Health, tech and saved wealth could turn an ageing workforce from an economic challenge into an advantage, say experts.
The population in the world’s biggest economies – from the United States and Europe to Japan and China – is ageing. Globally, in the next 30 years, the number of people aged 65 and above is expected to double from 761 million in 2021 to 1.6 billion in 2050.
By then, one in every four people (PDF) in Europe and Northern America would be aged 65 or older, according to the latest United Nations population projections. Even developing economies across Asia, Latin America, the Caribbean and sub-Saharan Africa – home to the world’s youngest population – will see an increase in the share of their above-65 population, from 3 percent in 2022 to almost 5 percent in 2050.
A younger population serves as the engine of economic growth by offering a large, productive workforce. However, in 2018, for the first time, people older than 65 years outnumbered those below five, pointing to a future with an increasingly dependent population.
The fast-paced ageing has led to concerns about the future of the global economy. Some studies have shown that the growth in the income levels of a population slows in an ageing society.
Yet, there is also growing evidence that if advanced economies can keep their elderly population in good health, they might be able to not just reduce the economic downside of ageing but even turn it into an advantage.
So, is the world poised for an end to high economic growth? Or can older societies reinvent themselves to keep their economies churning? Al Jazeera asked economists and demographers these questions.
The short answer: Ageing might slow down gross domestic product (GDP) growth rates but is unlikely to affect per capita income – which is what matters most to people – much. Technology and higher life expectancy levels could increase productivity in the working-age population, experts said, potentially offsetting losses from a shrinking labour force.
And the accumulated wealth of older generations could drive future investments. None of this will be easy but some countries are showing how it could be done.
Despite their ageing populations, developed nations have so far been in an economic goldilocks zone – not too young, not too old. Because their fertility rates have been declining sharply too, countries in East and Southeast Asia, Europe, North America, Australia and New Zealand currently have the highest proportion of working-age populations – which the UN describes as between 25 and 64 years old – in the world.
But this working-age population is now plateauing or declining. Meanwhile, this age group will continue to rise in Central, South and West Asia as well as in North Africa until 2045, and in sub-Saharan Africa until 2050.
Yet, while the timelines for a declining labour force vary across regions, the consequences will eventually be common, experts said. Typically, the working-age population of a society produces more than it consumes, ensuring a surplus for dependent groups: children and the elderly.
“Population ageing puts great pressure on those in the working ages because of these costs of supporting the growing dependent population,” Ronald Lee, a professor in demography and economics at the University of California (UC), Berkeley, told Al Jazeera. Broadly, he said, a slowdown in the population and labour force growth rates translates roughly one-to-one into a similar decline in GDP growth.
In some cases, though, the effects of an ageing population on the GDP can be more “extreme”, Lee said. China is an example. The growth rate of China’s working-age population is projected to drop by 1 percent every year from 2020 to 2060, compared with 1990 to 2015 when it was increasing by 1.5 percent every year.
“This will translate into a 2.5 percent decline in the GDP growth rate,” even if the economy’s productivity grows at current rates, he said, based on his calculations from UN population estimates.
Lee, however, cautioned that the GDP growth rate itself is not always the best indicator of how an economy is coping with ageing. For the wellbeing of the population, what matters most are income levels, which are measured by per capita GDP. As a country’s population growth slows or declines, even anaemic GDP growth “doesn’t necessarily mean that per capita income growth is slowing down”, he said.
Indeed, a study by researchers Jonathan Cylus and Lynn Al Tayara, looking at data from 180 countries from 1990 to 2017 and showed that the effect of an ageing working-age population on the per capita income levels is negligible.
“Our study shows that it’s not age that matters too much, it’s more about the functional capacity of the workforce,” Cylus, the head of the London Hubs of the European Observatory on Health Systems and Policies and senior research fellow at London School of Economics, told Al Jazeera.“Age is a very blunt measure of productivity because you could still be healthy at 70 and working.”
Second demographic dividend
Economists often think of a demographic dividend as a benefit to the economy when an increasing share of the working-age population can provide higher levels of economic growth.
But Gretchen Donehower, a demographer at UC Berkeley, said there is a “long-term idea” that countries should consider — of a second demographic dividend that comes with an ageing population.
“As your population shifts older, on sort of a permanent basis, you have more people in those ages, where they’ve had the chance to accumulate lots of capital for investment,” she told Al Jazeera. “So even if you have a smaller working-age group, you have other kinds of capital that you can make use of for more productivity.”
This, Donehower said, could lead to a situation where a country might be able to invest more capital in the health or education of fewer children, which could potentially prepare them for greater productivity relative to the generations they are replacing.
To get to such a scenario, Donehower said, governments should direct policies towards increasing the overall productivity of the economy where each person is able to produce more, aided by technology.Lee said research has suggested that ageing societies adopt labour-saving technologies more rapidly, becoming more capital-intensive, leading to higher per capita income than other countries.
Fixing a ‘horror show’
But economists point out that in the focus on ageing, countries are slipping up elsewhere too: they are often failing to utilise their working-age populations better.
“We may have growing older populations but currently we also have a lot of unemployed young people,” Cylus said. The European Union had a youth unemployment rate of 13 percent in 2021. “So the potential of the labour market can be unlocked by trying to address these existing gaps,” Cylus added.
Donehower said some countries face labour shortages because of the gendered nature of the economy, where women feel discouraged from participating in the workforce. In India, for instance, the female labour participation rate has crashed from more than 30 percent in the mid-2000s to 19 percent in 2021. Allowing more participation of women in the workforce could help counter the ageing population factor, Donehower said.
There are deeper systemic challenges at play too, according to experts — what Lee described as an “institutional lag situation” where a society’s cultural values, political and economic policymakers and broader government have not caught up with the changing demography of that nation.In many countries, “it looks like a horror show to have a career and raise children”, he said. “While older people may need to work longer, younger people should have more leisure and security.”
Some ageing countries are trying to incentivise people to have kids. After putting in place a strict one-child policy for three decades, China in recent years is encouraging couples to have more children. It now allows them to have up to three children. It has also introduced policy steps such as preferential public-rental housing for couples with more than one child and tax benefits for those raising children.
Hungary, which has seen a low fertility rate for many decades, has put in place a host of measures — from wage-adjusted parental leave and tax relief for large families to a debt-reduction scheme for parents with three or more children, and expanded family allowances to unemployed parents.
Australia has passed laws to encourage higher women workforce participation, such as allowing parents flexible working arrangements — from the hours to the location of work, for taking care of young children.
So far, though, none of these countries has seen any signs of a reversal in their declining fertility rates. For now, at least, the future of these economies depends on how they keep elderly populations healthy, and how they utilise the skills and experience that seniors can offer.
That is a reality that countries on the front line of ageing know they cannot ignore. Japan, with the world’s oldest population, is leading the way in developing policies that focus on the health needs of older people, while making labour markets more flexible by allowing old-aged but fit people to work, said Donehower.
It has a lifetime employment system wherein companies hire college graduates and effectively guarantee them stable employment until they reach retirement age. At the same time, the country has pushed back its retirement age to 65 from 60, and through a 2021 law requires employers to try and retain their workforce until the age of 70. As of 2022, one in every four people in Japan older than 65 was employed — and half of the people in the 65-69 age group.
To make working conditions better for the older population, Japan provides subsidies to companies to provide facilities such as railings on staircases and extra rest areas for older workers.
This has spillover benefits for younger people too. In 2000, Japan established a nationwide insurance system, making long-term care a right for older adults regardless of income or availability of family support. Research shows that, since then, younger family members feel less pressure when it comes to caring for the elderly.
Also an advanced, ageing society in Asia, Singapore has since 2022 made it mandatory for companies to offer re-employment to workers when they hit the retirement age of 63, at least until the age of 68. The country provides wage offset grants for employers who employ people aged 65 and above and earning up to $4,000 a month, besides benefits to companies that offer part-time re-employment and other flexible work arrangements to senior workers. And by the end of the decade, the country plans to raise the retirement and re-employment ages to 65 and 70, respectively — by 2030, one in four Singaporeans will be older than 65.
Singapore is investing in apartment complexes with social and health facilities integrated, so elderly residents can access them without having to travel.
But all of this needs society to buy into the need for change. As some countries are discovering, that is easier said than done.
France recently approved a law increasing the retirement age from 62 to 64 years, after increasing it from 60 years almost a decade ago. President Emmanuel Macron argued that the move was aimed at preventing the pension system from collapsing due to the increasing financial burden of an ageing population.
However, the move has been met with large protests and demonstrations as it delays the age at which people start receiving pensions.
The government’s proposal and the public backlash showcase the complex political and policy-making juggle that governments will increasingly need to make to keep their economies afloat, according to experts.
On the one hand, they must think of future generations. “If the retirement age is not increased then it puts the cost of ageing on the younger people and not on the elderly,” Lee said.
Yet on the other hand, Donehower said, countries should be cautious about raising the retirement age for all occupations, especially without investing in healthcare at the same time.
“There could be health consequences for raising the retirement age across the board,” she said. “A construction worker may not be able to continue working at 70 as much as a person who has a desk job.”
Evidence suggests that by merely raising the age at which people can receive pensions, governments end up pushing them towards disability insurance, or people “suffer health, mental health and physical health consequences”, Donehower said.
Sweden offers an example of a country that has balanced the needs of the economy and its people better than most, suggested Lee. The Scandinavian nation has linked the minimum pension age to life expectancy in the future — so people know that it will go up in a transparent manner. While this is aimed at lessening the burden on public funds, Sweden has also allowed workers to use a part of their overall contribution to go towards a pension fund of their choice, giving them greater control over their retirement savings than they previously had.
To be sure, countries can take — and have long been taking — shortcuts to address immediate labour shortages.
One way is to open up doors for immigration from countries with younger populations. Another way could be to move capital to younger countries in Asia and Africa. “There is a strong incentive for moving investments into countries with high rates of return on capital, where labour forces are younger and growing more rapidly,” said Lee.
But amid growing anti-globalisation and protectionist sentiments in many countries, governments are under pressure to protect jobs for locals, making both immigration and the outsourcing of capital hard-to-sell prospects politically.
And with even developing nations ageing slowly but surely, these solutions offer temporary relief at best to older, advanced economies.
What Donehower called a second demographic dividend, driven by an ageing population, might in the coming decades be the first and only demographic dividend countries can count on. Old will have to be gold.