Understanding ageing population and how it can impact an economy

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What is Populating Ageing?

To understand ageing from a macroeconomic perspective, it is important to differentiate between the ageing of individuals and the ageing of populations. Interest in the ageing of individuals focuses on survival and longevity (i.e. life expectancy within a country), which make ageing a function solely of changes in death rates. In contrast, the ageing of a population refers to whether a population as a whole is getting older or younger and is a function of changes in rates of mortality, migration, and birth. Population ageing in this sense is measured in terms of such units as median or mean age, the proportion of persons 65 years old and over, the ratio of persons 65 years old and over to persons under 15, or some other summary unit of the age structure of the whole population [1].

Drivers of Population Ageing

When we look at global ageing, we can see it as a sign of success in terms of advancement – more people are living beyond a certain age which could mean we have better medical care or technologies to deal with diseases. But it is not the only element leading to an ageing population around the world. Professor David E. Bloom of the Harvard School of Public Health highlights three main drivers of population ageing – declining fertility, increasing longevity and the progression of large-sized cohorts to older ages [2].

Today, approximately half of the population of the world lives in a country that has fertility rates below replacement rate, meaning the number of children each woman needs to have to maintain current population levels [3]. According to a Bloomberg report, the fertility rate in the 1960s was five live births per woman and by 2017 it had fallen to 2.43, close to the critical threshold [4].

Alongside declining fertility levels around the globe, are increases in life expectancy. People around the world are living much longer than previously recorded in human history, with World Health Organization projecting the number of people aged 65 and older to grow to nearly 1.5 billion by 2050, significantly outnumbering children younger than 5 years of age [5].

Similarly, an important feature of population ageing is the progressive ageing of the older population itself. With medical advances and better health care, more people have a better chance of living past the age of 85, the oldest of the old, currently forming approximately 7 per cent of the global elderly population in which they constitute 10 per cent in developed nations and 5 per cent in underdeveloped countries [6].

Economic Challenges of Ageing Population

Provided that an ageing population can be an indicator of growth in medical and economic advancements, it does not come without its challenges. We can view these challenges from a variety of angles, but I will bucket them under two core categories – implications of a drop in the proportion of the younger population and the effects of a growing older population.

Declining Proportion of a Younger Population

In 2017, Statistics Canada reported that the proportion of people aged 15 to 24 fell to 15 per cent during the same time period when people aged 25 to 54 made up only 49 per cent of the working-age population [7]. With similar trends developing across the globe, especially in the developed nations, this could mean fewer entrants into the workforce as compared to the retirees, possibly leading to a shortage in the workforce. As nations experience a shortage in labour force, which is a major factor in production, they can possibly see it hamper its economic growth. A major economy which is currently facing this challenge is Japan where there are not enough young people to fill in the vacuum created due to this shortage [8]. This further implies that some of Japan’s big industries – like motor vehicles and electronic – do not possess the manpower to continue at the current level of production, and if this persists, it can eventually lead to Japan losing its spot as the third-largest economy in the world.

Growing Older Population

On the other hand, a rise in the proportion of the older population comes with its own consequences. As individuals age, their health generally declines, meaning an increase in various disabilities and chronic diseases. This will involve more and expensive health treatments in order to properly care for elderly patients or to make their conditions comfortable, in return putting pressure on the government to increase expenditures for age-related programs, particularly healthcare expenditure. The OECD has reported that Europe’s population over age 65 takes up 40 to 50 per cent of healthcare spending while per capita health costs come to three to five times greater than for those under 65 [6]. Similarly, the pension systems across the globe can be hurt financially as the payouts to pensioners would start to increase relative to the payment contributions coming into the funds.

Conclusion

All things considered; population ageing is likely to influence the global economy in significant ways. Since it can be observed how some key macroeconomic variables are affected due to shortages in labour supply as well as the increasing government expenditures, it is the responsibility of governments and various major institutions to take timely action and address these challenges. The global economy has faced numerous obstacles throughout history and therefore, through the right policies and appropriate reforms, the governments can minimize the negative outcomes and drive the economy in the right direction.

 

References:

[1] National Research Council (US) Committee on Chemical Toxicology and Aging. Aging In Today’s Environment. Washington (DC): National Academies Press (US); 1987. 2, The Aging Population and the Psychosocial Implications of Aging. Available from: https://www.ncbi.nlm.nih.gov/books/NBK218731

[2] Bloom, D. (2019, October 16). For the economy to cope with an ageing population, we must identify new solutions – here’s how. Retrieved from https://www.weforum.org/agenda/2019/10/ageing-economics-population-health

[3] Haseltine, W. (2018, November 19). Why Our World Is Aging. Retrieved from https://www.forbes.com/sites/williamhaseltine/2018/11/19/why-our-world-is-aging/#399a16fe20db

[4] Tartar, A., Recht, H. and Qiu, Yue. (2019, October 31). The Global Fertility Crash. Retrieved from https://www.bloomberg.com/graphics/2019-global-fertility-crash/

[5] World Health Organization (2018, February 05). Ageing and health. Retrieved from https://www.who.int/news-room/fact-sheets/detail/ageing-and-health

[6] Guarino, A. (2018, August 02). The Economic Implications of an Aging Global Population. Retrieved from https://www.focus-economics.com/blog/economic-implications-of-an-aging-global-population

[7] Rolfe, K. (2019, April 04). Older employees to make up larger portion of Canadian workforce. Retrieved from https://www.benefitscanada.com/news/older-employees-to-make-up-larger-portion-of-canadian-workforce-statscan-128081

[8] Yoshino, N., Kim, C. and Sirivunnabood, P. (2019, March 15). Aging Population and its Impacts on Fiscal Sustainability. Retrieved from https://t20japan.org/wp-content/uploads/2019/03/t20-japan-tf10-11-aging-population-impacts-fiscal-sustainability.pdf

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