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:

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]