For Fast-Growing Countries, Should Aging Be a Concern? Planning for the Second Demographic DividendSeptember 10, 2013 By Elizabeth Leahy Madsen
Population aging and decline are frequently described as a threat to countries’ economic development and social stability. Evocative language, such as “demographic winter” and “graying of the great powers,” portrays the serious consequences that many observers envision as fertility and growth rates decline and the elderly comprise a greater percentage of the population. These concerns reach around the globe, including in Africa, which has the lowest percentage of elderly among the world’s major regions.
The recent release of the United Nations’ biannual population projections offers an opportunity to assess the present and future extent of population aging and to consider a more nuanced analysis of its economic effects. Significant aging remains on the distant horizon for most countries, and the relatively slow pace of demographic change offers governments sufficient time to plan and prepare. Moreover, while aging does present genuine policy challenges, it is not universally negative. If the right conditions are in place, countries can even experience an economic bonus, known as a “second demographic dividend,” as their age structures mature.
Aging Underway, But Decline Uncommon
Population aging and decline are related but different processes with distinct causes and effects. Aging is a typical and expected consequence of progress through the “demographic transition.” As women have fewer children on average, the percentage of children and young adults in the population falls and the percentage of older adults rises.
Population aging is therefore natural and inevitable as soon as fertility rates begin to fall. A country can have a high fertility rate but, if that rate is decreasing, the population is by definition aging. From an economic perspective, aging that happens early in the demographic transition is a good thing because it signals that the age structure is becoming more balanced, the dependency ratio is falling, and a larger percentage of the population is composed of working-age people who can generate income. Aging is thus a prerequisite to the first “demographic dividend,” which becomes a possibility when the share of working-age adults rises.
Population decline refers to an absolute decrease in the number of people in a population. Each of the three driving demographic forces – fertility, mortality, and migration – can contribute to population decline, but in most countries today it is caused by low fertility and/or high rates of out-migration. Population decline occurs when the number of deaths plus outward migration exceeds the number of births plus immigration. Figure 2 shows the differences between an aging population and a declining one.
In 2010, a total of 19 countries experienced a decline of at least 1,000 people in their population compared to 2009 (Table 1). All of them, except Cuba and Puerto Rico, are located in Eastern and Southern Europe. In 11 of the 19, low fertility is the primary cause of decline, as annual deaths surpass births. In five countries, including the two in the Caribbean, there are still more births than deaths, but high outward migration rates create population decline. The remaining three unlucky countries – Latvia, Lithuania, and Moldova – are facing both natural declines, as deaths exceed births, and high rates of out-migration.
By 2030, the number of countries experiencing population decline is projected to increase from 19 to 34. The geographic scope of decline will broaden beyond Eastern and Southern Europe, incorporating China, Japan, Thailand, Italy, Greece, and Spain. Table 2 shows projected populations for 2030 and 2050 in large countries facing population decline, assuming that current fertility rates stay constant. (The more widely cited medium-fertility variant assumes that low fertility rates will rebound back to replacement level, which is not supported by recent trends in these countries.) The potential declines in Japan and Russia are most dramatic; both have current fertility rates below 1.5 children per woman.
The Little-Known Second Demographic Dividend
Aging is often described as a damper on economic growth because older, non-working adults are assumed to be economic consumers rather than producers, dependent on younger family members and/or the government for their financial support. With fewer working-age children to support elderly parents and significant numbers of childless adults reaching old age, governments fear that Social Security and pension systems will go bankrupt, diverting resources from other necessary budget lines.
However, economic models have found that in the long term, aging has no significant effect on the economy if related factors such as education and life expectancy are accounted for. Although an aging population typically depresses economic growth in the short term, countries are able to adapt, and the economic impact stabilizes over the long term.
Unlike children, older adults are not inherently dependent on others to support them. Elderly people have decades of accumulated knowledge and experience and, as life expectancies rise along with progress through the demographic transition, their longer and healthier lives are often more productive. In Australia, Japan, Norway, and the United States, more than 10 percent of people over the age of 65 are still active in the labor force.
The extent of aging’s potentially deleterious economic consequences varies greatly, depending on the relative generosity of public support systems and, perhaps more importantly, the behavior of individuals. In fact, population aging can lead to a second demographic dividend, when working adults anticipate that they will need to support themselves during retirement and save accordingly. Just as governments have decades of advance notice that their populations are aging, most individuals hope and expect to live to old age and plan accordingly. Their accumulated savings act as investments that drive economic growth. In fact, in all the regions at the end of the demographic transition where savings rates have been high, the second demographic dividend has boosted economic growth even more than the first.
Researchers who study the economic lifecycle have found that in countries without generous Social Security and pension programs, including the United States and Japan, older adults rely much more heavily on their own savings and assets than on government distributions once they reach retirement age. In addition, economic dependence on younger family members is often a fiction: In countries at various income levels, elderly adults are more likely to provide financial support to their children and grandchildren than vice versa.
Implications for High-Fertility Countries
Population aging is not necessarily a threat to national economies; however, governments would do well to prepare for it. If older people face high rates of chronic illness and disability, as in Russia, or if their savings are inadequate to meet their retirement needs, as in the United States, the potential economic consequences are more clearly negative.
Although many decades away from the age structures currently seen in Eastern Europe, sub-Saharan Africa faces several distinct challenges related to population aging. The high levels of human capital and economic development that have facilitated positive effects from aging in other regions do not yet exist. Formal government support systems for the elderly are scant to nonexistent, and informal family-based networks have little to provide. Per capita incomes are very low and most adults work in agriculture or the informal sector, which provides little opportunity to accumulate savings for old age.
The more pressing concern for much of Africa and other high-fertility countries, like many in the Middle East and South Asia, is improving standards of living and economic opportunities among very youthful populations. The current share of the population over 65 in sub-Saharan Africa (three percent) is one-third that of Eastern Asia and one-quarter that of Europe. By 2070, less than eight percent of sub-Saharan Africa’s population is projected to be older than 65, less than half as much as most other regions, even assuming a gradual convergence in fertility rates (see Figure 1).
Ultimately, countries that are still in the early and middle phases of the demographic transition, with fertility rates well above replacement level, should not let concerns about aging inhibit investments in girls’ education, family planning, and other initiatives that allow women and couples to achieve their desired family size. At the same time, they can begin planning ahead and promote an economic environment that enables a more balanced impact from population aging, including a possible second demographic dividend. As Alice Nabalamba and Mulle Chikoko, the authors of an analysis of aging in Africa for the African Development Bank, write, “Correctly managed…population aging can present an unprecedented opportunity for older citizens to enjoy a full and active life, far beyond the expectations of previous generations.”
Elizabeth Leahy Madsen is a consultant on political demography for the Wilson Center’s Environmental Change and Security Program and senior technical advisor at Futures Group.
Sources: African Development Bank, Bloom et al. (2010), International Labor Organization, Lee (2003), Mason (2005), National Transfer Accounts, Tsui (2011), UN Population Division.
Image Credit: Arranged by Schuyler Null, data by Elizabeth Leahy Madsen/UN Population Division.
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