outnumbered the elderly by a factor of more than six to one. Today, the ratio has declined to about three children per one older person.
  • By mid-century, projections for the European countries as a group point to nearly twice as many elderly as children, with nations such as Germany, Italy and Spain having about one-third of their populations aged 65 years or older.
  • The sooner adjustments are put in place, the easier it will be to deal with the far-reaching and profound consequences of population aging.

Population aging is a triumph of civilization. It is the inevitable consequence of attaining desired smaller family sizes, lower mortality rates and longer lives, with many living beyond 100 years.

This achievement, however, requires vital social and economic adjustments to expected future demographic realities. In particular, population aging raises critical issues for countries, states and cities in areas such as economic growth, employment and retirement, pensions, health care and social support services.

As a population ages, the proportion of elderly (those 65 years or older) increases, and that of children (those under age 15) decreases. For much of the past, children outnumbered the elderly by a factor of more than six to one.

Today, the ratio has declined to about three children per one older person. And within the next few decades, perhaps by 2060, the world’s elderly population will begin to exceed the population of children, when each group is expected to account for slightly less than one-fifth of the world population.

Developed countries have already moved well along this transition. In many developed countries, such as Germany, Greece, Italy, Japan, Spain and the Ukraine, the elderly already outnumber children.

A notable exception is the comparatively young U.S. population, where the number of children is 50% greater than those aged 65 and older. By mid-century, projections for the European countries as a group point to nearly twice as many elderly as children, with nations such as Germany, Italy and Spain having about one-third of their populations aged 65 years or older.

Developing countries are now going through a similar aging process, but at a much faster pace. For example, whereas France took 114 years for its elderly population to increase from 7% to 14%, many developing countries that have experienced rapid fertility and mortality declines (such as Brazil, China, Indonesia, Iran and Tunisia) are passing through this transition in a span of 25 years or less.

As a consequence of such rapid changes, accommodating the necessary social and economic adjustments to older population age structures will likely be even more difficult for developing countries.

The wide-ranging consequences of population aging are of mounting concern and significance for more developed countries — and are also increasingly a worry for less developed countries. The prospects of population aging are pressing governments at all levels to reconsider many of their existing economic and social policies, programs and benefits.

In particular, population aging raises serious questions about the financial viability of pension and healthcare systems for the elderly. With the number of workers declining relative to those in the retirement ages, as well as the rapidly growing numbers of longer-living retirees, many anticipate the arrival of a “red ink society.”

Today’s budgets for social security, pensions and health care are in the black largely as a result of the favorable age structures of the past, i.e., many workers and relatively few retirees.

However, with changing demographics — in particular, smaller numbers of workers per retiree and increasing longevity — many fear that red ink is coming in the very near future. How to prevent the coming of a “red ink society” is a major economic and political challenge for governments.

Generally speaking, possible responses to sustaining current government pension and healthcare systems tend to fall into four broad areas:

  • First, old age benefits and healthcare coverage could be reduced. This may prove to be politically difficult, as it is considered somewhat heartless by much of the general public.A somewhat more palatable version of this approach might be to reduce benefits for the well off. However, such an approach runs the risk of undermining currently broad public support for old-age programs.
  • Second, taxes could be raised or existing funds redirected. This too is difficult and disliked by many, including citizens, businesses and special interest groups. And perhaps more importantly, most elected officials and politicians consider raising taxes as tantamount to political suicide.
  • Third, the legal retirement age could be raised. This approach appears to be less problematic than others in the short run, as such increases in retirement ages usually come into effect in the distant future.While some countries, such as Germany and the United States, have already increased the statutory age of retirement by a few years, proposals for increases in other countries (e.g., France and Greece) are confronting protests, strikes and demonstrations.
  • Fourth, pensions and healthcare systems for the elderly could be privatized. In traditional pay-as-you-go (PAYGO) systems found in most nations, current workers pay for the benefits of current retirees. Privatization would replace or modify PAYGO systems with private retirement accounts, in which current workers would put aside funds needed to cover their own retirement benefits. In addition to the difficulties of moving from one system to another, public reactions to privatization, especially with the recent economic downturn, have been largely unfavorable.

Not surprisingly, none of these options is popular among most elected officials or the general public. More acceptable and frequently mentioned responses to population aging include increasing worker productivity and technological advances and fixes. However, these ideas may turn out simply to be wishful thinking.

Other mentioned responses to population aging include raising below-replacement fertility levels and increasing the immigration of workers. Current and foreseeable efforts of most governments to raise fertility rates to replacement levels, however, seem highly unlikely, at least for the near term. Moreover, even if fertility were to rise, it would take a generation for the additional births to enter the labor force.

Increasing the immigration of workers, in contrast, would immediately impact the size of the labor force and increase the number of workers per retiree. In the longer term, however, immigrant workers age and eventually join the elderly population.

To offset those future increases among the elderly would in turn require even more immigrant workers. In brief, immigration is not a long-term solution to population aging.

In sum, while population aging is indeed an impressive achievement that has greatly improved the quality and length of human life, it will require social and economic adjustments to the expected future demographic realities.

To be sure, many of the needed changes are likely not to be popular among the public — and will be politically difficult to implement. However, the sooner these adjustments are put in place, the easier it will be for governments, organizations, families and individuals to deal with the far-reaching and profound consequences of population aging.

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