One of the great challenges facing the global order over the coming decades is the aging of the population. Most high-income countries have aged continuously over the past century. Driven by a combination of low childbearing rates and improved mortality rates, the average age of these countries has risen steadily. There are already more people older than 60 than youngsters under age 15 in Europe and North America, and by 2030, nearly half the population of Western Europe will be over 50, one-quarter over 65, and 13 percent over 75.
Middle-income nations are also now seeing their populations age but currently have the possibility of benefiting from a large generation of young adults. With the right factors— good governance, regulation, health care, and education—countries can convert this youth bulge into a demographic for promoting growth. This change is illustrated geographically: A century ago, 25 percent of the world’s workers lived in Europe. That has now fallen to below 10 percent, and by the middle of the century half of the global workforce will be based in Asia—around 2.5 billion workers. Yet by 2040 there will also be more elders than young in Asia, Latin America, and the Caribbean, and by the middle of the century there will be for the first time the same number of old as young in the world—2 billion of each—with each cohort accounting for 21 percent of the world’s population.
Most regions during this century thus will face the aging of their populations and a shift from predominantly young dependents to a majority of elderly dependents.
Japan is often seen as the classic aging society. Its rapid decline in births after World War II reduced its childbearing to the lowest in the world—reaching the replacement rate (that is, two children per couple) in the late 1950s, it fell to 1.5 in the 1990s and to 1.3 in 2005, recovering slightly to its current rate of 1.48. Japan also led the world in its declining mortality rate, with male life expectancy rising from around 50 in the immediate postwar years to 69 by the mid-1960s, and female life expectancy rising from 54 to 74. Life expectancies in Japan are now some of the highest in the world at 81 years for men and 87 for women.
Germany provides another example of an extreme aged society. Following unification in 1990, the childbearing rate of former East Germany reached 0.77 and has only recently increased to its current level of 1.46, with former West Germany at 1.38. As a consequence, population aging has progressed faster in the east of the country, encouraged further by strong flows of young people migrating to the west. There is expected to be a fall in the national population level over the coming decades as well as shrinkage of the labor force from its current 55 million to less than 40 million by the middle of the century.
Indeed, as longevity has increased, it is now forecast that the real life expectancy of today’s European babies will be well over 100 years old with over 5 million centenarians alive in Europe by the end of the 21st century. This will clearly have significant implications for labor supply, family and household structure, health and welfare service demand, patterns of saving and consumption, provision of housing and transport, leisure and community behavior, and social interaction. As governments and policymakers have awakened to the implications of population aging, concern about the demographic burden has spread. National health services, and even economies, are predicted to collapse under the strain of health and pension demand, and it is feared that families will no longer be there to compensate for failing public provision.
Much of this anxiety around the economic challenge arises from the presumption that future older labor forces will be less productive and less innovative, and that an older population will consume less—both with negative consequences for economies. But there are other challenges as well. In particular, the total amount of ill health and disability is likely to increase, with accompanying pressure to increase health care spending. The type of ill health is likely to change from acute and infectious diseases to chronic conditions, and this will require major shifts in the allocation of health care resources and the configuration of medical and health care services. In addition, demographic change will reduce informal family care through a reduction in the availability of younger family members to provide it.
Yet the major concerns—public spending on pensions, high dependency ratios between workers and nonworkers, increases in health care costs, declining availability of family-based care, and a slowdown in consumption due to an increase in older people and a decrease in younger people—are based on assumptions developed from the characteristics and behavior of current older populations. Some of these fears are supported by evidence, but many are speculative myths, widespread in public debate but lacking a robust evidential base. Behind the rhetoric defining dependency and productivity lies the complexity of social and economic behavior and the ability of societies and individuals to adapt to changing circumstances. It is highly likely that future generations of older adults will have higher levels of human capital—in terms of education, skills, and abilities—and that old age, as defined by retirement and dependency, will occur at far older ages than now. This means these issues can be addressed by policy, given the political and economic will.
The two main challenges facing high-income countries in light of their aging populations are how to ensure an income for these older people, whether from work, pensions, assets, or savings, and how to provide appropriate and sustainable health care. Crucially, both of these depend on two broad concepts found in most societies—the acceptance of the generational contract and of generational succession.
In most societies, there is recognition that adults look after their dependent children and that when they grow up these adult children care for their dependent parents. In traditional societies, this is done within families and households, in modern societies via public welfare systems. Given their aging populations, many countries are now debating whether this contract should be adapted so that older adults bear more direct responsibility for their own late life care and support. This is particularly the case in those societies where modern medicine is enabling not only increased life expectancy but also increasing years of frailty and dependency.
However, in the high-income countries new cohorts of highly educated, skilled, and increasingly healthy populations are approaching traditional retirement ages and are increasingly remaining in economic activity—producing, consuming, and paying taxes. Furthermore, longer lives allow a great accumulation of assets which, when invested, can enhance productivity, generate asset income, and raise living standards. Similarly, while population aging may affect the aggregate savings rate by increasing the fraction of the population in age groups traditionally associated with drawdown, it may also affect an economy’s average level of savings per capita, as individuals approaching and shortly after retirement tend to have higher levels of savings than those at the start of their working career. It has been estimated, for example, that the United States will see a 25 percent increase in national net worth per person of working age by the middle of the century due to population aging alone. Similarly, it has been argued that increased life expectancies can be expected to induce increased savings over the working life in order to finance a continued high standard of living in retirement. These two factors—the need to save more for a longer retirement and the changes in the age distribution of a population—have the potential to raise the asset income of a nation.
So maybe the aging of the population, if that population remains healthy, might prove unproblematic after all? It might if it weren’t for the factor of generational succession. Within most societies, there is a clear concept of the generational transmission of status, assets, power, and wealth down through the generations at a steady rate. What will happen when, due to the extreme longevity of a population, people are in their 80s when they inherit from their parents and grandparents? What happens to our workforces—as well as our communities—when healthy, active individuals are still in full employment in their ninth decade?
It’s possible to accommodate this change, but it requires individuals and institutions to rethink the life course. This requires a move away from seeing a clear progression along a linear line of work and income, to a more fluid life course. In this version, education and retraining continue throughout everyone’s lives, parents are able to withdraw from full-time, pressure-filled employment to care for young children, and return in their late 40s refreshed and ready for 30 more years in the workforce.
It is clear that the grand challenges of the 21st century, including population aging, are being tackled by institutions that were established to tackle 20th-century problems and are no longer effective. Pension systems and long-term care systems now exist across the developed world. However, these institutions themselves may facilitate higher dependency ratios or larger wealth transfers across the generations. Generous public pension systems allow healthy, active, and potentially productive individuals to retire and be supported for 40 years or more. Discrimination against older workers, increasingly defined as over 50, encourages them to withdraw from economic activity 40 years before the expected end of their lives. Germany and the U.S. are examples.
Germany, one of the oldest welfare states in the world, has had social insurance since the 1890s. The needs of the dependent age groups are publicly funded, with a large proportion of the nation’s gross domestic product (GDP) spent on providing health, education, and pensions. Under the German system, young people spend a long period of time in the free education system at one end of the life cycle, while early retirement plans, sound pension provision, and good unemployment benefits for older workers encourage early retirement. Consumption of publicly funded goods is thus high among the dependent young and old, while the time spent in production in the labor market is relatively low. The result is that the cost of such a public pension system is projected to reach 14 percent of Germany’s GDP within the decade and the country is expected to encounter severe financing problems within the next few decades.
Alternatively, in the U.S., old-age consumption and old-age productivity both remain high, supported by strong age discrimination protection. The Social Security system has more than 90 percent coverage, but replaces on average only 40 percent of employment income, which is low by European standards. The U.S. has no universal public health care system, though those over 65 are covered by the Medicare system. This, however, is still a system that is creaking under increased demand and allows a high degree of inequality in its provision for its older population. Even so, the U.S. is facing considerable budget deficits, in part due to its public social security and health programs. Some estimates predict that the deficit will range from 8 to 20 percent of GDP by 2050.
What is also clear is that not only are individuals living longer, but they are doing so within a population that is in itself growing older. To grow old in a society where most people are young is fundamentally different from doing so in a society where most people are old. Young nations have high proportions of economically active individuals with the potential to produce the wealth needed to support dependents, both old and young. However, old populations have a lower proportion of workers, and the responsibility of providing for old-age dependency may increasingly fall to the older persons themselves. In addition, societies with a large proportion of their populations in old age have to consider how to redistribute resources away from a focus on younger people toward older people in an equitable manner, both intergenerationally (between the generations) and intragenerationally (within each generation). And that is perhaps the greatest challenge of all.
Takeaway
Sarah Harper is a professor of gerontology and director of the Oxford Institute of Population Aging at the University of Oxford.
