Societies around the world, particularly in Asia and parts of Europe, are aging quickly, due in part to the baby boom generation moving into retirement age, lower fertility rates, higher life expectancies and the imposition of government policies, such as the now abandoned one-child policy in China and restrictive immigration policies in Japan.
Many look to Japan, where the country’s Statistics Bureau reports 29 percent of the population is over 65, as a case study for how a country is changed by an aging population, including how these shifts can influence the economy, investing opportunities and the social fabric.
Japan has already far surpassed the minimum requirement to be considered a super-aged population, defined by the United Nations as a country where the over-65 population cohort exceeds 20 percent of the total population. “A lot of European countries are very close, but then a lot of the rest of the world is, in the next 30 years, also going to be there,” says Gretchen Donehower, researcher on the demography of aging at the University of California at Berkeley.
According to the European Commission, 21.1 percent of Europe’s population was over the age of 65 as of 2022. In the United States that figure was at 16.8 percent as of the 2020 Census.
Falling birth rates and the aging baby boom generation are significantly raising the “dependency ratio,” the number of people over age 65 relative to the working-age population (15-64), in many countries.
Birth rates across Europe range from 1.2 to 1.9, notes a Centre for Economic Policy Research paper by Rainer Kotschy and David Bloom titled Economic growth prospects in the face of population ageing.
The euro zone’s contingent of 15-to-64-year-olds, which was roughly 64.1 percent in 2020, is projected to fall to 58.2 percent by 2050 and 56.1 percent by 2070, according to estimates from Eurostat and EUROPOP. Meanwhile, people over the age of 65, who made up 21.1 percent of the population in 2022, are projected to comprise 28.2 percent of the total population by 2050 and 30.2 percent by 2070.
How fast societies age and at what point in their economic growth cycles this aging occurs has a drastic impact on the economic development potential for a country. Whether they can take advantage of a demographic dividend (the economic growth potential that can result from a population age structure when the share of the working-age population is larger than the non-working-age share of the population) before it becomes a demographic drag can have repercussions for generations of citizens, affecting per capita GDP, income and retirement benefits.
While the United States and Europe experienced dropping fertility rates earlier than other parts of the world, Asian countries have since begun experiencing significantly steeper declines in fertility rates, Donehower has found.
In France, says Donehower, it took around 100 years for the fertility rate to go from five to two, while it took China roughly 25 years and Iran about 15 years to move from population growth to stagnation. That sort of rapid shift has given countries such as China and Iran less time to capitalize on their demographic dividend.
Donehower says, “We have to get rich before we get old, because how are we going to manage these extra consumption needs without raising the base of the economy? So, that is a big concern.”
A common refrain among U.S. policymakers fretting over the shrinking working-age population is to ask, “Who’s going to pay for Medicare?” and “Who’s going to pay for Social Security?” or any other vital service, for that matter — even after having capitalized lavishly on the demographic dividend for decades.
A handful of countries in Asia, such as South Korea, Taiwan and Japan, were also able to successfully capitalize on their demographic dividends and supercharge their economies. But other Asian countries, such as Thailand and Vietnam, may have missed their opportunities and are experiencing an aging trend before they have been able to substantially raise their per capita wealth to the levels found in high-income countries.
FALLING DOMINOES
Aging populations have a dampening effect on economies for a host of reasons. For starters, productivity and the ability to innovate tends to decline with advancing years. Retirement shrinks the workforce, leaving some positions unfilled or a labor pool without the level of skills required. Once senior citizens are living on reduced and fixed incomes, their consumer spending declines, robbing the economy of fiscal stimulus (except for in the United States, where healthcare costs are so high that the elderly population are actually the highest spenders).
Retirement also brings reduced rates of savings and investment. And government-sponsored medical and pension programs for seniors also inevitably swell in size, often resulting in higher tax rates to fulfill their financial obligations, while bleeding money away from the private sector.
This helps explain the palpable anxiety in China, where citizens have broadly ignored the Communist Party’s insistence (and incentives) they have more children to prevent the steep population declines that have been forecast. The government’s efforts to boost birth rates comes after more than 30 years of a one-child-per-couple policy to address concerns around rapid population growth and its perceived impact on the country’s economic development and social stability. Since the one-child policy was abolished, birth rates have continued to decline. The Shanghai Academy of Social Sciences expects the birthrate to drop to 1.1 by 2030, which could reduce China’s population from about 1.3 billion today to 587 million come 2100.
This is why many economists have said, “China will grow old before it grows rich.”
FISCAL SUSTAINABILITY
Fewer workers means fewer tax receipts for federal, state and local governments, even as the financial demands of social programs supporting the elderly and infirm rise.
The “fiscal support ratio” is a calculation that assesses the number of taxpayers compared to the number of beneficiaries. The International Monetary Fund estimates that from 2010 to 2050 the fiscal support ratio for the United States will drop 11 percent — meaning that to balance tax revenues and expenditures in government budgets in 2050, tax revenues will have to be 11 percent higher or expenditures 11 percent lower, or some combination of the two, just to offset the increased costs from the aging population. Things are worse among European countries where the fiscal support ratio will fall out of balance by 14 percent to 28 percent, and the ratio will dip to 26 percent in Japan.
One strategy the United States, France and other countries have undertaken to combat a falling fiscal support ratio is to raise the retirement age. Vietnam, too, has raised its retirement age, from what was 50 and 55 (for women and men) in 1995 when the country first instituted its modern pension system, to current plans to forestall retirement until age 60 for women (by 2035) and 62 for men (by 2028).
Vietnam, whose fiscal support ratio is projected to triple to 33 percent from 2020 to 2050, according to an estimate from Allianz, has been seeking additional ways to ensure fiscal security for the elderly population.
In an effort to promote saving among the working-age population, the Communist Party in Vietnam began offering workers the option of contributing to a private pension program, in addition to the state pension system. Vietnam’s retirement system currently covers just 40 percent of its elderly population, notes Lien Hoang of Nikkei Asia, leading many workers, particularly women, to work deeper into old age.
Another mechanism countries have put in place to incentivize putting off retirement is to increase retirement benefits the longer you work and to decrease benefits the earlier you retire.
Donehower says there are other governmental policies though that can increase labor supply. Labor rigidity in European countries can hamper older people from taking on informal or less-demanding work as they reach their 70s. In Japan, the opposite is true, as more people are working as septuagenarians in an informal capacity, running a small family business or working part-time.
The United States, too, has a more flexible labor market that does not place restrictions, such as forced retirement age, on its people — with exceptions for certain high-risk professions, such as airline pilots, air traffic controllers and the CEOs of some companies.
SOLVING THE LABOR DEFICIT
An aging population, left alone, means a shrinking workforce. However, there are investments and policies that governments are pursuing to stimulate greater workforce participation and longer working careers.
Labor market reforms such as increasing the female participation rate in the workforce, incentivizing working into one’s late-60s and early-70s, and attracting and enabling the immigration of workers are all vital steps that governments can take to respond to their aging populations.
Immigration is one of the most effective ways to increase the pool of workers in a country, thereby adding to the taxpayer-base and boosting domestic productivity.
“In developed economies, the only policy that has successfully prevented population declines is allowing for some immigration,” says David Laibson, professor of economics at Harvard University.
Aging countries around the world are attempting to draw in more working immigrants specifically to address worker shortages and a dwindling taxpayer base.
In Germany, where the baby boom generation is sizeable, 13 million workers will be aging out of the workforce during the next 15 years, reported Le Monde in March 2023. The country’s Federal Employment Agency says that it will need 400,000 immigrant workers to fill that gap.
President Olaf Scholz and the Bundestag have recently implemented measures to encourage immigration by making it easier for newcomers to become German citizens. The years of residency required for German citizenship has dropped from eight to five (and three for those with proficient German language skills), and a ban on dual citizenship for those from non-EU countries has been terminated.
Spain, which had a birth rate of 1.19 as of 2020 and is projected to have a dependency ratio greater than 50 percent by 2045, passed a reform in August 2022 to allow immigrant workers a faster path toward acquiring legal status.
The reform allows trained workers who have lived in the country for two years the ability to “regularize” their situation and makes obtaining a permit for employment, social and family reasons a simpler process. It also created a new permit altogether offering professional training for migrants who have been in Spain for two years.
Other efforts that can help expand the labor pool are those focused on worker longevity. The World Bank Group notes in its 2022 paper, Silver Hues: Building age-ready cities, the most effective methods to increase working and productivity longevity is to improve health conditions and to raise life expectancies and education levels.
Technological advancements, such as the dissemination of artificial intelligence applications into everyday work processes, may also change the nature of work and facilitate longer careers and increased productivity for older workers.
Donehower voiced the possibility that AI applications may be used to make what would otherwise be a complex software program instead into a text-based interactive application that is easier for older people and others to engage with.
“I think there could be really great enhancements of productivity in older workers from AI-based kinds of things,” says Donehower. “And there is research out there showing that the kind of economic hit countries take in this rapid aging process doesn’t come from just having the older workers. It’s that the older workers are less productive.”
A June 2023 article in The Economist sounded an optimistic tone on how AI could impact productivity in aging societies. “The world will have to make do with fewer youngsters — and perhaps with a shrinking population,” the article reads. “With that in mind, recent advances in AI could not have come at a better time. An uber-productive AI-infused economy might find it easy to support a greater number of retired people.”
SILVER OPPORTUNITIES
Despite such AI hopes, real things will need to be built in the coming years if societies are going to adapt to their aging realities. And as aging continues, demand for these assets will only grow.
Senior housing communities and facilities are some obvious examples, but denser and more accessible urban communities (i.e., “15-minute cities”), where the doctor, the grocery store, cultural venues and green space are all within walking distance, as well as modified and accessible homes and public transport, will also be important and highly desired aspects of the built environment as a greater percentage of the global population moves beyond age 65.
Lewis Dayton is associate editor at Institutional Real Estate, Inc., parent company of this magazine.