The century of old age

As mentioned previously, the 21st century will be the century of old age, where declining birth rates meet longer life expectancies.

This ageing of the population will affect many areas of the international economy, from consumption and growth to asset valuations.

The impacts from ageing will likely be most acute in Western Nations, although some developing countries, most notably China, will also be negatively affected.

Over the past 25 years, the global economy has benefited from a demographic ‘sweet spot’, whereby there has been a high proportion of working age people supporting only a small pool of dependents.

This ‘sweet spot’ has come about from two main factors:

  1. The Baby Boomer generation – defined by the Australian Bureau of Statistics (ABS) as those born between 1946 and 1965 and comprising around 25% of Australia’s population – has been at working age; and
  2. Declining birth rates from the mid-1970s.

This fall in the dependency ratio – defined as the ratio of the non-working population, both children and the elderly, to the working age population – is clearly evident by the below chart showing dependency ratios in key Western Nations.

With a large number of workers supporting a relatively smaller pool of dependents, the global economy’s growth potential was maximised between 1985 and 2010.

However, 2011 marks the year when the oldest members of the Baby Boomer generation – those born in 1946 – turns 65 and reaches official retirement age. From now on, each year that passes will witness a marked rise in the number of retirees and an increase in the dependency ratios of Western Nations (and China) and will, other things equal, act to reduce the global economy’s potential economic growth as well as weigh on asset values.

At the same time, the working age population will likely have to wear the burden of increased taxes in order to cover the health care, pension, and other costs relating to an ageing society.

Over the past two weeks, two media reports have shed some light on the challenges faced from an ageing population.

An article published yesterday in Caixin (h/t Bernard Hickey) warns that China’s population is starting to age rapidly, and that this ageing will cause growth to slow unless China can re-balance its economy away from production and toward consumption.

China’s population is getting older, and that could have a major effect on the nation’s economic prosperity.

The emergence of negative growth in the total working-age population, which some demographers predict will happen as early as 2013, is likely to contribute to slower economic growth and higher inflation, according to analysts…

The latest census data, released by the National Bureau of Statistics on Thursday, showed that the proportion of the population aged between 0 and 14 fell to 16.6 percent in 2010 from 22.9 percent in 2000. Meanwhile the number of people aged 60 and above grew to 13.3 percent from 10.3 percent.

The falling number of young people suggests the Chinese population is aging rapidly. The Asian Development Bank forecast that the proportion of those aged 60 and above is expected to rise to 33 percent by 2050. That would make China’s population the same age as Denmark’s, but older than that of the United States (26 percent)…

The potential emergence of a labor shortage is likely to contribute to slower economic growth in the short term,” said Zhang Juwei, professor and director of the Labor and Social Security Research Center at the Chinese Academy of Social Sciences.

China has already reaped the benefits of a demographic dividend, which is believed to have played a role in the country’s economic breakthrough, having enjoyed the advantage of abundant cheap labor for decades.

“Wage increases are the most direct response to labor shortages. That will definitely squeeze the profit margin for some low value-added manufacturers,” Zhang said.

Economists said that higher wage rates could lead to higher inflation and a decline in the competitiveness of the manufacturing sector, which may cast a shadow over the country’s position as a global manufacturing center.

I discussed China’s demographic challenges in China’s demographic time bomb. In a nutshell, China’s economy has until now benefited enormously from its ‘one child policy’, which was brought into effect in 1979 and is credited with preventing around 400 million births from 1979 to 2010. This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age).

This relationship is shown in the below chart, which maps China’s dependency ratios. As you can see, the precipitous fall in China’s birth rates from the mid-1970s caused a sharp fall in the dependency ratio which, other things equal, increased China’s growth potential.

However, the demographic blessing provided by the one child policy is beginning to turn into a curse. As China’s population ages, an inverted pyramid is beginning to develop, whereby too few workers might be left supporting an army of retirees.

Over the next two decades the retired segment will grow rapidly, with those aged over 60 years doubling to around 24% of the population (see below chart).

To date, China’s economic model has been based largely on its abundant and low-cost supply of labour, which has enabled it to become ‘manufacturer to the world’ as well as build the infrastructure that has transformed it into the world’s second largest economy. However, the gradual reduction of labour supply, stemming from its ageing workforce, could eliminate China’s traditional comparative advantage in the cost of labour, possibly resulting in it losing its manufacturing base and/or exporting cost-push inflation abroad.

This brings me to a recent article published in the New Zealand Herald entitled Nation at mercy of age crisis, which warns about the potential costs to the New Zealand economy from the retirement of the Baby Boomer generation.

New Zealand authorities and businesses need to wake up to the looming crisis posed by the retiring baby-boomer generation, a university demographer says.

Professor Natalie Jackson says the downstream effects of New Zealand’s baby boom will be more severe than in most other countries.

The post-war population burst was much greater here than in other places – New Zealand’s baby-boom birth rate was 4.2 births per woman, compared with Australia’s 3.6.

Added to that, the baby boomers were living much longer than anticipated and New Zealand had suffered a “bite” out of its 20- and 30-something population thanks to migration…

In five years, 19 per cent of people would be of retirement age and costs such as superannuation and healthcare would place an impossible tax burden on the young, she said.

“No one really imagined a world where we would have 20 per cent of the population over the age of 65.

“By 2023 there will be more elderly than children. Then it’s a short stop to having more deaths than births.

“Once your age structure turns upside down the potential for growth is gone.”

Businesses and government agencies tended to focus only on the particular demographic that affected them, the University of Waikato academic said. “But the whole age structure is the story … There is a crisis unfolding.”

New Zealand’s ageing ‘problem’ is illustrated in the below chart showing how New Zealand’s total dependency ratio is projected to worsen gradually as the baby boomer generation enters retirement.

New Zealand’s demographics are actually very similar to Australia’s. While its birth rate – at 2.1 births per woman – is higher than Australia’s (1.9) and relatively high by OECD standards, its immigration rate is just above the OECD average, but lower than Australia’s (see below chart).

To illustrate the similar age profile of the two countries, I have charted the total dependency ratios for Australia and New Zealand.

Not surprisingly, then, both nations will face similar demographic headwinds as their populations age and the proportion of working age people declines, bringing with it lower consumption expenditure and growth, as well as higher taxes.

And the impact of ageing on asset prices are expected to be substantial. For example, according to a recent Bank for International Settlements (BIS) working paper, the ageing of the Baby Boomers is projected to reduce Australia’s (New Zealand’s) real house price growth by around 30% (40%) over the next 40 years compared to neutral demographics. This is because the Baby Boomers will reduce their housing stock as they enter retirement by liquidating their investment property holdings and downsizing, thereby depressing house prices (see below chart).

Demographic shifts are inherently slow moving, so the impacts from an ageing society will likely be gradual and may go unnoticed for an extended period of time. Nevertheless, these longer-term challenges are significant and are likely to alter the path of the global economy in the decades to come.

It, therefore, pays to consider changing demographics when planning any long-term investments.

Cheers Leith

[email protected]

Unconventional Economist


  1. The right tail of dependency, the ‘older dependents because of a social construct.

    Allowing them to ‘retire’ at an arbitrary age.

    This aged was calibrated a long time ago, and does not reflect current circumstances.

    Recalibrating this upwards does two things, it reduces the number of people who are ‘dependent’, and increases the contributions made by individuals for self-dependency.

    At the most, we have a system that is pretty much ‘here’s a life-time annuity of paid leisure time for 40 years service’.

    It’s bizarre this website does not challenge this concept of retirement age.

    • Oh we do Rusty – most of us want to retire before we are 40.

      Retiring is an outmoded concept though, but it will take until the last Boomer is past 65 before governments can up the preservation age and/or Pension age to around 70-75.

      But having said that, the Gen X/Y will likely have a similar or even less life expectancy of their older generation – the “Western” curse has that effect.

      • “Retiring is an outmoded concept though, but it will take until the last Boomer is past 65 before governments can up the preservation age and/or Pension age to around 70-75.”

        It’s a precriptive law, not a natural law. Are you perceiving it as an irrevocable condition, or resigning yourself that there is too much inertia to overcome in regards to baby boomers for this to change?

        I for one find this the most pressing issue economically, even more so that mortgage debt.

        The latter can be resolved by a quick round of bankruptcy and a change of ownership, the former is a crushing annual obligation that will last another generation.

    • As the latter Rusty – retirement is as outmoded concept as being in the same job your entire life, or how our current education system pumps out people without the skills requisite to live in a changing world.

      The observable fact remains that the majority of working Australians do not have the requisite skills or equity to sustain their livelihoods past the ages of 60 or thereabouts, and the Pension system will be used to fill this “gap”.

      The Gen X/Y brigade will help fund this as they see this gap diminish (whilst paying off exorbinant mortgages to boot).

      This gap could have been self funded through a RSPT/SWF combo, whilst genuine reforms to superannuation (i.e turn into personal wealth funds – not a singular focus on retirement purposes alone) were enacted.

      I find this the most pressing economic issue for the future of the nation – we are FAR FAR FAR behind the rest of the world in this regard.

      Relying on houses and holes in perpetuity, along with just jacking up the migration rate, or giving tax shelters and welfare payments (but I repeat myself) to keep the masses happy is not a sign of good governance.

      It is the inevitable result of decades of mobocracy and crony capitalism.

      • “The observable fact remains that the majority of working Australians do not have the requisite skills or equity to sustain their livelihoods past the ages of 60 or thereabouts, and the Pension system will be used to fill this “gap”.”

        A 60 year old can’t operate the deep fryer at McDonald’s and receive a wage for it?

        A 60 year old can’t contribute as a minimum wage file clerk?

        You’re embedding excuses for people.

        “This gap could have been self funded through a RSPT/SWF combo, whilst genuine reforms to superannuation (i.e turn into personal wealth funds – not a singular focus on retirement purposes alone) were enacted.

        I find this the most pressing economic issue for the future of the nation – we are FAR FAR FAR behind the rest of the world in this regard.”

        An accural of financial assets, I do not believe is the panacea to all our woes. The problem will be the delivery of real product to the market, and the size of the workforce charged with the exertion to deliver it.

        A load of excess financial assets being exchanged for diminishing real product will be an inflationary problem. The problem arises because of allowing people to cease having to participate in delivering product to market, and instead receiving income support from those that are.

        And while a mild fan of a SWF, I do know Temasek holdings will get a lot of fan boys amongst many in the finance industry, I am averse to thinking this will solve all our problems, as I will address after the following…

        “It is the inevitable result of decades of mobocracy and crony capitalism.”

        Crony Capitalism has been rewarded, in so far we have seen the reduction of wage share, to the benefit of profit share, and it has deterred people from seeing value in their labour (and sees the appeal of SWF’s, profit share diminishes as a broader social change and a SWF won’t look so good).

        The few who do see excess gains from their labour are the only ones who can then afford the excessive high marginal tax rates, which I know is much to your chagrin.

        Why invest in educating yourself and upskilling (which fits into your line of poor education and skills component) when the way to get ahead is leverage and pursue financial (not entrepreneurial) risk, especially when government underwrites risk.

        The endorsement is labour is not a good investment, so any wonder people want to opt out selling their labour with a life-time annuity at age 65?

        Make labour, well more accurately physical exertion, a much valued commodity, and this will change. And well I feel the time to implement this change is now with the unique demographic pressures, and that is telling the baby boomers “you’re working past 65”

  2. Sam Birmingham

    Great article, Leith!

    I am adamant that the ageing population is going to be THE defining issue over the decades ahead – touching everything from the global economy and financial markets, to political decision making and generational equity.

    Uh oh…

  3. upsize pensioners = downsize public service.

    Pensioners Vs Public Service

    95% of public service work could be performed by pensioners at minimum wage.

    The money is there, we just keep giving it to the wrong people.

    • Despite being a public servant I agree. Public servant jobs are not physically demanding and generally quite flexible and therefore would be very good for pensioners.

    • Tell that to The Princess – she had a back breaking job in her ex public service position, and the pay was WELL below the private sector version. And this was during her 20’s!

      I would suggest that encouraging people to work, thus adding to demand (i.e spending) whilst encouraging saving, would mean a removal of the income tax IN ITS ENTIRETY, but thats a reform I can’t suggest.

  4. Leaf

    Not sure you have nailed the right dates here.

    The Baby Boomer generation is marked by two “popular” dates 1946 and 1964 – probably because of the end of WW2. The end of the period is reasonable, it fits in with the introduction of contraception thereabouts. However the start of the real baby boom WAS NOT 1946.

    You really need to show a graph of the birth index immigration adjusted (since records have been kept). The graph in all western countries shows the growth in birth rates starting 1933, finishing in 1962 – this is what I see as the real “baby boomer” generation.

    Forward projecting their predicatable spending pattern and you can see their contributions over the next 80 or so years – most noticeably peak consumption at 47/48 years of age, marking the period of economic expansion between 1980 through to 2010.

    Birth rates declined from 1962 to 1975 – you might want to update your early reference in the blog on declining birth rates, from the mid 1970’s the birth rates were in fact increasing, the inflection point was 1975 which marks the pivot between X and Y gens.

    There is no argument on the outcome – the only “known unknown” is the rate of initial decline in asset values – I still favour a swift draft down, housing included.

    The banks here in Australia hold the keys … and perhaps the Government guaranteeing their deposits infinitum??

    A credit crisis at any time will swiftly knock the value of assets.

    Over the next 5 years I believe there is no escaping a major down draft – simply because of the draft upwards (last decade). All booms bust, but this one will be particularly nasty as there is no economic expansion behind this one – there just isn’t enough productive people coming through to replace the ones retiring (and who will vote Governments in and out until they get what they want).

    The days of easy money are over!

  5. Colin Clark’s magisterial 1967 book, “Population Growth and Land Use”, analyses numerous positive feedback loops in economies as populations are rising, that go into reverse when the population growth levels out or falls. This is even more significant in its economic effects, than resources like oil becoming scarcer and more expensive.

    I am only saying what I do here, not necessarily to argue for “more growth”, but to try and alert people to the kind of tough political options we are going to have to confront, that will go way beyond superannuation liabilities. The end of growth, either planned or unplanned, means serious recession and falling income, not equilibrium at the “status quo”.

    The development of free markets and the creation of wealth requires, along with
    a culture that encourages trust and co-operation; “connections” via transport
    and communication, between potential participants in exchange and trade. These
    connections can be the result of proximity (through density), as well as by roads and other transport infrastructure.

    There is a limit to how much density is achievable as a substitute for transport
    infrastructure, because the production of low-density rural areas, especially
    food, has to be transported to the workers in urban industry. There is actually a correlation between the “density achieved” in urban areas throughout history, and the provision of roads in those urban areas.

    Population growth is one way in which densities are increased, and “demand
    pressures” result in rural land being used more intensively and efficiently.
    Population growth disturbs a certain “status quo” that might have existed
    previously, where rural production levels were regarded as “satisfactory” to
    both the producers and the consumers of the produce.

    As population densities increase, and rural production increases, a number of
    efficiencies are realised.

    There is increased competition, and reduced oligopoly, monopoly, and monopsony exploitation.

    Increased specialisation becomes possible, because of a viable number of
    customers for the products of the specialist. “External efficiencies” are
    realised by increasingly networked producers.

    Economies are realised in infrastructure, social institutions, and government. Roads, bridges, harbours, etc, can be utilised by increasing numbers of people without capacity increases being immediately necessary. The same goes for churches and clergy, courts and lawyers, hospitals and doctors, other professionals, government bureaucracies, public buildings, educational and other institutions. This also allows for important advances in sanitation and health.

    Labour productivity growth occurs, and less additional “capital” is required for
    each additional unit of output. The utilisation of land and resources previously underutilised, is a “substitute for capital”.

    Nevertheless, return on capital increases, AND capital formation is also
    increased. A rising population results in increasing returns to existing
    investment, encouraging more investment. Less investments “go bad”, because
    there is a rising number of customers for whatever products or services the
    investor and his competitors provide. More production capital is utilised (and
    even worn out) before it becomes obsolete.

    The products that result from new investments, inventions, and efficiencies, are easily absorbed in a rising population; as are the redundancies and relocations that might be necessary. Younger people, of which there are more, are more mobile and receptive to change. The increases in wealth creation and demand, make society more amenable to changes in employment patterns as the result of advancing technology and methods. There are more valuable “positions” to go around, so that change is less regarded as a threat by those occupying positions of advantage.

    Younger people tend to accumulate capital, while older people tend to “draw down on it”. Larger families result in pressure on the parents to save more, and on the children to provide for themselves because their inheritance will be split more ways.

    (Note: Julian Simon added a further thesis to Colin Clark’s: that a higher
    population includes both more inventive geniuses, and more people to purchase
    and enjoy the fruit of those creative geniuses).

    A high proportion of government spending is inflexible to rises and falls in
    population. This spending is more efficient if population is higher. Much
    government spending is extremely difficult to reduce even when falling
    population justifies it.

    If population is falling, there is much greater pressure on politicians to cheat
    by inflating the money supply, as the fewer numbers of young simply cannot
    sustain the taxation levels necessary to keep the government running, apart from
    the burdens of caring for larger numbers of elderly.

    Younger people are rendered less able to save, capital is “drawn down on”,
    returns on investment decline, more investments fail, investment declines.

    Population increases demonstrated beneficial effects in Holland in the 1500′s, Britain in the late 1700′s, and Japan in the late 1800′s. Holland and Japan were economic successes while importing most of their food. A LOWER percentage of the workforce in agriculture, correlates to wealth increases. These increases in population and in wealth, result in a freer, more mobile society.

    Ancient Rome in its decadent phase, illustrates the effects of falling
    birthrates, including increased taxation burdens and monetary debasement.

    Declining populations, in ancient Rome and in Europe in the 1400′s, brought
    about a simultaneous shortage of workers, and yet lack of demand. Many people clung to their source of diminishing income, becoming protective and demanding restraint of competition; others had serfdom imposed upon them by the government, their freedom to relocate and change their livelihoods being removed. These seemingly contradictory effects are the result of a reversal of the “virtuous cycle” described earlier, that occurs when population is increasing.

    France, in the period from from the revolution onwards, also illustrates economic decline consequent on falling birthrates.

    In underpopulated lands, and where population is falling, the people themselves become more “protectionist” in sentiment, and more vulnerable to illusions regarding “planning” and regulation of production and prices. This only worsens the vicious circle of decline.

    • Exile/emmigration of aged pensioners would be a nice option.

      We could offer it to a place like Eat Timor, devoid of industry.

      Reduce the pension to $150 per fortnight, however this would be capable of a great deal of aggregate demand there.

      Many East Timorese of this generation could offer, and perghaps only be capable of offering, low skill service industries, such as aged care, nursing aides, hospitality.

      While providing all these facilities for the elderly, an entire generation of young east timorese can be afforded years of primary and secondary schooling, and the bogan boomers can live a life of luxury in the tropics.

    • Exactly right, this isn’t a can to kick along the road.

      The issue is the size of the dependency ratio on the right hand side.

      Migration does not solve this, because it is a struggle between ‘retirement’ age, and how long you live after retirement.

      If greater than 12% dependency ratio is a problem, then fine, up the retirement age until you are calibrated to that 12% mark.

  6. Upping the retirement age will have no effect unless you change the attitude of employers. As a 50+ person I find it difficult to even get an interview. I do not believe there should be a mandatory retirement age. You should be able to work for as long as you wish to work. All impediments to continued working should be removed. Note: this is not the same as increasing the pension age.

  7. LOL ya the baby boomers will get a pension alright, a starvation pension. They lived the good life, saved nothing, and gen x/y when they get into power will give them a good “pension”. Oh and the super i wonder when they retire in 10 years if the super funds have half the money they claim.

  8. I think there is a whole flip side to the argument that is being missed, in what retired people put into the economy. How many 2 parent families leverage retired parents for baby sitting on a full day, evening or weekend?

    • We all put into, or have put into, or will put into the economy.

      What you’re describing is just chronology. There is no need to eulogise baby boomers for their stage of chronology.

  9. Why are we failing to produce enough children to sustain ourselves?

    As an economist, you should believe that people make economically rational decisions assuming knowledge.

    People on welfare and on very low earned incomes have plenty of kids, averaging about 5 per woman.

    But the middle class, the professionals are producing only one child for every two adults.

    So we have government intervention (means-tested family benefits, baby-bonuses etc) skewing behaviour into an un-intended and a very damaging way.

    Those children of the welfare dependant are likely to absorb large amounts of government funds in interention services, support services, crime and enforcement. Eventially they will be over-represented in the next generation of unemployed.

    Meanwhile the children of the professional class will be LIKELY to end up also professional, working etc etc… Building the clever country.

    The problem is that professionals can’t afford the kids they want, the the welfare dependant are bribed to have more children than they can look after.

    Overgenerous welfare family payments make having children financially rewarding, and so they have many kids.

    But professionals pay high taxes and receive little despite the high sums they tend to spend on good schoos, piano lessons etc for their kids. So they only have one or two kids.

    What we need to do is make our tax system recognise the costs of having kids… make kids reduce your tax. For example with income-splitting between all members fo a family. So professionals can afford the kids they want.

    [email protected]

    PLEASE NOTE – EVERYTHING I AM SAYING IS On average, by-and-large, trend-wise, typically, across the cohort… I am not saying that every child born to a welfare-dependant mother is doomed to end up in jail. Clearly this is not true. But in public policy, you have to base decisions on population-based trends, not individual exceptions.