There’s no need to fear an ageing population

By Leith van Onselen

The Economist has penned an interesting counter to the commonly held view that an ageing population spells disaster for an economy:

Globally, a combination of falling birthrates and increasing life­ spans will raise the “old-age dependency ratio” (the ratio of people aged 65 or over to those aged 15-64) from 13 per cent in 2015 to 38 per cent by the end of the century. Doomsayers posit this could lead not just to labour shortages but to economic stagnation, asset-market meltdowns, huge fiscal strains and a dearth of innovation. Spending on pensions and healthcare, which already makes up more than 16 per cent of GDP in the rich world, will rise to 25 per cent by the end of this century if nothing is done, predicts the IMF…

Warnings about a “silver time bomb” or “grey tsunami” have been sounding for the past couple of decades, and have often been couched in terms of impending ­financial disaster and intergenerational warfare. Barring a rise in productivity on a wholly unlikely scale, it is economically unsustainable to pay out generous pensions for 30 years or more to people who may have been contributing to such schemes only for a similar amount of time. But arguably the longer, healthier lives that people in the rich world now enjoy (and which in the medium term are in prospect in the developing world as well) can be a boon, not just for the individuals concerned but for the economies and societies they are part of. The key to unlocking this longevity dividend is to turn the over-65s into more active economic participants.

This starts with acknowledging that many of those older people today are not in fact “old” in the sense of being worn out, sick and inactive. Today’s 65-year-olds are in much better shape than their grandparents were at the same age…

The problems already in evidence today, and the greater ones feared for tomorrow, largely arise from the failure of institutions and markets to keep up with longer and more productive lives. Inflexible labour markets and social-support systems all assume a sudden cliff-edge at 60 or 65…

They will ­remain productive for longer, not just because they must but because they want to and because they can…

The pessimism about ageing populations is based on the idea that the moment people turn 65, they move from being net contributors to the economy to net recipients of benefits. But if many more of them remain economically active, the process will become much more gradual and nuanced. And the market that serves these consumers will expand if businesses make a better job of meeting their needs.

There are a lot of potential options for ‘solving’ the ‘problem’ of an ageing population.

The most obvious is to implement policies that boost workforce participation among the over-60s. Another is to overcome perceived labour shortages by embracing technology and automation, as is being done in places like Japan.

But what countries most certainly should not do is emulate Australia’s approach of using mass immigration to delay addressing the issue.

For more than a decade, the Productivity Commission (PC) has debunked the common myth that immigration can overcome population ageing. For example:

  • PC (2005): Despite popular thinking to the contrary, immigration policy is also not a feasible countermeasure [to an ageing population]. It affects population numbers more than the age structure”.
  • PC (2010): “Realistic changes in migration levels also make little difference to the age structure of the population in the future, with any effect being temporary“…
  • PC (2011): “…substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age… It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts”…
  • PC (2016): “[Immigration] delays rather than eliminates population ageing. In the long term, underlying trends in life expectancy mean that permanent immigrants (as they age) will themselves add to the proportion of the population aged 65 and over”.

In a nutshell, trying to overcome an ageing population through higher immigration is a Ponzi scheme.  It requires ever more immigration, with the associated negative impacts on economic and social infrastructure, congestion, housing affordability, and the environment.

In any event, economists at MIT recently found that there is absolutely no relationship between population ageing and economic decline. To the contrary, population aging seems to have been associated with improvements in GDP per capita, thanks to increased automation:

ScreenHunter_18202 Mar. 26 13.24

If anything, countries experiencing more rapid aging have grown more in recent decades… we show that since the early 1990s or 2000s, the periods commonly viewed as the beginning of the adverse effects of aging in much of the advanced world, there is no negative association between aging and lower GDP per capita… on the contrary, the relationship is significantly positive in many specifications.

Again, the sustainable solutions to population ageing come from: 1) better utilising existing workers; and 2) where required resort to technological solutions.

The last thing that Australia should be doing is running a mass immigration program which, as noted many times by the PC cannot provide a long-term solution to ageing, and places increasing strains on infrastructure, housing and the natural environment.

[email protected]

Comments

  1. Q. If GDP per capita is rising in spite of the falling percentage of people who are of working age, why is ageing an economic problem?

    A. It isn’t.

    Q. So why are we told that it is?

    A. Because if we maximize workforce participation, we maximize capacity to bid up land prices and rents and to blow money on superfluous goods and services. So the ageing-population “crisis” has been fabricated by those who want to charge us higher prices for housing and sell us more $h!t.

    • Agreed Gavin and the Productivity Commission were once allowed to say so viz…

      “By 2044-45, the average [real] income of Australians is projected to rise by around $35,000 per capita…. In that year, Australia will need to find around $4,700 per person to meet the fiscal gap, or around 15 per cent of the gain in average income.”

      and…

      “…So even after meeting the expenditure needs of Australia’s ageing population, the dividends of economic growth mean that, on average, Australians will be better off by around $570,000 per capita from 2003-04 to 2044-45 than they would have been in the absence of such growth.”

      …from p324 of ‘Economic Implications of an Ageing Australia. PC-2005’ full research report at http://www.pc.gov.au/inquiries/completed/ageing/

      That modelling needs a revamp as it then assumed 1.75% productivity growth (I think) and NOM=120k.

      They’re no longer allowed to mention this easy solution as they are constrained by the dictate to use ‘Current Settings’ i.e. that tax as a proportion of GDP is not allowed to rise above today’s settings no matter how much real wages were to grow.

  2. The big reason to fear an aging population is that state pensions are a pyramid scheme. They are not based on government investments, rather they are based on taxes on the young and deficit borrowing.

    This is not sustainable. In 2016, the average pensioner costs the government $450,000 in pensions and $40,000 in healthcare in their lifetime. As people live longer these numbers will increase.

    • DominicMEMBER

      Nailed it. The public sector liabilities are the essence of why this whole thing is a major issue. Governments have already run up colossal debts (to be serviced in perpetuity by future tax-payers) and their future liabilities are set to go parabolic as the grey tsunami hits — not to mention the fact that government is getting progressively bigger, while the tax-payer base (relatively), goes in the opposite direction. Government is a cost-centre to the economy, despite what the GDP calculation says.

    • drsmithyMEMBER

      If the economy is capable of meeting those needs, what does it matter if it employs 10,000 people or 10,000,000 ?

      Production and consumption are what’s important, not $$$$s.

    • The aged pension is really mostly about unemployment. If there aren’t enough jobs to go around, it makes sense to bribe people to get out of the work force once they have reared their children and have had a chance to accumulate some savings. As it is, according to Roy Morgan Research, real unemployment plus underemployment among working age people is close to 20% and has been for years.

      The British government investigated work force participation in 1881 (before the aged pension) and found that 73% of the men over 65 were still working. If we really had a labour shortage, we could eliminate the aged pension and just have disability pensions for the minority who were too feeble to work.

      • Try getting a job if you’re over the age of 50, 55 60, never mind 65…
        Employers just bring in an imigrant to replace you when you reach a deemed age depending on your particular industry.
        Me and the wife will have lost a collective 30 year’s productivity by the time we reach official retirement age(give or take the odd McUnreliableJob), barring some miraculous change of attitudes across industry and government.

    • Philly SlimMEMBER

      Government pensions are just a promise. I wouldn’t want to be the last cohort on them as that promise gets easier to break the lower % of them in the community.

      The shameful thing is that when I was in NSW Treasury, that the area that looks after Defined Benefits super policy is staffed by folks on Defined Benefit super. Incentive for reform? Zero. [staff joining from early 90s are all now defined contribution]

      The Govt should have years ago, but they can still catch up for those who are in their last decade of working, cap their DB super at their current income and any additional income gains (from promotion or 2.5% pay increase) should go to Defined Contribution super.

  3. It boggles the mind that so many so-called economists continuously roll out the ageing population bogeyman calling for more immigration and then tell us everything will be great if we keep doing it. As the article so rightly points out, it is the very definition of a ponzi.

    • Presumably it’s because nobody has the tiniest fraction of an idea how to do deal with an ageing population.
      Japan, for example, has tried automation, and now they’re moving to immigration.

      https://www.bloomberg.com/news/articles/2017-07-09/foreigners-are-shoring-up-japan-s-shrinking-population

      and if Japan can’t think of how to do it without immigration, what hope does anyone else have?

      (although it only works while the median global age is relatively low. Given it’s expected to reach 37 by mid-century, any country hoping to lower their median age by immigration has a pretty limited window where it will still work)

      • drsmithyMEMBER

        Isn’t Japan’s issue mostly one of timing (ie: the technology side is about ten years behind where it needs to be) that immigration is the short term fix for ?

  4. Why do Australians continue to allow the LNP and ALP lie to them about the need for a growing population. It is destroying living standards, increasing unemployment, under-employment and job casualisstion. If you truly care about your children, you would put a stop to the crime of a Big Australia policy as implemented by BOTH the ALP and LNP. Put a stop to selling out our children’s futures.

    Solutions to an ageing population:
    1)STOP voting for the LNP and ALP.
    2)Legalise euthanasia.
    3)STOP immigration.