We are quick to
celebrate advances in medical science which allow us as a species the
opportunity to live longer. But the consequences of living longer are often
glossed over. The economic consequence is that – worldwide – there are going to
be more and more people in their old age relying on a smaller and smaller
proportion of people of working (and taxpaying) age. It will affect different
nations in different ways, so this is a quick wrap up based on the latest
predictions from the United Nations population division.
The old age dependency ratio is a formula that expresses the
population of people aged 65 and over as a proportion of those aged from 15 to
64. A rising ratio simply means that there are more people aged 65 plus
relative to those aged 15 to 64. There is almost nowhere in the world this is
falling. The world picture shows that we have gone from around 10% in the 1980s
to one in four by 2050. Meaning that there was one person aged 65 plus for
every 10 in 1980 but that this will change to one for every four in 2050. Those
four will have to do the work that ten did in 1980, relative to supporting the
65 plus age group.
The rising dependency ratio is going to affect higher income
nations with more developed economies to a much greater extent than lower
income, less developed nations. The reason is pretty simple: wealthy nations
can afford better health care and higher living standards. The difference is
profound though – by 2050 high income nations will have a dependency ratio
approaching 50%, compared with less than 10% for lower income nations. Will they be able to remain high income nations with this future burden?
The continents that will be most affected broadly align with
income status. The worst affected will be Europe, with a dependency ratio
nudging 50% by 2050. North America is not far behind and Asia will be rapidly
closing the gap.
Amongst the major European nations, Germany has a particularly
nasty problem emerging on the forward radar – a dependency ratio of almost 60%
by 2050. Little wonder German Chancellor Angela Merkel was so keen to attract
such large numbers of refugee migrants (said to be more than 1 million in 2015
alone). France and the UK are following a similar pattern although with
slightly lower dependency ratios and Russia only passes 30% in around 2045.
Closer to home, Japan is facing some serious problems. A forecast
dependency ratio of 70% means there will be seven people aged 65+ for every ten
aged 15 to 64. Japan’s dependency ratio is already problematic and this will
get worse. China is also facing a rapid escalation in its dependency ratio
which will rise quickly from around 2025, effectively almost doubling in the ensuing 25
years. I wrote about China’s people shortage (being a shortage of working age
people) a couple of years back. You can click
here to read it.
Australia itself shares a great deal in common with the USA
and Canada in terms of our aged dependency ratio. We are currently in the midst
of a significant increase which will see our dependency ratio rise from a
fairly stable band of 15% to 20% from 1980 to 2010, to one in three by 2035.
This will pose a range of budgetary challenges on both the income (tax) and
expenditure (health and welfare) sides going forward.
The good news at least is that while we are increasingly
better informed about the economic challenge of an ageing society, we are not
ageing quite as fast as some places. Maybe we can observe closely how nations
like Germany or Japan handle this escalating dependency challenge, and
essentially copy the policies that seem to work best?
The bigger challenge is that further advances in medical
science and disease prevention will mean these dependency ratios could in
reality be much greater challenges in the future. Living to 100 might be
commonplace for today’s millennials. Their children may expect to live to 120.
But the question of how world economies – which were never designed for this
demographic pattern – are going to afford to support societies where there will
be nearly as many people aged 65 plus as there are of working age, is a big one
and it’s unanswered.
Maybe in the future old age will no longer be an ambition
but something for which we need a cure?
