Defusing the Demographic Time Bomb

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Ageing populations pose one of the most serious and enduring challenges for OECD countries.

The European Commission has already issued a warning about the dangers arising from ageing populations over the next decade, which include diminished GDP growth and the creation of budget deficits.

Global population estimates from the UN spell out the stark reality confronting Governments. By 2047, the number of people aged 60 and over will exceed the number of children in the world. Furthermore, the number of people aged 60 and over is set to more than double between 2013 and 2050 to two billion. Meanwhile, Europe’s old-age dependency ratio is expected to reach 50.2 by 2060, according to Eurostat figures. In the UK, the Office for National Statistics (ONS) projects that by 2039 one in 12 people will be aged 80 or over.

Countries with ageing populations face the prospect of slower growth due to smaller proportions of working-age people. In addition, lower birth rates set in motion a vicious circle whereby an already shrunken workforce will not be replenished.

Ageing populations present governments with a toxic mix of lower tax receipts, lower revenues and a growing retiree population necessitating higher welfare costs in areas such as pensions and healthcare. Governments are therefore faced with the choice of whether to borrow and tax more or spend less.

Demographic change also has implications for debt. In countries like Japan which are saddled with large debts in proportion to the size of their economy, lower growth resulting from population ageing will only exacerbate the debt burden.

The impact of the demographic time bomb is, therefore, far-reaching. The ripple effects are felt across all aspects of the global economy, impacting retirement provision, long-term care, health services and the ability of governments to run budget surpluses. If these demographic dangers are not addressed, countries face the prospect of declining prosperity — and retirees will be hit especially hard.

Due to this reality, the income and investment strategies of retirees and the soon-to-be-retired have to accommodate the fact that people are living longer. Insurance companies and pension funds are also affected as they need to guard against longevity risk translating into higher-than-expected pay-out-ratios. Providers therefore need to develop innovative retirement products that can tackle this, maybe by partially linking payments to life expectancy.

Advisors are also having to adapt their business models in an effort to counter these changing demographic trends. In a recent discussion paper on the ageing population, the Financial Conduct Authority (FCA), the UK financial regulator, called for a wider range of products for retirees, along with more tailored advice targeting their specific needs.

The demographic transition can also be considering to be fundamentally altering the employment landscape as ageing populations mean companies have a smaller pool of young talent to recruit. This means employers risk walking into a skills shortage situation which can threaten their ability to expand and innovate. In this scenario, governments need to play their part in ensuring older workers have relevant training and remain active members of the workforce. The phenomenon of ageing employees is also bound to have an attitudinal and societal impact on the perception of older workers. Companies may need to re-evaluate their attitude towards older employees and reassess working conditions in areas such as flexible working hours, part-time work and benefit packages. Society at large must debunk the myth that an older workforce could be detrimental to younger workers. Given this is the reality of the future, employers will have to harness the experience and talents of older workers and assist them in transferring and imparting that knowledge to younger staff.

Meanwhile, advisors do not feel supported by their government –  this is true for those in the UK. Our research finds only 18% of advisors in the UK think the Government is doing enough to address the UK’s ageing population. The extent of the problem is revealed by figures from the ONS showing the number of people over the current official retirement age has doubled over the last 20 years. The over 85-year-old age group is now growing faster than any other demographic group.

There is a clear and pressing need for governments to create robust strategies to manage the fiscal fallout arising from larger retiree populations. Initiatives such as those put in place by the UK Government linking the state pension age to longevity will help alleviate pressure on the public purse to an extent. But in the long-term, a situation where retirees work for longer and get less in return seems inevitable. Some countries could even decide to abolish the system whereby state benefits for retirees are paid from the contributions of current workers. Important, tough and unpopular decisions will invariably need to be made by governments to defuse the demographic time bomb or at least soften the impact of its blast.

One way of tackling the ageing population is to increase birth rates. Various policies have been pursued by governments all around the world in efforts to encourage women to have more children — including cash incentives, tax breaks and subsidized childcare. In the long-term, such policies could reap rewards. China estimates that its decision allowing couples to have two children will add 30 million people to the country’s workforce by 2050.

But more short-term solutions are needed. One option is migration. Immigration offers immediate rewards in terms of expanding the workforce and the associated economic benefits this brings. But the issue is politically charged and especially so in Europe where governments face potential public backlash by accepting large numbers of economic immigrants. A key pillar of UK Prime Minister David Cameron’s recent efforts to negotiate a better relationship with the EU centers around curbs on migrant benefits. If immigration continues to be a thorny and politically-toxic issue then governments will be unable to realize the huge economic and demographic benefits has to offer.

Whatever policies are pursued, it is imperative that governments take action now before ageing populations help give rise to economic and social crises. The demographic time bomb is ticking faster than ever as advances in medical science mean people are continuously living longer.

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