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Financial planning, Investment and Self Managed Super Fund Article
We Are Getting Old, So What
By Lester Wills
1st September 2009
This article may be out of date.
Most of society old enough to understand would probably be aware that our population is ageing. This has come about as we have fewer children and continue to live longer. However, such changes to the make-up of our society are having some interesting effects. In Germany, for example, there are more people over the age of 60 than under the age of 16. Australia is likely to hit that milestone somewhere around 2020, which is only 11 years away. What many have not really considered is just what change in the structure of society will actually mean.
Population shift
As a recent report from Japan noted, this change in our population can have all sorts of consequences, not least of which is the fact that that there will be a shortage of workers.
By way of example, in 2000, two-thirds of Japan’s population was between the ages of 15 and 64, but by 2050, that figure will be around 50%. That means that unless the Japanese government dramatically increases immigration or persuades more women and retirees back to work, companies will soon be struggling to fill jobs with all sorts of economic implications. Of course fewer workers means fewer taxpayers and less revenue to fund things like pensions and health care. But, as the number of retirees goes up, that same government will be facing increasing pension and healthcare costs.
On a more micro level, the effects of these demographic shifts are revealing themselves outside major cities in Japan. In many towns and villages, the proportion of old people is double the national average. Young people are leaving for the cities, government funding is falling, schools are closing and buses are running less often.
In fact a recent article noted that in one rural town, if a new building goes up, it is most likely to be an old people’s home. There are no burger bars, CD shops or coffee chains.
…it was easier to buy clothes for a little dog, than for a small child.
Instead, small shops and stalls sell clothes, traditional food and health products all designed to appeal to pensioners. Parents, on the other hand, are not being similarly accommodated. A young mother was reported as saying that it was easier in some suburbs to buy clothes for a little dog, than for a small child.
Grey power
I recently came across a detailed research report entitled The Greying of the Great Powers, produced by the Center for Strategic & International Studies (CSIS) as part of their Global Ageing Initiative. The analysis not only considered the impact of the demographic trends on population numbers, wealth and defence capability, it also explored how they could change the temperament of society.
Whilst we may all have some idea that this demographic shift is significant, the report’s author claimed that this transformation is not a transitory wave like the baby boom many affluent countries experienced in the 1950s, or the baby bust experienced in the 1930s. Instead it was called a fundamental shift with no parallel in the history of humanity. Sounds a bit like Al Gore talking about global warming; however, it backs up this rhetoric with some hard numbers in several areas.
Median age
Until the beginning of the twentieth century, a country having a median age over 30 was a rarity and as recently as 1950, no nation on earth had a median age higher than 36. Today, eight countries in Western Europe have a median age of 40 or higher and by 2050, six Western European countries will have a median age of 50 or higher. So will Japan, all of the East Asian Tigers, most of Eastern Europe and the former Soviet republics.
Population growth…or not
Throughout all of history, populations have behaved in one of two ways:
- they have grown steadily; or
- they have declined fitfully due to disease, starvation or violence.
In the coming decades we will see something entirely new; large, low-birthrate populations that steadily contract. Such patterns are already showing themselves as the following countries are already seeing their populations shrinking: Russia, the Czech Republic, Poland, Germany and Japan. By 2029 this list will include Italy, Greece, Portugal, Spain, Taiwan, South Korea, Finland and China. By 2050 you can add countries like Denmark, Belgium, Thailand, Singapore, UK and Hong Kong. As the report says, there are already 18 countries in the world with contracting populations, by 2050, there will be 44.
For many years there was skepticism about global warming, in fact some still deny its plausibility. What is even more unbelievable is that some still do not believe that the world’s population is ageing. But demographic ageing is about as close as social science ever gets to a certain forecast. Every demographer agrees that it is happening, and that outside of major global catastrophe, such as a deadly super virus (swine flu anybody?), it will continue to gain momentum. It is like trying to stop a supertanker; it takes a long time to slow down and once stopped, it takes quite an effort to get it moving again. This is what demographers call demographic momentum; population growth takes a long time to slow down and once stopped, it takes years before an increase in population is seen.
In demographic figures, anyone over the age of 43 in the year 2050 has already been born and can, therefore, be counted. Although the number of younger people cannot be projected as precisely, there is no reason to expect low fertility rates in the developed world will reverse anytime soon.
In fact, some even suggest that societies with very low fertility may enter a social and cultural trap that prevents fertility from rising again.
That seems a bit extreme, but even if that does not happen, and even if fertility rates do experience a strong and lasting rebound, the declining share of young (childbearing age) adults in the population will delay any positive impact on overall population.
Given that we are talking about global ageing, it will affect everyone on the planet, but different countries will experience the shift toward slower population growth and a higher median age at different rates. This different rate of change will, therefore, cause growing differences in societies before they all inevitably experience the same consequences.
Put simply, most of today’s youngest countries (such as those in sub-Saharan Africa) are likely to undergo the slowest ageing, whilst most of the world’s oldest countries (such as those in Western Europe) are likely to experience the most rapid ageing. This will lead to an increasing divergence or spread of demographic outcomes over the foreseeable future.
By way of example, during the 1960s, 99% of the world’s population lived in nations that were growing at an annual rate of between +0.5 and +3.5%. By the 2030s, that will widen to an annual growth rate of anything between -0.9 and +3.5%. Whilst that does not sound like much of a change, most countries will see their populations growing only slowly, some will see their populations shrink, but some will still be growing at 3% or more a year. As if we didn’t need any further difference to emerge between the western and Arab world, in both instances the median age will rise between now and 2050, but the median age in Western Europe will rise faster, meaning the differences will become even greater.
A major consequence of this demographic shift is that the growth rates of the working-age population, and most likely as a result, GDP growth, will all fall far beneath historical trends in the typical developed country.
…workforces will actually shrink from one decade to the next with the gloom and doom scenario being that GDPs may well stagnate.
What’s more, this lower growth rate for many developed countries is also likely to fall beneath growth rates in most of the rest of the world.
In many developed countries, workforces will actually shrink from one decade to the next with the gloom and doom scenario being that GDPs may well stagnate.
So what does this actually mean? How will it change our society on a day-to-day basis? The CSIS report speculates on the potential outcomes. The report suggests:
…that in slowing and ageing economies, the shift toward services will accelerate, employees will become less adaptable and mobile, innovation and entrepreneurship will decline, rates of investment and savings will fall, public-sector deficits will rise, current account balances will turn negative, and arguments over immigration (both for and against)
will intensify.
I would suggest there is plenty of evidence to indicate we are already witnessing that type of behaviour around the world.
The authors argue that psychologically, older societies will be more conservative in outlook and possibly more risk-averse in electoral and leadership behaviour. Further, they suggest shrinking nuclear families could produce youth who are more achievement-oriented, yet also less sociable. They also believe that ongoing immigration and higher-than-average minority fertility could well lead to inter-ethnic friction.
What’s more, senior control over taxes and benefits will become increasingly controversial, perhaps pitting more secular native-born elders against more religious young families (both native and ethnic minority). I would argue that there is evidence of this type of behaviour in certain parts of Europe and possibly else where as well.
This demographic shift will produce a range of more macro scale consequences.
According to the CSIS analysis, some developing countries will learn to translate the demographic dividend of their declining fertility rate into human and capital development, efficient and open markets, rising incomes and living standards and stable democratic institutions. Consequently, they are likely to follow the path of South Korea or Taiwan, whilst others will adopt the slower-but-still-steady success path of India or Malaysia.
However, the CSIS authors suggest countries, most notably in sub-Saharan Africa, that are least touched by global ageing, but have large youth bulges, high poverty, weak governments and chronic civil unrest, offer the least prospect of success.
In the countries where population growth is declining, there is still the potential for substantial economic growth, e.g. in the Arab world and parts of South Asia. However, they include the caveat that in such places, terrorism and dangerously destructive revolutions and wars are also more likely.
Finally, they consider the countries whose demographic transformation will be so extreme (Russia), or is arriving so rapidly (China), that population change itself could become a critical social and political issue. In Russia, the Ukraine and the other former Soviet republics for example, they have the double whammy of very low fertility and declining life expectancy. Consequently, they are projected to lose more than 30% of their population by 2050. According to the CSIS analysis, China on the other hand, having suddenly adopted a one-child policy in the 1970s, will face a developed country’s level of elder dependency with only a developing country’s income.
It doesn’t sound too rosy. Next Edition I will look at how demographic and economic policy will be affected.
Dr Lester Wills can be contacted at lester.wills@atcbiz.com.au
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