Global ageing threatens economic growth

An increasingly elderly world is likely to smother economic growth, although there may be some remedies. The second of a four-part series on global ageing.

If population is destiny, then much of the world is headed for trouble. At a recent conference hosted by American think tank the Center for Strategic International Studies and the Japan External Trade Organization in Tokyo, economists, academics and healthcare executives warned that rapidly ageing societies are going to hamper economic growth. This will apply most acutely to Japan and Western Europe, but also to the United States and developed Asian countries. But the picture is not all bleak; indeed, it creates major new business and investment opportunities.

Naohiro Yashiro, president of the Japan Center for Economic Research, notes Japan's greying population and subsequent decrease in productive workers is creating an opportunity to increase labour productivity. But this is predicated on an efficient labour market. In reality, in Japan, market rigidities impede the ability of the elderly to continue working, or for workers to move from dying to dynamic sectors. For example, many Japanese companies use the statutory retirement age of 60 to fire people and hire cheap youngsters.

To realize productivity gains, Japan, Germany and other countries must deregulate labour markets, particularly in regard to older workers and women, and allow the greater use of temporary workers. At the same time as retirees begin selling assets rather than saving, capital must be allocated more efficiently, which means Japan and other countries must develop capital markets and reduce reliance on banks and postal savings systems, says Yashiro.

Why the fuss over productivity? Axel Borsch Supan, professor of economics at the University of Mannheim, says the decline in productive labour will "eat" a third of annual productivity growth; fewer consumers and workers means productivity must rise by 33% just to tread water. One way to alleviate this is to raise the retirement age, but he notes in Western Europe it would have to be raised 10 years to counter the problem – which is not politically feasible. Therefore productivity itself needs a massive boost, which Borsch Supan notes will be impossible without drastic pension reform, which will raise savings and capital. He believes fully funded pension systems that are globally invested can almost completely compensate for productivity losses.

Norbert Walter, chief economist at Deutsche Bank, is sceptical this can be done. He accuses governments of avoiding necessary reforms. Furthermore, other issues have not been addressed, such as the costs not of the old but of the bedridden – the truly old. Furthermore, he stresses that an aged society will not be able to be trained and educated in new technologies so easily. "Learning at my age is harder than learning at 17," he notes. He also warns that entrepreneurs are typically young people, while older ones are conservative with their resources and time, and he fears older societies will lose much of their creative business spirit.

While some new technologies could ease some of the burdens of older workers, Walter says such advances are likely to come from young people – who will be in shorter supply. Last, countries with old populations risk losing their attractiveness as a destination of investment capital. If old societies are not growing because of falling consumption, then why invest there? He notes Japan enjoyed a high savings rate in the 1990s but offered nothing to invest in.

It is not all gloomy, however. Patricia Barry, executive director of pharmaceutical company Merck Institute of Aging and Health, says, "The numbers do not have to represent a growing burden." More active and healthy adults in the United States have led to savings in America's government healthcare programme Medicare of $3.7 billion in 1999. Furthermore, more elderly Americans can take care of themselves and don't require nursing homes; the net savings of better health and medical treatment generated a national saving of $19 billion, she says. America and other societies can create considerable economic gains by preventing illness and disability through simple things like teaching people about diet, exercise and the perils of smoking.

Furthermore, Gerold Yonas, principal scientist at Sandia National Laboratories in the US, says it is not self-evident that consumption will fall because we have more older people. He notes there will be a huge demand for products and healthcare services to make lives easier and fulfilling for older people, and new technologies will be developed to meet these needs. In other words, old people will consume more than cruises to Alaska.

This sounds encouraging, but there are serious obstacles to making these positive visions a reality. Fujio Cho, president of Toyota Motor, says that while his company is encouraging workers over 60 to find new opportunities, it has additional priorities. One is training young hires and providing them with the kind of stable work environment enjoyed by former generations. Cho agrees companies must retain older workers that maintain their productivity. But he cautions that a mandatory retirement age allows companies to hire young people, who would otherwise have to be fired first in a downturn. He also says, "Compulsory retirement is a useful milestone in life," that lets people make changes. He says Toyota is in the process of shifting to merit pay but also providing more opportunities for its retirees outside of the company.

Maria Livanos Cattaui makes a more blunt assessment. "Europeans do not want to work past the age of 60," she says. She says that aside from the immediate demographic crisis, there is no philosophical basis for people to continue working, particularly those in boring civil service or manufacturing occupations. Workers in Europe who stay on past 60 tend to face social marginalization at the office, implicit taxation and reduced benefits and no infrastructure to support them. Furthermore, companies fear older workers could damage competitiveness or even lead to new potential litigation. Suggestions to raise the retirement age in France a few years ago caused mass riots. Nothing will be done without the government removing tax disincentives to older workers as well as provide incentives to stay on, which will mean fiscal burdens for governments and companies.

Last, it is important to note that the problems of ageing are intimately tied with gender issues across societies. Pension reform cannot take place without reference to the fact that older women outnumber men, but make up the vast majority of caregivers to the elderly, notes Jeanette Takamura, professor of gerontology at California State University. Women also are poorer than men, and in many cases, widowhood means impoverishment. This inequity worsens with age because older people's incomes drop after retirement.

This directly ties into the issue behind the ageing problem, which is the decline of birth rates, a process due to industrialization, says John Haley, president and CEO of Watson Wyatt. This has led to falling mortality rates (particularly of children), the transformation of children from having economic value to becoming costs on families, the rise of female education and labour, access to birth control and secularisation. These trends have existed to some degree in developed countries for nearly two centuries, and have made rapid inroads in developing countries since the 1960s.

Our demographic crisis is not one of old people; it's one of conditions in which women do not want to have children. Pension reform, financial restructuring and market deregulation must take this fact into account if birth rates are to be raised. For example, companies are going to have to find ways to allow parents, and particularly women, more flexibility in parenting while working, while governments must do better at childcare. These are key elements of stabilizing populations and ensuring continued economic prosperity.

This raises questions about globalization, and in particular how Asian societies are handling the problem of ageing. This in turn poses questions about international finance in the coming decades, and the challenges of structural reform in ageing societies, particularly Japan. These questions will be addressed in the third and fourth articles of this series.

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