Managing demographic risk will be critical to every country’s future
We are entering a period in which the West’s postwar social welfare system is under growing threat as the global demographic structure is being turned upside down. And it is not just the West, but also China and other middle-income powers who will have to deal with an aging workforce and unsustainable health and pension costs in the next decade.
For sub-Saharan African countries whose birthrates remain high, overpopulation carries big costs not only for them, but for the rest of the world, which will depend on them for a growing proportion of the world’s workforce.
It is clear that managing demographic risk will be critical to every country’s future. Not making the right choices now can lessen economic potential for decades.
However, middle-income countries will soon face many of the same demands for increased government health care spending as high-income countries. The share of health care spending in upper-middle-income countries will slowly decline because of a government inability to keep up with increasing demand.
For sub-Saharan African countries whose birthrates remain high, overpopulation carries big costs not only for them, but for the rest of the world, which will depend on them for a growing proportion of the world’s workforce.
It is clear that managing demographic risk will be critical to every country’s future. Not making the right choices now can lessen economic potential for decades.
Biggest risks now for high-income economies
How prepared are high-income economies for the increased costs of pensions? In the fifty years between 1960 and 2010, public pension expenditure as a percent of gross domestic product (GDP) doubled for high-income countries from 4 to 8 percent. By 2035 the GDP share of public pension expenditure is forecast to grow another 3 percent at a time of shrinking workforces.
These increased pension costs are coming at a time of rapid extensions in life expectancy. Since 1990, lifespans increased more than 2.5 years per decade on average. Increases in pensionable ages for all high income countries, on the other hand, averaged 1.8 years per decade. Life expectancy in some individual high-income countries increased at an even more rapid rate.
There is a similar story for health care spending. The increasing proportion of those aged eighty and over – a consequence of increasing life expectancy – will necessitate more extensive and expensive health care needs, such as in-home or long-term care. With health care costs rising, retiree savings will be depleted, putting the onus on governments to pay a larger share.
But governments will be increasingly strapped: government spending is forecast to cover less than half of the health care spending needed – down from 62 percent in 2015 to 49 percent in 2035. With demand growing for pension and health care spending, high-income countries, especially, face a Catch-22 dilemma: cutting education, research and development (R&D), and infrastructure spending risks undercutting the higher productivity needed to offset declining workforces.
But governments will be increasingly strapped: government spending is forecast to cover less than half of the health care spending needed – down from 62 percent in 2015 to 49 percent in 2035. With demand growing for pension and health care spending, high-income countries, especially, face a Catch-22 dilemma: cutting education, research and development (R&D), and infrastructure spending risks undercutting the higher productivity needed to offset declining workforces.
With labor-driven growth increasingly behind us, high-income countries will have to boost productivity to compensate for declining labor forces or face slowing economic growth.
Emerging labor-saving technologies – robotics, increased automation, and more sophisticated artificial intelligence – could help offset the declines in workforces. But past technology breakthroughs have also led to new employment demands. Will there be enough skilled workers for high tech industries if health care and pension costs swamp national budgets, squeezing revenues for education and R&D?
Emerging labor-saving technologies – robotics, increased automation, and more sophisticated artificial intelligence – could help offset the declines in workforces. But past technology breakthroughs have also led to new employment demands. Will there be enough skilled workers for high tech industries if health care and pension costs swamp national budgets, squeezing revenues for education and R&D?
Crunch comes later for middle and low-income countries
Most middle-income countries have proportionally larger and younger workforces, putting them in a better position to prepare for the inevitable aging process. For countries with fewer dependents, there is higher saving potential and more growth capacity.
However, middle-income countries will soon face many of the same demands for increased government health care spending as high-income countries. The share of health care spending in upper-middle-income countries will slowly decline because of a government inability to keep up with increasing demand.
Upper‑middle‑income countries will also face pressures to increase public pension spending. Need for pension spending as a share of GDP will increase by close to 5 percentage points by 2035.
Most low-income countries have the opposite problem. Instead of aging, their populations are youthful. The sooner they can bring down their high birth rates, the sooner they can move into the demographic bonus years where they have the opportunity to boost growth. So long as fertility remains high so do health care costs. Forty-eight percent of Afghanistan’s population is under the age of fifteen and infant care is estimated to account for over 40 percent of the country’s total health care osts.
The more that resources can be devoted to education, the more low-income countries can maximize the approaching demographic bonus years.
Still, low income countries will have a hard time matching the resources that high and middle-income countries can devote to the educational needs of their large youthful populations. With Africa forecast to provide one out of every four workers by 2050, a poorly educated African workforce has negative implications for long-term global growth potential.
High levels of unemployed youth lead to civil conflict. One hundred percent of the states marked as Very High Alert or High Alert on the Fragile States Index compiled by Foreign Policy and the Fund for Peace have very youthful age structures.
A sense of urgency needed by all
Political and economic measures can make a critical difference to whether we all end up poorer and more unstable, or able to fully enjoy the benefits of growing longevity.
• With the aging process in full swing, high-income countries face a particularly difficult task of raising retirement ages, implementing efficiencies in health care, and reforming pension systems if they are to avert an economic slowdown.
• Middle-income countries have more time, but the accelerating aging process means they need to move quickly to align pension schemes to increasing longevity and build efficient health care systems. They have a big opportunity in closing the education gap with high-income countries, boosting their productivity levels and attractiveness to foreign investment.
• Migration into societies with declining labor forces can relieve many of the economic growth and financial pressures associated with that decline, but can also create many social problems, especially when cultural and socioeconomic differences with the host population are great. Countries will need to balance these issues carefully and make decisions that consider the longer term, not just the immediate impacts of migration.
• Low-income countries need to bring down fertility quickly and increase educational standards if they are to maximize their advantages during the demographic bonus years.
Firms have a key role to play in managing pension schemes that take into account likely extensions in longevity. While raising the retirement age faces strong political opposition, firms can help encourage workers to remain at work longer with more flexible workplace schemes.
Increases in government funding for education in the high-income economies are likely to be limited, if any, so firms should prepare to offer more on-the-job training of new entrants and reskilling of older workers. By contrast, in upper-middle-income countries, firms have the opportunity to recruit an increasingly better educated workforce.
Increases in government funding for education in the high-income economies are likely to be limited, if any, so firms should prepare to offer more on-the-job training of new entrants and reskilling of older workers. By contrast, in upper-middle-income countries, firms have the opportunity to recruit an increasingly better educated workforce.
Demographics does not have to be destiny if we take action now to ensure the promise of longer and healthier lives does not turn into a net cost for society, putting an extra burden on future generations.
By Zurich Insurance Group
By Zurich Insurance Group
Source: "Reducing risks from demographic change", by Zurich Insurance Group, the Atlantic Council.
Zurich Insurance Group and the Atlantic Council are engaged in a multi-year thought leadership effort to quantify aggregated global risks. They use an extensive quantitative model pioneered by the University of Denver’s Pardee Center for International Futures to explore the economic benefits and costs of demographic risks.
