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SEPTEMBER 2000

Online
Geo file 384

John Pallister

Ageing populations – the Economic and


Social Consequences
Two hundred years ago Thomas Figure 1: Population issues – some newspaper headlines between 1995 and 2000
Malthus published his Essay on the
Principle of Population, in which he ‘The population explosion – action needed now to avert
predicted a future of gloom and doom disaster’
for humanity. Population growth, he
said, would outstrip food supply, ‘Population growth – a host of future problems’
leading to widespread poverty and
mass famine. About 30 years ago the ‘Ageing populations set to put strain on purse’
Club of Rome, an international group ‘Defusing the pension time-bomb’
of industrialists, scientists,
economists and statesmen, echoed his ‘Conflict between age groups looms’
views, predicting that food, energy
and raw materials would all run out
‘Governments need to plan ahead for the approaching pension
in the face of the ever-growing crisis’
population. In Malthus’s time the ‘Day of reckoning looms for Italy’s welfare system’
total world population was under 1
billion. On 12 October 1999 it was ‘“Time bomb” alerts as births tumble’
adjudged by the United Nations to
have reached 6 billion.
Figure 2: Ages of retirement in selected countries
A first response to the dire warnings
of catastrophe is to observe that there Country Retirement age Changes in train
is still more than enough food in the Male All Female
world to feed 6 billion people. Thirty
years ago the global food output was Iceland 70 Already changed
the equivalent of 2,360 calories per Denmark 67
person per day; today it is 2,740 Canada 65 Already changed
calories – above the level considered Ireland 65 Additional old age pension
necessary for healthy living. paid at 66
However, up to two billion people in USA 65 Rising to 67 for both sexes
the world are going hungry because Germany 65 60 Female retirement age rising
of the inadequate distribution of this to 65
food. Governments of some LEDCs Japan 65
can’t afford to buy food from the Australia 65 60 Female retirement age rising
world market. Even if they could, to 65
their transport infrastructures are UK 65 60 Female retirement age rising
usually incapable of distributing it to to 65; proposals for common
the rural areas where it is most retirement age of 70
needed. In rural areas problems such Brazil 65 60
as unequal land ownership and soil Italy 62 57 Male retirement age rising
erosion are limiting the amount of to 65, female to 60
food that poor farmers can grow. France 60
Additionally the world’s population China 60 55
explosion is not over yet. Nine billion Russia 60 55
is the most likely prediction for total Bolivia 55 50
world population by 2050. More than Sources: The Guardian, 22 April 1999; Mail on Sunday, 16 October 1999, p. 7
95% of the growth is expected to
occur in LEDCs, and the bulk of the developing world in the 21st century, distribution of its population by age
new births will take place in those just as it was for the whole world in group), geographers usually isolate
countries that are the poorest, where Malthus’s time. However, in the three principal groups. The most
governments are the least prepared developed world there is another important group is the working
and where problems of resource population issue of increasing population (15–64-year-olds) which
shortages are already most acute. concern – the problem of ageing generates the country’s wealth and
populations (Figure 1). pays its taxes. People in this age
Although the doom-mongers may not group make up the independent
(yet) have been proved right, element within any population.
population growth has nevertheless
Ageing populations Below them is the group of young
placed severe pressure on natural An ageing population is one in which people (aged 14 and less) who are not
resources and the quality of the the proportion of older people is expected to be in full-time work and
environment. Population growth will increasing. When studying a are therefore dependent financially
remain the big issue in the country’s population structure (the upon their parents. Above them is the

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September 2000 no.384 Ageing Populations – the Economic and social Consequences

group of elderly people who have Figure 3: Old age dependency ratios, 1950–2040
passed the age of retirement. They
Key
depend upon pensions as their main 70
source of income. In most countries, Ratio of old people to workers
money for state pensions is provided 60 Italy
by the working population, so the UK
elderly also depend upon the 15–64 50
Germany
age group as well. USA

40

Percent
As Figure 2 shows, there are
considerable variations between
countries in the official age(s) of 30
retirement. It tends to be lower in
LEDCs, where life expectancy is less. 20

The old age dependency ratio is the 10


measure of pensioners per 100 people
of working age. It is calculated as
0
follows: 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040

Elderly population (65+) Source: OECD


x 100
Working population (15–64)
continuing in-migration, particularly people are living longer. Some
Figure 3 is a plot of known and of Hispanics from Mexico and other diseases and conditions that were
predicted old age dependency ratios Spanish-speaking countries in the considered to be untreatable or
for four MEDCs. It shows a ratio of region, is predicted to keep the ratio inoperable only a few years ago can
around 25% in the UK in 2000. This at lower levels than elsewhere in the now be dealt with as a matter of
means that, at present, there are developed world. routine.
about 25 pensioners for every 100
The net result of these trends will be
workers. However, the ratio is Causes of ageing populations a doubling of the number of people
predicted to increase sharply after
2010, climbing to over 40% by 2040. Ageing populations can be viewed as over 60 in the world over the next 30
Expressing this another way, the the result of technological and years, from 600 million (10% of the
present ratio of 4 workers to support economic progress that has led to world total) in 2000 to 1.4 billion
every pensioner is predicted to fall to reductions in both birth and death (about 16% of the predicted total) in
2.5 workers per pensioner by 2040 rates. Fertility rates have been falling 2030. Pensioners will soon
(Figure 4). fast in MEDCs, to the point where outnumber children in Europe and
four EU countries are now North America for the first time.
While Figure 3 suggests that the experiencing natural decreases in Much of the predicted increase in the
ageing (or ‘greying’) of the population population (Figure 5). Fertility rates numbers of the over-60s will be in the
is a demographic characteristic are also coming down in LEDCs, better developed LEDCs, particularly
common to many MEDCs, the where lower birth rates typically
intensity of this phenomenon varies accompany industrial and economic Figure 5: Predicted opulation change in
from one country to another. The development. Of equal, if not greater the EU countries, 2000–2010
UK already has a more aged significance, is increased life
expectancy and the consequent Change in population 2000-2010
population structure than the Annual average change (%)
majority of MEDCs, so that the lowering of death rates. Improved
Luxembourg 0.5
predicted increase in the ratio, whilst primary health care and screening, Ireland 0.4

quite marked after 2010, is not as the development of new drugs and Greece 0.2

rapid as those predicted for the other general advances in medical Netherlands 0.2

three countries. The greatest change knowledge and treatment, mean that Sweden 0.2
Denmark 0.1

of all is expected in Italy. France 0.1


UK 0.1
Historically, for a long time Italian Figure 4: Workers per pensioner in the Austria 0
birth rates were considerably higher UK, 1950–2050 Finland 0
than those of Italy’s European Spain 0

neighbours to the west and north, –0.1 Belgium


–0.1 Germany
which led to old age dependency 16 –0.2 Italy
ratios that were low in the 1950s and 14 –0.3 Portugal
Number of workers

60s. However, more recent 12 0.3 0.2 0.1 0 0.1 0.2 0.3 0.4 0.5
per pensioner

demographic data (Figure 5) show 10 DECREASE INCREASE


that by 1999 Italian fertility levels 8 EU Countries experiencing
had fallen to the point where the natural decrease during 1999
6
crude birth rate was actually lower Country Crude birth Death rate Change
4
than the death rate, resulting in a rate (per 1000) (per 1000) (per 1000)

natural decrease in population. 2 Germany 9.3 10.3 –1.0


Although a similar general trend is 0 Italy 9.1 9.9 –0.8
1950 2000 2050 Sweden 9.9 10.6 –0.7
exhibited in Figure 3 for the USA,
Source: Financial Times, 13 October 1999, p.6

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September 2000 no.384 Ageing Populations – the Economic and social Consequences

in Asia, where the problem of ageing spending on health services, from the state.
populations is likely to become as available to all age groups, but which Although the arrangements appear
great a concern to governments there are consumed more by the elderly. to be fundamentally different, in
in the near future as it is in MEDCs one important way the distinction
today. Spending on pensions is the most between them is a false one. The
obvious and potentially most money from which pensions are
Economic consequences contentious economic issue paid always comes out of current
associated with an ageing production. Most investments
As the world’s population grows population, because it already through which private pensions are
older, governments in MEDCs must accounts for a very high proportion funded involve the purchase of
address the possible economic of welfare spending in MEDCs. shares and bonds in companies.
consequences. Although operating There are two types of funding Although the number of shares in a
under different names and in arrangement for pensions; the UK fund is built up over the years, it is
different ways, welfare systems exist uses a bit of both: the current generation of
in all MEDCs. Welfare systems production (and hence profits) by
cover pensions, health care and 1. Pay-as-you-go. The state pension companies in which funds have
social security. The roots of the that is paid when the retirement been invested which maintains the
economic problem are not hard to age is reached (currently 65 for value of the investment from which
identify: men and 60 for women) is an the pension cash is drawn.
example of a ‘pay-as-you-go’
• The proportion of working scheme. It is the type that most Governments in MEDCs have
people, who create wealth and governments operate. The money inherited pensions systems from
pay direct taxes, is going down. for pensions comes from taxes times when both life expectancy
• The proportion of the elderly paid by the present generation of and the age dependency ratio were
people dependent upon the workers. The obligation to pay lower. However, any given cohort
welfare system is increasing. for the pensions of those who of pensioners is unlikely to be
• A point must be reached where have retired is passed down the willing to accept an inferior
the amount being paid in cannot line from one generation to pension package to that which
keep pace with the amount that another, so that each generation previous cohorts of pensioners
needs to be paid out. of workers takes on the enjoyed (and which they
obligation to provide for the themselves helped pay for during
Welfare systems tend to be more generation that went before it. their working lives). Nevertheless
generous in most European All people currently in work are governments now realise that the
countries than in the USA, but even helping to pay for the pensions of cost of current pension systems
in the USA the public pension those who have already retired. If must be reduced; the term used for
scheme is predicted to go into deficit such a system is to work well and this is ‘downsizing’. To achieve
between 2015 and 2020 unless fairly, income and expenditure downsizing, a combination of one
amendments are made to it. need to be reasonably in balance. or more the following approaches is
In the past, when income was in probable:
At present, an average of 25% of surplus, the surplus was usually
GDP goes on welfare spending in spent on other areas of the • a higher retirement age (Figure
EU countries. Just under half this welfare system, or invested in 2);
expenditure goes on pensions. The projects for growth from which • reduced levels of benefit by
rest goes on unemployment benefits those of working age benefited. changing the basis for its
and maternity, housing and family Governments are becoming calculation – for example, by
allowances, which are spread more increasingly alarmed by likely indexing pension rises against
broadly through the age ranges. In future funding deficits for the retail price index instead of
addition there is significant state pensions. average earnings (as has already
been done in the UK);
2. Self-funded. This arrangement is • a flatter structure of benefits to
Figure 6: Percentage of people suffering usually referred to as private target the poor better.
from long-standing illnesses requiring pension provision. Individuals
medical treatment in the UK, by age save for their old age when Meeting the demands of increasing
group, 1995–96 working by making personal numbers of elderly people for
contributions to private pension pensions, health, social services and
schemes or by joining an residential care means higher taxes
Years 0-4 occupational pension scheme to and reduced spending and
which both employers and investment on services for those in
5-15
employees contribute a certain other age groups. There are plenty
16-44 of other competitors for
percentage of gross wages. The
45-64 funds are invested and build up government money, such as
65-74 over time. The bigger the fund regional aid and investment in new
75 and over on retirement, the larger the economic activities. At the same
All ages person’s pension. This scheme time there are limits to the
has gained increased favour with proportion of earnings that
0 10 20 30 40 50 governments can take in taxes.
UK governments because it
shifts some of the funding
Source: Financial Times, 30 January 1997, p.14 obligation for pensions away However, there are some beneficial

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September 2000 no.384 Ageing Populations – the Economic and social Consequences

consequences of an ageing property. The political and social population growth would spread
population. Some manufacturing interests of this group are quite havoc across the world, European
companies have tapped into the different to those of other and North American countries, as
growing niche market for products pensioners who have no income well as Japan, are now more afraid
such as stair lifts and wheelchairs. other than the basic state pension. of the explosion in numbers of
The service sector has been boosted All that some of the latter will have their elderly populations. In his
by the purchase of leisure and known is low-paid, part-time and recent book, Agequake, Paul
recreational facilities at off-peak irregular work without Wallace predicts that ‘Populations
times during the working week. A occupational pension schemes. in Europe generally are poised to
proportion of pensioners is Some are single or divorced. Many plunge on a scale not seen since the
sufficiently wealthy to bear the full live in rented accommodation that Black Death’. He speaks of a glut of
costs of their own health, private swallows up a proportion of their retirees, supported by fewer and
nursing and residential care. Some meagre weekly income. Their life is fewer workers; of overloaded state
large properties that were formerly characterised by poverty and pension systems facing bankruptcy.
of little commercial value because struggle and an over-dependence The breakdown of European
of size and location have been upon the quality of local social economic and monetary union, and
converted into residential homes services. stock market crashes as the baby-
and become profitable. Many boomers start cashing in their
elderly people are great travellers, More and more people are retiring shares (in around 2024, if you want
and take advantage of the lower early, yet some still-healthy elderly the most likely date) are other
prices outside school holidays, people would love to top up their elements of this scenario. Agequake
which has helped to extend the pensions by working. They come reads a bit like Malthus, but the
tourist season and allowed hotels up against the problem of ageism focus of the book – the change in
and tour companies to spread their among employers. In the demographic structure within the
costs over more of the year. recruitment of workers there world’s most developed countries –
remains, at present, a widespread lies beyond even the wildest
Social consequences bias on the grounds of age. The dreams of the Reverend Thomas
elderly are seen as less dynamic and Malthus.
Governments make economic flexible than young people – they
decisions that have social don’t fit the image of an expanding
consequences. They are responsible company. Only a few companies,
for setting levels of spending on notably the DIY chain B&Q, have
pensions and services for the positive policies for employing
elderly. Balancing expenditure in older people. One estimate is that
these areas with spending on 40% of 55—65-year-olds in the UK
measures for job creation or on would like a full-time job, but are
education, areas where there is a unable to find one. Possibly,
more direct effect upon other age however, as the proportion of the
groups, is a delicate task. Younger population that is of working age
generations of workers have a diminishes, attitudes to age and
strong interest in the cost of caring suitability for employment will
for a rapidly ageing population change.
being spread evenly so that they, as
the wealth creators, are left with
sufficient funds to enjoy interesting Conclusion
and healthy lives. As the numbers After decades of fearing Malthusian
and proportions of elderly people predictions that unstoppable
increase, so also does their political
clout. In areas where there are
concentrations of the elderly, such
along the south coast of England,
Focus Questions
or in the Sun Belt states of the 1 (a) Identify the main characteristics of an ageing population.
USA, politicians cannot afford to (b) Why is an ageing population more of an issue in MEDCs than in
ignore the voting interests and LEDCs?
concerns of the old. The potential
for conflict between the generations 2 (a) What is meant by the ‘old age dependency ratio’?
is likely to increase when the baby (b) From Figure 3, describe:
boomer generation – born in the (i) the common trends, and
1960s – reaches retirement age from (ii) the differences between the four MEDCs.
2025 onwards. (c) Describe and comment upon what Figure 6 shows.
(d) Why are any problems associated with an ageing population structure
There are also conflicts of interest likely to worsen with time?
between different groups of
pensioners. Some are financially 3 (a) Explain the economic problems caused by ageing populations and
secure. Their wealth is derived comment upon the possible ways of managing these problems.
from occupational pensions, (b) Why might the economic problems have social consequences as well in
income from savings and inherited MEDCs?

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