Age and Population: Older, Healthier, Happier, but Poorer

By Joanna Chung, Financial Times Hong Kong

Asia

March 14, 2007

First, the good news. People across Asia are living longer and healthier lives than ever before. Now, the bad news. This - together with the tendency for families to have fewer children - it is posing challenges for policymakers. According to the United Nations, the more developed regions of the world, such as US, Europe, and Japan - accounting for 70 per cent of the world economy - will have as many people aged over 60, as those of working age in 20 years' time. That means the dependency ratio will have risen from 30 per cent at the start of this century to 50 per cent a quarter of the way through.

In some parts of the globe the trend is particularly strong. Japan, Italy and Germany are well known for their adverse demographic profiles. Japan, for instance, is set to see its population shrink from around 127m last year to 100m in 2050. There are also striking differences between countries. China, thanks to its one-child policy, will see population growth of 6 per cent by 2050 while India's is expected to be 44 per cent.

The upshot is that the ratio of pensioners to workers is rising rapidly - and will have a potentially profound impact on all areas of life, including economics and politics. There are questions about who will drive economic growth and about what governments should do about healthcare. A growing number of retirees and a shrinking workforce may also have profound consequences for business and the financial markets, not least because retirees may spend more on travel and leisure.

However, the impact of this phenomenon is not clear-cut. Population ageing will mean, among other things, that the cost of providing retirement income, healthcare and housing to a growing number of older people will increase - an issue that is foremost in the minds of opinion leaders in the Asia-Pacific region surveyed recently by AARP, the influential US retirement lobby group. Labour shortages are also looming. With the exception of India, majorities in all surveyed countries believe that their country is likely to experience labour shortages over the next 20 years. Moreover, countries with high dependency ratios and falling populations could easily experience weaker economic growth and poorer investment returns. "In any economy, output growth can be treated as a function of changes to the labour force and of productivity growth," Lombard Street Research noted in a report last year.

"Further, the returns on financial assets over the long term tend to be related to output growth. Demographics can play a vital role in affecting a country's output growth and so indirectly the return on financial assets."

However, there are also potentially positive factors resulting from the demographic trends, according to the AARP survey, including increased access to the knowledge and experience of older people, creation of new markets for products and services targeted at older people and the potential availability of older people to contribute as productive members of the workforce.

Sharmila Whelan, economist at investment bank CLSA, concludes in a recent report on demographics and Japan's economy that, since the rise of Venice in the 11th century, there has been little connection between economic growth and population size or increase. Innovation and specialisation are more important. Even in China, where population growth has clearly played its part in increasing the absolute size of the economy, Goldman Sachs reckons that accumulation of human capital - essentially education - has contributed more to gross domestic product growth than the growth of the labour force since economic reform began in 1979.

Moreover, there are at least three reasons why economic growth may not be hit as badly by demographic change as pessimists fear, according to Standard Life Investments. The first is the rapid growth of the developing economies, led by Brazil, Russia, India and China, the so-called Bric countries - which could continue to drive the expansion of the world economy.

Second is migration, which can also drive growth globally. The US, for instance, has relied on net migration for many years to lift economic growth. More recently, UK economic performance seems to have benefited from an influx of workers from eastern Europe. Even Japan has begun to consider immigration in view of the decline in population.

Third is the increased willingness of retirees to work. A recent survey showed that 63 per cent of Japanese retirees planned to work at least part-time. In any case, people are having to work longer as retirement ages are increased to offset some of the burdens on state pension systems.

Some countries in Asia are better prepared than others for the changes in population profiles. In the AARP survey, majorities in five out of the eight countries - China, India, Japan, South Korea, and the US - report that their country is "not too prepared" or "not prepared at all" to deal with changes that may result from the ageing of their population.

By contrast, majorities in Australia, New Zealand, and Singapore believe their country is at least "somewhat prepared", although few describe their country as "very prepared". However, most opinion leaders surveyed by AARP agree that population ageing is an opportunity to create new roles for older people. Older people are generally seen as helpful, contributing members of society and older workers as wise, respected, and productive. In addition to being viewed as producers, older people are also perceived as consumers.

Meanwhile, the demographic trends are exercising some of the sharpest banking minds, in places such as London and New York. Bankers see a huge opportunity and are engaged in a race to create products that enable investors to place bets or hedge risks on death rates - or more commonly referred to as "longevity risk" - through the use of derivatives and other market instruments.

Although derivatives were initially developed as a tool to manage interest rate and currency risks, financial engineers are now applying these techniques more broadly.

Some bankers say it is inevitable that the capital markets will play a big role in taking on longevity risk.

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