Mapped: how a demographic time bomb will transform the global economy
Advanced economies risk sleepwalking into a new reality of permanently lower growth and higher debt unless policymakers tackle ageing populations
Source: The Telegraph
By Szu Ping Chan
02 Jan 2016
It was an unusual intervention. Masaharu Fukuyama, Japan’s equivalent of Brad Pitt, had just announced his marriage to fellow film star Kazue Fukiishi.
As messages congratulating the couple poured in, Japan’s chief cabinet minister had something rather more blunt to say to them.
“I hope this marriage inspires mothers to want to contribute to their country by feeling like they want to have more children,” said Yoshihide Suga. “Please have lots of children.”
Suga’s shocking remarks this autumn drew accusations that he was encouraging a return to the wartime era, when political leaders urged women to reproduce as a matter of duty.
But while his comments were inappropriate, they showed how deep the concern is about Japan’s low birth rate.
The country’s population has been shrinking since the 1990s. Its birth rate dropped to a record low of just over 1m in 2014, while the number of deaths climbed to just under 1.3m.
The demographic change can even be seen at the checkout. Sales of incontinence products outpaced nappies for the first time in the year to March 2013, according to Japanese healthcare giant Unicharm.
Japan’s population is now projected to shrink from around 126m today to 87m in 50 years’ time. At this rate, there will be no one left by 2500.
It’s not just the world’s third-largest economy that’s getting old. Germany started shrinking at the turn of the millennium, while in China – the world’s most populous nation – the number of working age people will shrink for the first time this year, according to HSBC.
Based on UN population estimates, the number of people in the developed world aged between 16 and 64 peaked in 2010, while the number of people aged 60 and over will exceed the number of children for the first time in 2047, and more than double from 841m in 2013 to two billion by 2050.
In the UK, the average age is expected to rise from 40 years in 2014 to 42.9 by mid-2039, when one in 12 people is projected to be aged 80 or over, according to the Office for National Statistics (ONS).
Looking further out, the 85 and overs will make up 7.4pc of the population by 2065, up from 2.4pc today and 0.7pc in 1965, according to the Office for Budget Responsibility (OBR), the Government’s fiscal watchdog.
This has a number of serious implications.
First, growth is likely to be slower as labour forces shrink and smaller populations lead to less demand and lower medium term growth.
HSBC believes global potential growth will be 0.6 percentage points lower per year over the next decade compared with the past ten years as a result of demographic change.
“Without children being born to replenish both the workforce and potential consumers, the outlook for growth deteriorates significantly,” says James Pomeroy, an economist at the bank. “Having provided a dividend to global growth for decades, demographics will now pull down growth rates quite significantly”.
As tax bases and revenues shrink and the number of retirees grows, governments face the choice of borrowing more or giving out less to ensure the numbers add up.
Demographic change also has implications for debt. For countries like Japan, which already has a debt share that is more than double the size of its economy, lower potential growth means the ratios can only get worse.
Policymakers are also worried about who will foot a growing health care and pensions bill as the number of retirees continues to increase.
According to the European Commission, the dependency ratio of people in the EU aged 65 and over to those aged between 15 and 64 is projected to increase from a current rate of 27.8pc to 50.1pc in 2060.
In other words, the bloc will move from having four working-age people to pay for every pensioner to about two within 50 years.
Vitor Constâncio, vice president of the European Central Bank, has described this as “collective demographic suicide”.
Governments face the stark reality of spending more on pensions and healthcare, at the detriment of other departments, or future generations will simply have to make do with less help from the state.
Chancellor George Osborne has linked the state pension age to longevity, meaning it will rise to 68 in the mid-2030s and 69 in the late-2040s.
But governments are already playing catch-up, says Pomeroy.
“The retirement age in most developed markets is 65 years, and has been such for some time. However, taking the UK as an example, life expectancy, which was 69 years back in 1950 shortly after the inception of the basic state pension in 1948, has risen to roughly 81 today and should cross 85 before 2050,” he says.
“This means that instead of living on average for four years on a state pension, we’re now looking at closer to 20. That’s a fivefold increase in the strain on the state.”
Martin Weale, a policymaker at the Bank of England, suggests that the UK’s “pay-as-you-go” arrangements, whereby state benefits are paid out of contributions from current workers, may soon become a thing of the past.
“At the end of the day I think if people want to have a comfortable retirement then they have to be prepared to pay what it costs,” he says.
Gertjan Vlieghe, his colleague on the Monetary Policy Committee, will discuss the demographic challenge in a speech at the London School of Economics later this month.
Raising the retirement age is one thing though, whether people are healthy enough to keep on working is another.
Mark Pearson, deputy director for employment, labour and social affairs at the Organisation for Economic Co-operation and Development (OECD), says: “It is possible to do better in terms of getting people to work over the age of 65 in countries such as Japan and New Zealand – already they have 40pc of the population aged 65-69 in work. The UK is going to struggle to get there, because frankly our population isn’t healthy enough to work that long.”
Pearson cites a Scottish study that showed half of people had a chronic disease such as diabetes by the time they reached 60. By the age of 70, a third have three diseases.
“The fact is the UK is sicker than other countries, and raising the retirement age to 68 – if that is to mean something – we are going to have to try to keep people healthier for longer.”
According to the EC, a rise in age-related government expenditure is projected to cost the equivalent of 2pc of GDP in 2060, which will only be partially offset by a reduction in unemployment benefits as the labour force shrinks.
“Ageing-associated diseases or ‘diseases of the elderly’ are the primary cause [of chronic conditions] including cardiovascular disease, cancer and Alzheimer’s”, according to Sarbjit Nahal and Beijia Ma at Bank of America Merrill Lynch.
“The incidence of all of these diseases increases rapidly with ageing, and sometimes exponentially, in the case of cancer”, where annual cases are expected to grow to 22m by 2030, from 12m in 2012, according to the World Health Organisation.
Another way to defuse the demographic time bomb is to have more children. Birth rates have fallen from five per woman in 1950 to 2.5 today, and are expected to fall to between 1.8 and 2.2 by 2050.
In many Asian countries such as Korea, where the birth rate has long been in decline, a focus on education means many couples believe they can’t afford to have more than one child.
Couples are also delaying having children, which affects fertility rates.
Policymakers in some countries have tried to reverse this decline by supporting families and creating financial incentives to have children.
In Finland, mothers gets a “baby box” full of essential items including clothes and nappies – the box can even be used as a cot.
France introduced tax breaks, cash incentives and subsidised childcare to encourage people to have children. Money talks. France has the highest fertility rate in the EU, according to Eurostat.
Chinese policymakers are also finally waking up to its demographic decline. Policymakers claim a decision to let couples have two children will add an additional 30m people to China’s workforce by 2050 and lift growth by 0.5 percentage points, economists highlight that the benefits will not be felt until these children join the workforce – which is a generation away.
A more immediate solution is needed. Constâncio suggested in September that immigration could form part of the solution.
“To change the demographic trends, promoting birth is not enough. It also has to be done through immigration. If not, we’re creating a great difficulty to growth and to the welfare of future generations,” he said.
But the reality is that politics often trumps economics, and many countries are focussing on how to keep people out rather than let them in.
Shinzo Abe, Japan’s prime minister, has described immigration as creating “a lot of unhappiness” and “friction” in countries that had accepted more people in. Britain is also trying to prevent too many people from coming in, with curbs on migrant benefits forming one of the cornerstones of prime minister David Cameron’s EU referendum negotiations.
“While migration may be currently politically unpopular, especially in many parts of Europe, the implications in terms of growth cannot be ignored,” says Pomeroy.
“The recent influx of immigrants could raise potential GDP growth in the eurozone by 0.2 percentage points per year. Beyond this, economic migrants – moving for better employment opportunity – can help to smooth population pyramids, increase the potential labour forces and stimulate growth.”
This is because migrants don’t just take jobs, they help to create new ones. Like the rest of the population, migrants eat, shop, and spend money in the economy, creating an extra 1.2 local jobs each, according to a recent academic study.
But policymakers must do more than just open the door. According to a report by the European Commission, integration of migrant workers into communities is essential to ensuring prosperity for all.
A survey by Germany’s Ifo think-tank showed that most companies believed the greatest employment potential for refugees was as unskilled workers, with only 22pc of the 3,000 firms polled believing they could do skilled work and just 3pc that saw “leadership potential”.
The biggest barrier was communication, with 92pc citing a lack of language skills as a barrier to employment, while 71pc cited a lack of qualifications.
“Much care needs to be taken over the integration of migrant workers into communities, labour forces and the education system to avoid ‘ghetto-isation’,” says Pomeroy. “Without such policies and integration, the full benefits may not be realised.”
Of course, these solutions will take time to bear fruit, and perhaps too long for politicians dealing with uneasy electorates over terms of five years at a time.
Demographic decline in advanced economies is one of the biggest challenges facing the world this century, and solutions will take at least a generation.
But without change, countries may find themselves sleepwalking into a new reality of permanently lower growth and higher debt.