There was a time a few decades ago when policymakers were trying to come up with strategies to deal with high population growth rates. Emigration, birth control and fiscal incentives to have fewer children were some of the tactics used to deal with overpopulation.
The big question has become how the economy can support the needs of its dependant, elderly population. Photo: Chris Sant FournierToday most developed countries have the opposite challenge: dealing with the negative effects of an ageing population. With the relative size of the workforce shrinking the big question now has become how the economy can support the needs of its dependant, elderly population.
The first economic effect of an ageing population is a reduction in GDP per capita output. When the pool of active, productive workers in an economy shrinks while the number of inactive retired people grows the economic cake gets smaller unless the labour supply is increased through immigration.
Those countries that have an unfunded pay-as-you-go pensions system will expose retired people to financial stress as politicians rarely put pensioners’ interests at the top of their priorities for spending. This implies lower standards of living, on average. Those pensioners who would have saved voluntarily in their lifetime will have to start tapping into their savings to cater for their financial needs as the State pension is rarely enough to ensure that retired people enjoy the same quality of life when they are no longer active in the workforce.
Countries like Malta that have a free health service at the point of delivery will have to dedicate more public funds for the care of the elderly. Social security and health programmes will absorb a higher proportion of current government consumption and this in turn usually creates pressures on other sectors like education, the infrastructure and security.
Unless an economy is growing in a sustainable way, governments will have a limited range of options to balance the books. Increasing taxes is the simplest and easiest of measures, but it is also the most politically disruptive. Turkeys do not vote for Christmas and most politicians will prefer to adopt another option: borrow more money to bridge the funding gap and hope that a future generation will eventually repay the debt.
The mushrooming of sovereign debt in many EU countries like Greece, Italy and France is partly the result of government borrowing to support the welfare state that at times offered social benefits that the country could not afford. However, politicians are experts at kicking the can when they are unwilling to undertake structural reforms. The problem caused by rising expectations fuelled by irresponsible political promises and the unwillingness to underpin these promises with unpopular but necessary financial planning afflicts most administrations.
Many retirement age people have talents that employers can benefit from
It is no wonder that many younger people never worry too much about their financial situation when they retire. Even if they see their parents struggling to make both ends meet they hope that they will either win the lottery or, more likely, decide to cross their bridges when they come to them.
The more competent governments decide that the only effective way of dealing with the downside of an ageing population is to invest more to improve productivity. Labour productivity can increase with capital deepening, that is, providing workers with more and better equipment in their work to enable them to produce more. In a service-based economy this investment often takes the form of more intensive education and training.
It is a dangerous fallacy to equate investment in equation with how much a country spends in this sector. The acid test of a good educational system is the quality and the range of the skills that students acquire in their formative years. Investment in human capital is the least discussed but most important tool to deal with the negative effects of an ageing population.
Policymakers, students and their parents need to understand that what matters is what job applicants are offering to their prospective employers. Low unemployment rates may be hiding a problem of underemployment where many graduates settle for jobs that do not match their aspirations because they have the wrong qualifications for the kind of jobs that offer good career paths and salaries.
Employers and policymakers also need to change their mindset with regard to those who have reached retirement age but are still healthy and willing to continue to contribute by remaining involved in the labour market. Many retirement age people have talents that employers can benefit from.
Ageism is still prevalent. It prevents employers from benefitting from the experiences and skills of older people.