The Economic Conundrum of an Aging Population

The Economic Conundrum of an Aging Population

The shift to a stable population will increase the "dependency ratio" of old to young. While that may stem environmental decline, it could bring economic hardship to the countries that first achieve it. The only real chance of escaping this dilemma is to eliminate the huge economic inequities that now prevail in the world.

 

In a large part of the world, old age is an incentive to have many children. That may seem puzzling to Europeans or Americans, for whom old age can be a welcome escape from the burdens of buying kids' clothes or paying for college tuition. Retired people in affluent countries usually have savings or pensions, as well as government-provided retirement income. But in poor countries, where hundreds of millions of people have no such income after they stop working, adult male children are the equivalent of social security. For this reason, there are strong cultural imperatives for children to provide support for their elderly parents, in preference (if a choice is necessary) to their own young. The result is a combination of too many children and too little care for those children-a potent formula for yet another generation of poorly educated and impoverished young people, including more young men whose frustrations make them prime prospects for militias and terrorists, and young women who have few prospects other than to have more children. It's a self-perpetuating cycle, which ironically becomes harder to break as life expectancies increase and the number of old people in poor countries continues to increase.

Aging Populations Have Fewer Children, But...

The incentives for having fewer children in rich industrialized countries are the mirror image of the reasons for having large families in poor countries. In poor countries, most people live on subsistence farms where child labor is valuable. In rich countries, most people live in cities where children are required by law to go to school. Children are an expensive luxury for people who live in cities and who have jobs outside the home. They must be housed, fed, and schooled. They add nothing to family income. If the mother has a job, she must find (and pay for) a baby-sitter or nanny to look after young children. Urban teenagers are often neglected by working parents, and too many of them-lacking adult guidance-engage in high-risk or costly behavior, from profligate consumption of video games or TV shows exhibiting extreme violence, to unsafe sex, drug-taking, or even crime. If unemployed, children may be an economic burden on parents into their thirties. In Italy, especially, unmarried children have become notoriously inclined to continue to live with their aging parents and enjoy mama's cooking. For that reason, among others, Italy now has one of the lowest birth rates in the world. Some Italians would like to see that trend reversed.

Last fall, The Economist magazine published a story, "Work Longer, Have More Babies." The illustration showed a horrified young woman-presumably in shock over the news that she is expected to stop having fun and start reproducing, for the good of western society. The underlying message, of course, was that as the populations of rich countries get older, with smaller percentages of them of child-bearing age-and as fewer of them care to bear the expense of having kids in any case-the populations of those countries will shrink and their cultures will risk being overrun by others, whose populations are rapidly expanding.

It is true that all of the industrialized countries, including the United States, are aging. The number of old people supported by social security, compared to the number of younger employed people paying into the retirement system, is growing. This "dependency ratio"-the number of people over 65 as a percentage of the number in the 20-24 age group-is a good indicator of the fundamental demographic problem. This ratio is now just over 20 percent for the United States, about 27 percent for the Euro zone, and 28 percent for Japan. However, by 2050, according to the World Bank, the dependency ratio will be close to 46 percent for the United States, 60 percent for Europe, and 70 percent for Japan.

The number of workers supporting each German pensioner today, via the main government "pay-as-you-go" (PAYG) system, is about three. By 2030, if current trends continue, the number of active workers per pensioner will be only 1.5. If each of the active workers earned 100 Euros before the transfer, he (or she) would get to keep 60, and the retiree would also get 60 Euros (1.5 X 100 = 2.5 X 60 = 150). The other costs of government would be taken (via taxation) out of the 60 Euros of income each person has. Costs of government, net of pensions, are at least 25 percent of GDP for industrialized countries, so taxes would take at least 15 Euros from each worker and retiree. The original 100 Euros is therefore down to 45, or less. From that, the future worker must think about saving for his own future retirement when the over-stressed PAYG system collapses, as many people now expect.

A Demographic Dilemma

To an environmentalist, an aging population might seem a good thing-proof that birthrates have fallen and that overall population will stabilize or decline. But a small aging population like that of Italy, in a world of huge younger populations like those of China or Brazil, may not be sustainable. First, there's that pressure from those who don't want their traditional culture (of Italy, or Spain, or France) to be overrun, and who want to encourage their young families to have more children. But even if that weren't a factor, there'd be the economic pressure on a country with a high dependency ratio to alleviate the imbalance, by delaying retirements or reducing retirement benefits. There's also the kind of pressure created by the Bush administration in the United States, to allow active workers to divert part of their social security taxes into privately controlled savings or investment accounts. It's a tempting idea because share prices have increased in value faster than government bonds (in which social security funds are invested), but it would take money away from the PAYG funds available to support current retirees, thus imposing either a very large near-term tax burden or additional government debt to make up the difference. 

All things considered, an aging population of non-workers will necessitate an increased tax burden or increased public sector debt, or both. In the past, a few countries have lived with taxes in the 50-percent range, especially in wartime, but not happily. However, this is no longer plausible. In a globalized world with no restrictions on capital flows, where nations compete for investment and where multinational firms can-and do-move money around at the touch of a button, high taxes are a major barrier to investment. In the world of 2030, the United States will be somewhat better off than Europe or Japan, thanks to its lower dependency ratio. On the other hand, China and India will have much lower dependency ratios than the United States, in addition to having lower wages. Even if they had to pay much higher wages, as they must do eventually, those countries would, and will, continue to absorb most of the capital available for investment, including whatever savings the workers of the (formerly) rich countries can manage to divert from current needs.

When environmentalists began to worry about population in the 1970s, the idea that having a declining population could spell trouble for a country might have seemed unimaginable. After all, wasn't that the ultimate goal? But in a globalized economy, a declining national population means a nation with a high percentage of elderly, non-working people will compete against nations of young, productive (often low-wage) people-and lose. The change of perspective since the 1970s can be attributed to three factors.

  • First, retirement ages have gotten younger, putting greater burdens on the social security system. According to the European Commission, the average age of retirement in Western Europe was 65 in 1960, but is 60 today. Civil servants and some unionized workers, such as truck drivers, are able to retire considerably earlier. In the United States, the average age of retirement was 66 in 1960, but is down to under 63 today. Moreover, when firms "downsize," which happens with alarming frequency these days, they often do so by offering early retirement schemes to older workers without replacing them with younger ones. This cuts payroll costs and shifts some or all of the burden to the government. Employees who were previously paying into the social security system are suddenly withdrawing funds from the system.
  • Meanwhile, birth rates in the industrialized countries have declined, just as environmentalists hoped they would-but with some unforeseen consequences. In 1950, the average overall birth rate in the European union was still above replacement (2 children per woman), at 2.7. Today it is 1.5 and falling. Similar rates are now observed in Japan, China, and Russia. In the United States, the birth rate is just above 2, in part because many of the country's Latino immigrants still prefer large families. If current trends continue, the working-age population of Europe will fall by 18 percent (40 million people) by 2050, while the corresponding U.S. group will increase by a similar amount. In that period the average age of the German population will increase to 54, while the average American will still be only 35. This discrepancy is very disturbing to most European economists, and politicians, who are concerned about economic competition with the United States, not to mention China and India.
  • Finally, life expectancies have been increasing since the beginning of the 18th century, and especially fast since the early 19th century. When Thomas Malthus warned of explosive population growth, in 1798, the average life expectancy was probably no more than 35. When Otto von Bismarck introduced the first state pension in Germany in 1889, the average life expectancy was 48, whereas the retirement age was set at 70. No wonder the German PAYG system was fiscally sound when it was introduced. There were a lot of active workers and very few retirees. The ratio was probably more than 100 to 1. Now, of course, the life expectancy of Europeans, Japanese, and Americans alike is around 77 (slightly more for women, slightly less for men) and still rising.

An older population requires more health and other services, and produces less wealth, than a younger population. At least that is the conventional wisdom. What is certain is that existing pension plans and social security programs are in deep trouble, even in the United States, and more so in Europe and Japan.

What Would an Aging Society Be Like?

Imagine a society ruled by the old. College professors, army generals, CEOs, doctors, judges, and legislators would hang on to their jobs into their seventies or eighties, or even longer. Promotion in big corporations, civil service, colleges and universities, and the military officer corps would slow almost to a halt, as vacancies due to retirement become rare. Even poorly paid jobs like teaching children in primary or secondary schools, or nursing, or processing forms in government agencies, would most likely require advanced degrees. Computers already do much of the work formerly done by clerks and middle managers. Computers are learning to talk to each other. The need for human interfaces will continue to decline.

Highly skilled construction, repair, and maintenance jobs, such as heavy machine operation, auto repair, plumbing, masonry, plastering, plumbing, electrical work, and electronics repair, would continue to be important and well-paid. However, many such jobs tend to be passed on from father to son. Union membership would be essentially closed to outsiders. Without an expanding economy to absorb them, young people on the lower rungs of the education ladder would be chronically unemployed-or forced to take jobs that most people are unwilling to do, such as collecting and separating trash or cleaning fish.

It is unlikely that there would be enough such jobs for all. But unemployment, especially among the young, is socially destabilizing. Moreover, it discriminates against ethnic minorities of all kinds. It is not at all unlikely that half or more of the present U.S. prison population-disproportionately black and Hispanic, and the largest in the industrialized world-would never have got into trouble with the law if there had been enough decent job opportunities for the less privileged.

Of course there is nothing new about this situation. It has been with us for a long time. The children of the rich are less likely to steal or commit crimes for money, since they don't need to. If they are caught driving while drunk, or accused of date rape, they will be defended by high-priced lawyers or released on a convenient technicality to avert the expense of a trial without an assured outcome, or worse, the loss of a wealthy campaign contributor. When the rich commit financial crimes that cause vast losses for customers or shareholders, they can afford to hire even more expensive lawyers skilled in the black arts of confusion, obstruction, obfuscation, and delay. Very few millionaire malefactors are convicted, still fewer punished. In the future, as the rich get richer-and older people become more demographically dominant-this sort of inequity will almost surely get worse before it gets better.

One way it's likely to get worse is in access to medical services. The rich can afford services that the poor can only dream of. No matter what the Christian and/or Islamic fundamentalists and their moral police think, and no matter whether it is legal in the United States and other major Christian or Islamic countries, cloning of stem cells from human embryos for therapeutic purposes is on the way. Clinics will soon-probably within a decade-be available in China, Russia, the Ukraine, Armenia, or other countries, where custom-grown livers, kidneys, hearts, lungs, or even legs and arms can be had for a suitably high price. The technology is already well along in development. Demand will surely follow. The more effective the gene therapies and stem cell technologies become, the longer their lucky recipients will live-and block the promotion prospects for younger people.

Given these trends, there is growing risk that the aging society of a mature industrial nation will be an increasingly inequitable society, ruled by the rich (and the old) for their own benefit and perpetuation in power. It will be controlled by means of hired guardians who will perform the same duties as today's police and military, but with added civil powers. Having high unemployment or underemployment, and no real power, the rest of our urban society will inevitably revert to a form of existence analogous to that of the Romans who were kept satisfied and entertained by bread and circuses. Its bread will be junk food and its circuses will be our 200 TV channels and omnipresent movieplexes, as well as our sports stadiums and NASCAR race tracks. But just as Rome was overrun, this self-indulgent senior culture (more toys for 65-year-old boys, with fewer actual children) could well be overrun by needier and more aggressive outsiders.

In a society thus dominated by the old, the young are doubly disadvantaged-by their subordinate positions in the major institutions of society and by their reduced capacity to pay the costs of social security. But the real killer is the fact that these overburdened young Europeans, Americans, or Japanese will be competing with nations that have both cheaper wages and lower dependency ratios-countries that will not only get the lion's share of investment but also will have to spend less of it on supporting their elders. To a policymaker in Brussels, Washington, or Tokyo, the advent of stable population will look worrisome indeed-unless the inequities between the enviable "old" and hungry or resentful "young" countries are bridged.

Supporting the Old Without Lots More Young?

The standard economist's formula for dealing with overpopulation is economic growth. The reasoning behind this formula is uncomfortable for environmentalists, but there is an inescapable logic: people with higher incomes, in countries that have social security for the elderly, want and need fewer babies; they do not need children to provide security. So, there's an enormous dilemma. Economic growth drives consumption, and waste, which is the reason population is a problem in the first place. But economic growth is also what's necessary to raise incomes to the point where population stabilizes.

It's here where the politics of economic development and the population stabilization that can follow become complicated. Environmentalists are not alone in their uneasiness about the full-throttle economic growth that increases incomes but also increases consumption of nonrenewable resources, degrades the environment, and may undermine social stability. They find some of their concerns echoed by their most fanatical adversaries-fundamental Islamists who regard Western modernization as decadent, but who have notoriously suppressed women's empowerment. The discomfort is made all the more excruciating by the fact that the anti-capitalist Muslims have become de facto bedfellows with some of their ideological enemies, the pro-capitalist Christian conservatives, in their mutual hatred of the "sexual revolution" of the past quarter-century. Experts on population virtually all agree that female empowerment, starting with education, is a necessary condition for reducing birthrates.

What's needed, to raise incomes and empower women while also mitigating concerns about profligate consumption, is an engine to drive economic growth without the kind of consumption that depends on the exploitation of remaining stocks of natural resources. How would this engine differ from the one that now drives global GDP yet leaves hundreds of millions of people in poverty and dependence on children-and vulnerable to social unrest?

To begin with, it would probably be a more "dematerialized" economy, in which economic productivity is not so rigidly tied to the extraction of ever more oil, minerals, wood, and other physical resources from the Earth as it is now. Aside from the costs of the ecological disruption and pollution that such industries impose, past experience shows that logging, mining, and drilling concessions tend to benefit mainly the very few (and often very corrupt) who have the power to make such deals. The natural wealth has never been widely distributed beyond this elite group. Governments in countries like Nigeria or Indonesia, which still have important natural resource stocks of oil or timber, also have vast populations of poor people for whom having children is a source of income. For this reason alone, it is essential that the global community address the inequity problem-and the closely related problem of corruption-far more quickly and seriously than it has. The rich Western countries have a big stake in the equitable development of the rest of the world, because equitable growth is the only effective tool for ameliorating international terrorism and its close cousin, uncontrollable immigration.

In the short run, though, controlled immigration is probably one of the most promising answers to the conundrum raised at the beginning of this article-the lack of enough new young workers (because of declining birthrates) to replace the retiring workers. Immigrants are demonstrably hardworking and willing to do the jobs our own pampered children scorn. Immigrants (being predominantly young adults) even tend to pay more in taxes than they get back in social services. They are a bargain, economically speaking. They also have fewer children than their age group in their home countries, as well as contributing enormously to the economic development of their home countries by sending back significant amounts of their earnings to parents or siblings.

That's only a short-term, partial solution, however. In the larger picture, the rich countries need to provide far more development aid, and to provide it with much tighter-and smarter-strings, to prevent misuse. Investment by the private sector can and will be the dominant source of capital, but that investment should not be going into exploitation of increasingly scarce natural resources. International lending agencies should stop encouraging this sort of investment, and in fact they should create barriers to discourage or prevent it. By the same token, international development agencies should concentrate much greater efforts on education and on creating the institutions needed to assure the rule of law.

As long as there are large economic disparities between nations, there will be unstoppable pressures both to have more children in the poor countries and to endure uncontrolled immigration of the poor into richer countries. When incomes are more equitable worldwide, the problem of smaller working populations supporting their elders will continue to be a problem as birthrates decline, but with all nations then sharing common constraints, the present incentives to have more babies and/or migrate to richer countries will disappear. Instead of being shackled by the destabilizing effects of poor people having large families to produce free labor and/or illegally migrating into rich countries in search of jobs, all governments can then focus on finding ways to build economic productivity through an increasingly non-extractive economy, enough to allow people everywhere to support their elders while living comfortably in their home countries.

 

Robert Ayres is professor emeritus of management and environment at the European business school INSEAD and King Gustav XVIth professor of environmental science in Sweden.

References and readings for each article are available at www.worldwatch.org/pubs/mag/.

 

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