PRB Discuss Online: How Will Global Aging Affect Economic Development?
(June 2009) The number of people over age 60 is expected to reach 1 billion by 2020 and almost 2 billion by 2050, representing 22 percent of the world’s population. This growth in the size and share of the elderly population will affect many aspects of economic development, including national labor forces: The ratio of people in older dependent age groups will increase relative to those in working-age groups. However, declining fertility rates may counterbalance this shift by reducing the number of people in younger dependent age groups. In addition, the new generation of older people will be healthier than previous generations and may remain active in the labor force for longer. Along with continued increases in the female labor force, these circumstances may alleviate the economic burden of global aging.
During a PRB Discuss Online, David Bloom, economist and demographer at the Harvard School of Public Health, answered participants’ questions about how these trends will affect labor forces and economic development.
June 24, 2009, 1 PM EST
Transcript of Questions and Answers
Epokor Michael Kudjoe: Does Economic development wholly depend on the age bracket of an economy to warrant the effect of a dwindling economy?
David Bloom: Economic development is a complicated process that depends on many factors. Among these is the age structure of the population. This has been a neglected determinant of economic growth and development. But by no means are we suggesting that demography or age structure is destiny.
Richard Cincotta: In Europe, laborforce size is currently declining, yet unemployment rates remain stubbornly high. Some blame Europe’s high unemployment rates on overly-protective labor laws and and other investment disincentives put in place when labor was in greater supply. Is there any theoretical reason or empirical evidence suggesting that labor scarcity could stimulate reforms that might improve the performance of European labor markets?
David Bloom: Institutions respond to real economic conditions. Insofar as labor becomes increasingly scarce, we should expect labor market institutions to respond. The responses won’t be instantaneous; there is a great deal of inertia when it comes to institutional change and innovation. In addition, high unemployment in Europe represents a supply overhang on the market, so it will take a while until employers experience the need for more labor. One such example concerns retirement policy. A striking fact about the normal/legal age at retirement is that it has barely increased in most countries over the past 50 years, even in the face of a roughly two-decade increase in global life expectancy. The post-War baby boom has alleviated much pressure for the age of retirement to increase, but this will likely change as labor markets tighten with the entry of smaller cohorts. We can also expect to see the elimination in public and private pension systems of incentives for “early” retirement. This question also rests on a premise about the unemployment rate in Europe relative to the US. Based on http://www.cepr.net/documents/publications/US-EU-UR-2009-05.pdf this premise may not be entirely well founded. In particular, unemployment in the US is now higher than in most European countries. For a number of years, it was higher than in Austria, the Netherlands, Norway, and Switzerland.
Epokor Michael Kudjoe: If the aged shall exceed the young or the productive age group does that mean that birth rate will reduce?
David Bloom: The birth rate depends on the age structure of the population and age-specific fertility rates. The larger the population share at the very young and old ages, the lower the fertility rate, holding age-specific fertility constant. The higher the age-specific fertility schedule, the higher the birth rate, holding age structure constant. Insofar as fertility rates increase in the face of labor shortages, it could be expected that a high elder share will lead, over the long run, to an increase in the age-specific fertility schedule. On the other hand, labor shortages might reduce the demand for children, because work alternatives are so favorable. The bottom line is that this is a complicated question to answer.
Marlene Lee: The introduction to this discussion speaks of global aging as an economic burden, but your work on the demographic dividend and recent findings by Gruber and Wise that ” greater labor forceparticipation of older persons is associated with greater youth employment andwith reduced youth unemployment”suggest otherwise. Among potential responses to population aging—reducing incentives to retire, promoting life long health, etc.— which have the potential for greatest benefit to economic development?
David Bloom: This question makes an important point. Gruber and Wise do indeed cast doubt on the hypothesis that young and old individuals compete for jobs. Put another way, the young and old seem to be more complements in the labor market than substitutes. With respect to policy responses to population aging, the promotion of healthy aging will have no discernible effect on economic growth unless people also work longer. Reducing incentives to retire will have a first-order and relatively immediate impact on the macro economy, assuming older workers don’t crowd out, say, middle-age workers from the labor market.
Akanni Akinyemi: This is a very interesting topic. What are your views on automation of some work schedules as well as the use of technology rather than human in labour force? Also, with changing migration policies in the North to attract prime productive ages, what is the prospect for the developing countries in the aging-development issues?
David Bloom: Labor shortages can naturally be expected to encourage higher capital/labor ratios, e.g., automation. Migration is not likely to affect large enough numbers in the North or the South to substantially alter the age structure or the economic trajectory of either set of countries.
Ghazy Mujahid: The issue is will impact differently in developed and less developed countries at least during the medium term. While in the developed countries where the traditionally defined working age population already is or will be declining, in most less developed countries this potential workforce (still defined as 15-64 years) will be continuing to increase. While older persons (beyond 60) are becoming healthier and more able to work, letting them continue in work or be re-employed will impact adversely on job prospects for the younger workforce, particularly the new entrants. The question of inter-generational justice will then arise with respect to jobs. Should the preference not be to give jobs to the new entrants as those 60 have already enjoyed that privilege for decades? How do we resolve this?
David Bloom: The observation that the demographic cycles are out of phase is fundamentally correct. With respect to intergenerational justice, the evidence points in the direction of there being no effect of population aging on youth employment. This is one of the main findings brought out by Jonathan Gruber and David Wise.
Rahat Bari Tooheen: Global aging will call for new social security systems to cater to special needs of the elderly. Against the backdrop of the current economic crisis, will countries be able to respond adequately to these special needs?
David Bloom: Many social security systems are indeed very generous to the elderly. In fact, they are so generous that the real issue here has to do with their sustainability in the face of aging populations. If the economic crisis were substantially protracted, it could serve to exacerbate this challenge. But most economists think the crisis will abate in the next two to three years, which means that it won’t have any fundamental implications for the long-term solvency of social security systems. Of course, a bit of humility is in order here, since the bulk of the economics profession failed to anticipate the current crisis.
Clarence Pearson: Dr. Bloom, 80% of the worlds population are not covered under a pension plan. Most not covered are in devloping countries. What can we do to get insurers and policy makers involved in solving this problem?
David Bloom: It’s certainly true that most of the world’s population is not covered by a pension plan. But that doesn’t mean that all of those people will suffer substantial hardship in old age, since the elderly can still rely on family networks, private savings, and continued work. The democratic process can be expected to exert pressure on public policymakers to initiate programs in the area of pensions. In addition, insofar as policymakers can strengthen market institutions, private insurers are more likely to perceive profit potential and offer pension services. Renewed, long-term economic growth will abet all of these processes. Economic development that is inequality-reducing would also likely play a positive role in addressing this challenge.
K. Fidel: Is continued immigration to the U.S., and illegal immigration in particular, essentially a “ponzi scheme” with respect to the ability of the U.S. and other countries of immigration to provide support for an aging population?
David Bloom: This is a complicated question. I would start by noting that there is no evidence or reason to believe that US immigration (documented and undocumented) will have an appreciable effect on the age structure of the US population. I would also point out that immigrants pay taxes, but they also receive social services. Finally, I question the basis for assuming that non-immigrant fertility will be low for several decades into the future. Insofar as non-immigrant fertility rises, we could see non-immigrant workers funding the pension receipts of retired immigrants.
John Rohe: Would you agree that U.S. immigration will not substanially affect U.S. dependency ratios for the elderly or the age of expected retirement? Here are two references, first, an article in the CIS Backgrounder: http://www.cis.org/articles/2007/back1007.pdf and second, this YouTube video on age structures: http://cis.org/node/29. Thank you, John
David Bloom: Yes. See previous answers, which call into question the force that immigration will exert on population age structure in the US.
Tom Te-Hsiung Sun: In Taiwan, TFR has been down to 1.15, and 10.5% of the population is over 65. The ratio of working age(15-64) to 65+ is 7 : 1 in 2008. It is projected that elderly will be about 25% by 2050, and the ratio of working age to elderly will be 1.5 : 1. How do you think this change will affect Taiwan’s economic development? And, what should we do?
David Bloom: Demographic changes in Taiwan will tend to lower per capita economic growth. But the effect is not likely to come even close to overwhelming other forces that favor growth. Changes in policy that affect, for example, retirement, human capital accumulation (via education and health), and the labor force participation rate of women could further ameliorate the impact of aging on economic growth.
NANA YAW OSEI THOMPSON: How will global aging affect economic development in Africa (with emphasis on sub-saharan Africa )?
David Bloom: The main effect of global aging on sub-Saharan Africa will operate via increasing opportunities for emigration. Emigration will tend to reduce Africa’s surplus labor. It will also promote economic development insofar as emigrants send home remittances. At the moment, though, there is little basis for thinking these will be large effects for sub-Saharan Africa as a whole. They may, however, be significant for some particular countries, especially smaller ones.
Noelia Paez: How [is] aging of population … going to affect pensions and social security programs (50 years from now if fertility trends remain as predicted)? Do you think consequences of aging are different by pension scheme? (Pay-as-you-go versus Fully-funded)?
David Bloom: As we’ve noted in the response to an earlier question, population aging poses challenges to the capacity of pension systems to maintain benefits at current levels of generosity. The conventional wisdom is that fully funded systems are the best from the standpoint of sustainability. However, Adair Turner, former chair of the U.K. Pensions Commission, has offered some compelling arguments against the superiority of funded systems as compared with PAYGO. See http://www.imf.org/external/pubs/ft/fandd/2006/09/turner.htm
Ghazy Mujahid: I think that Prof Bloom should throw some light on Brundtland’s remark that the developed countries became rich before becoming aged, while the developing countries are ageing before becoming rich. Does that not call for very different approaches to addressing ageing-related issues in the two differenty types of countries?
David Bloom: With respect to the options they have for providing for the economic security of the elderly, the distinction between developed and developing countries is important. For example, the rich countries have relatively more effective institutional structures for transferring resources between income groups and between generations. This means that pension systems are much easier to design and implement in those countries. By contrast, poor countries are forced to rely more heavily on traditional family networks and continued employment by the elderly. The bottom line is that developed and developing countries will indeed have to adopt different approaches to providing population-wide old age economic security. We should also not lose sight of the fact that the challenge faced (in terms of the elderly proportion of the population) is more formidable in the wealthy industrial countries – at least for the moment. But those countries can also bring to bear much greater resources to address this issue.
Ghazy Mujahid: The points mentioned in response to Clarence Pearson are family networks, private savings, and continued work. These in fact can be seen to be falling increasingly short of the needs of the growing numbers of older persons in the developing countries. Family networks are under strain because of smaller size family, out-migration and increasing tendency of female employment. Private savings are virtually not there for a majority of the older persons in the poor countries. Continued work -which older persons are increasingly relying on – is leading to lower wages for the older workers and will also adversely affect employment available for younger persons. Sorry for this pessimistic scenario but in many developing countries these are ground realities. The question is where will resources for social pensions and welfare payments come?
David Bloom: I agree that family networks are being subjected to increasing strain. The severity of this strain is likely to increase as a result of continued fertility decline and increased mobility within countries. Under these and related circumstances, people typically look to the state to safeguard the well-being of the elderly. The substantial vacuum that exists with respect to pension and healthcare systems in many developing countries means that such institutions will need to be designed and implemented. It would be folly to design such institutions in the absence of an appropriate evidence base. The Health and Retirement Studies that are under way in more than two dozen countries (including India and China) offer a promising step in this direction. These studies will contribute to increased public consciousness about the situations and the needs of the elderly. In this way, they may be expected to help inform and catalyze a process of institutional development that has the potential to improve the well-being of the elderly. More generally, a set of policies and institutions that promote equitable economic growth will facilitate greater savings and will increase the government’s ability to effect transfers of resources. These are the most likely sources for pension funding and, I believe, the most likely scenario under which they will be forthcoming.
Ghazy Mujahid: As it approaches 2 pm and I have to rush to another meeting, I would like to use this space to express my thanks to Prof Bloom. This one hour has been very useful and interesting for me. I hope we all will have more opportunities of such interaction. Thanks and have a nice day.
David Bloom: Many thanks to you. Your questions and comments (and those of the others as well) were terrific! I, too, would welcome further opportunities like this and, even better, meeting you in person.