Thursday, April 24, 2014
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Public Policy’s Senior Moment

EDINBURGH – A century ago, children outnumbered the elderly by as much as ten to one in most European countries. Today, there are as many people over the age of 65 as there are under the age of 16. In the United Kingdom, roughly one in six people is 65 or older, compared to one in eight Americans, and one in four Japanese.

This shift has been powered by declining birth and infant-mortality rates in the first half of the twentieth century, together with rising life expectancy in recent decades. Whatever the causes, many are concerned that, in the coming decades, rapidly aging populations will increasingly strain health, welfare, and social-insurance systems, putting unsustainable pressure on public budgets.

But, while such fears are not entirely unfounded, discussions about population aging tend to exaggerate the trend’s scale, speed, and impact, owing to a fundamental misperception about how populations grow older. Unlike people, populations do not follow the life cycle of birth, aging, and death. And, while a population’s age distribution may change, age becomes an unreliable way to measure a population’s productivity as lifespans increase.

Age has two components: the number of years a person has lived (which is easy to measure for individuals and populations) and the number of years a person has left to live (which is unknown for individuals, but possible to predict for populations). As mortality declines, remaining life expectancy (RLE) increases for people of all ages. This distinction is crucial, because many behaviors and attitudes (including those that are health-related) may be linked more strongly to RLE than to age.

The standard indicator of population aging is the old-age dependency ratio (OADR), which divides the number of people who have reached the state pension age by the number of working-age adults. But this approach fails to distinguish between being of working ageand actually working, while classifying all people above the statutory pension age as “dependents.”

In fact, social and economic shifts have broken the link between age and dependency. Young people spend an increasing number of years in education, while many older workers retire early, implying that they have sufficient personal savings. In the UK, the 9.5 million working-age dependents (those who are not in paid employment) outnumber those who are above the state pension age and do not work.

Moreover, the OADR disregards how, over time, rising life expectancies effectively make people of the same chronological age younger. In 1950, a 65-year-old British woman had an average life expectancy of 14 years; today, she can expect to live another 21 years (the figures are 12 and 18 years, respectively, for men).

Many other countries, especially in the developed world, have experienced similar shifts, with life expectancy having increased the most in Japan. Meanwhile, some Eastern European countries still lag behind, with no increase having been observed in Russia since 1950 (see table).

A better measure of population aging’s impact is the real elderly dependency ratio (REDR), which divides the total number of people with a RLE of 15 years or less by the number of people actually in employment, regardless of their age. This measure accounts for the real impact of changes in mortality, by allowing the “old age” boundary to shift as advances in health prolong people’s productive lifespans.

In recent decades, as the OADR has risen in advanced countries, the REDR has declined. It has, however, stabilized, and is likely to increase gradually over the next couple of decades (see graph). In Germany and Italy, the REDR has been almost flat for two decades, owing to slower employment growth and lower birth rates than elsewhere in the developed world.

Immigration has played an important role in depressing many countries’ REDR by raising employment rates. Increased labor-force participation among women – who spend a significantly higher share of their lives in paid employment than they did 50 years ago, when most women withdrew from it after marriage or childbirth – has also helped to lower REDRs.

Of course, failure to support these trends has the opposite effect. Japan – where opposition to immigration and failure to embrace gender equality have led to a rapidly rising REDR – is a case in point. A low female-employment rate has also raised India’s REDR, albeit less drastically. Russia, too, has experienced a substantial increase in its REDR, owing to post-communist economic dislocation. But the rest of the major emerging economies still have relatively low REDRs.

In short, the REDR tells a very different story from the OADR, with at least three important policy implications. First, population aging is no excuse for trimming the welfare state or treating pension arrangements as unsustainable. After all, the phenomenon has been underway for more than a century, and, in some respects, its social and economic impact has been declining in recent decades.

Moreover, the REDR underscores that rising demand for health care and social services is not a function of having a larger share of people above a specific age. Factors like progress in medical knowledge and technology, and the increasing complexity of age-related comorbid conditions, are far more relevant.

In fact, while age-specific disability rates seem to be falling, recent generations have a worse risk-factor profile than older ones, owing to trends such as rising obesity rates. The capacity of health-care systems to cope with increasing longevity will therefore depend on the changing relationship between morbidity and RLE.

The third implication concerns higher education. Elderly people with university degrees (a small minority of their generation) enjoy a substantial longevity advantage. If the life-enhancing effect of higher education persists, population aging can be expected to accelerate further, as the younger, larger, and more highly educated generations grow older.

Preparing for and coping with changing demographics requires a more nuanced understanding of what population aging really means. For that, the right indicator – the REDR – is essential.

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  1. CommentedJason Gower

    Excellent thought provoking article with an alternative view of population ageing statistics.

    While these projections certainly do look better than the doomsday scenarios that are often presented, the primary question remains one of skills supply and demand. We are all aware that technology has forever changed labor markets with some skill sets essentially becoming obsolete at an ever increasing rate. To simply say people are "working" does not address the question of productivity. Further, it is also clear that medical advances have redefined what it means to be 65 today versus twenty five or fifty years ago. However, it is hard to argue that while technology may increase life expectancy the need for medical care is still closely correlated with the age of an individual. The combination of these factors leaves open the question of skill shortages in the developed world and the sustainability of relatively large (especially in Europe) social programs.

  2. CommentedDustin Hecker

    Interesting. How important to the conclusion is the assumption that those who retire believe they have sufficient resources to do so? What if they are assuming public support such as social security and medicare in an essentially unchanged fashion? That's not at all the same as having an investment account that would provide for 30 years of retirement.

  3. CommentedDennis Zelkowski

    A good thought provoking article, points well taken. I do think however that in this day and age nuance will take a back seat to corporatism's fanatical search to drain the wealth from every living thing and the aging and elderly, no matter how educated, are prime targets of "enhancing shareholder value" of some kind.

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