Population Aging and the Welfare State in Europe

by Ronald Lee and Andrew Mason

[Population Aging to 2030, Day 3, Essay 1 of 3]

Many countries in Europe and elsewhere are aging rapidly.  In part this is occurring because of the enormous strides that have been made in reducing death rates at older ages and in part because of low fertility.  Fertility is particularly low in Southern and Eastern Europe where the total fertility rate, the number of births per woman over her reproductive span, is typically around 1.5 or less.  This means that the next generation will be twenty five percent smaller than the current generation unless fertility rebounds.  This is a recipe for both population decline and an old population, one with more elderly relative to those in the working ages.

Population projections are a powerful tool to look into the future.  We can be confident that in Europe the number 65 and older will rise substantially relative to those in the working ages however defined.  Demography can tell us only so much, however.  The economic effects of changes in population age structure in Europe depend on what people do at each age.  This is changing over time and varies considerably across countries depending on health status, values, public policies, standards of living and a variety of other factors.

Figure 1. Consumption (C) and labor income (Yl) by age in Germany, Spain, and Sweden. Source: National Transfer Accounts

The importance of this can be seen by comparing Sweden, Germany, and Spain.  In Spain and Germany labor income declines very rapidly at older ages as compared with Sweden.  Swedes in their late 50s and early 60s are producing much more than Germans and Spaniards at those ages.   Sweden has a different problem, however, which is very high consumption at older ages, largely due to publicly funded health care and long term care.  One could say that Swedes in their 80s are a much greater economic burden, while Germans and Spaniards in their 60s create more strain.

The support ratio, the ratio of effective producers per effective consumer, provides a way of measuring population aging that allows for differences in consumption and labor income patterns.  The support ratio counts people at each age according to what they produce and what they consume as according to the curves in Figure 1.

Figure 2. Percentage decline in the support ratio, 2010-2030.

By this measure, population aging will have the greatest impact in Germany where the support ratio will decline by over 20 percent between 2010 and 2030.  Germany has two factors working against it – low fertility and low labor income among older adults.  The decline in the support ratio in Sweden, the United Kingdom and the United States is projected to be at about half the rate as in Germany.  Spain is roughly in the middle between these two extremes.

The difference between Spain and Germany is primarily a matter of timing.  Germany is aging earlier than Spain because its fertility declined earlier.  Both countries will experience a decline in their support ratio by about 25% between 2010 and 2050, about twice as great a decline as in the other three countries.

A final element in thinking about the welfare state and population aging is that countries differ greatly in the mechanisms on which they rely to meet the needs of the elderly.  In general, countries in Europe rely more on the public sector than in the US or many other countries.

This is clear in Figure 3 which shows the relative contribution of net public transfers, net familial transfers, and asset-based flows to funding the gap between consumption and labor income for those 65 and older.

There is great variation in Europe with Sweden (SE) relying entirely on net public transfer to fund the old-age support system.  In Germany (DE), about two-thirds of the support comes from public transfers while in Spain (ES) it is closer to one-half.  Population aging will place particular strains on the public old age support system in Sweden.

http://ntaccounts.org/web/nta/show/Population%20aging%20and%20the%20generational%20economy%3a%20A%20global%20perspective

Figure 3. Old-age support system for selected countries. Public transfers, family transfers, and asset-based flows as a share of the lifecycle deficit for those 65 and older. Source: Ronald Lee and Andrew Mason, lead authors and editors, 2011. Population aging and the generational economy: A global perspective. Cheltenham, UK: Edward Elgar.

Note that all the European countries that are shown in Figure 3 rely very heavily on the public sector to fund net consumption by the elderly. None relies on help from children, and generally they rely very little on assets, unlike the US. Figure 3 also shows that some but not all Asian countries do rely on families to provide old age support. In these countries population aging will also put pressure on adult children of the elderly.

Ronald Lee is Professor of Demography at the University of California, Berkeley, and Chair of the Center on the Economics and Demography of Aging (CEDA). Andrew Mason is Professor, Department of Economics at the University of Hawaii and Senior Fellow at the East West Center. They are Co-Directors of the National Transfer Accounts Project.

The Sun Has Yet to Set on China

[Population Aging to 2030, Day 2, Essay 2 of 2]

Recent news of China’s economic slowdown has many American defense analysts predicting the end of the Chinese challenge to US dominance in world affairs. These predictions are based, in part, on China’s rapid population aging and signs of internal political fissures, both of which call into question China’s ability to continue to rise.

Such celebrations are premature. For many reasons, China’s economic power could match or even surpass US power in 20 years. Domestic political and demographic trends in China suggest continued growth, while domestic political and demographic trends in the US are concerning.

Seriously considering this contrarian view of demographic trends in China and the US is important because, as many political scientists have shown, the possibility of war becomes more probable when a rising power sees the decline of the dominant power and acts to surpass it. If Chinese leaders see the following picture of demographic and political trends, they will perceive that the US is in decline while their own power is rapidly rising. The outcome could result in a more aggressive Chinese posture.

The Dragon Still Has Fire

Just as it is possible to see the picture of a declining China that many defense analysts have clung to, we can also easily amass evidence to support the argument that China’s trajectory is positive. Long-term demographic trends in China suggest significant opportunities for growing the country’s economy, even if at a slower pace than the last decade.

First, despite the rapid pace of China’s population aging, the leadership has made few entitlement promises to the elderly and health coverage is sparse, meaning that the direct costs of aging are low.

Second, there will be fewer youth entering the labor market each year as the population ages. Even if China’s economic slowdown is inevitable and the supply of jobs is lower, the demand for them will be lower as well.

Third, the concern over so-called “excess males” in the Chinese population may be overblown. Differential growth in the male population could help China increase its national security through mobilizing surplus males for the state’s economic benefit. China has already recruited young men into large-scale public works projects both in its urban centers and its more remote regions. China has also been sending young men abroad to harvest natural resources on other continents for China’s benefit.

Finally, the Chinese political system allows leaders to focus on long-term planning, unlike the US system, which encourages policies that are politically expedient and take into account the never-ending election cycle.

Signs of US Decline

There are serious signs that the United States is actually the country in decline. Health care costs are sky high in the US, when compared with its peers, and particularly when compared with China. The role of interest groups in US policy making means that narrow interests—such as drug companies or organizations focused on protecting entitlements for seniors—have undue political influence. The US political system is sclerotic and polarized, and the country suffers from high national and personal debt.

Demographically, total life expectancy in urban China is only one year less than in the United States and healthy life expectancy (HALE)—the number of years a newborn can expect to live in “full health” (an adjustment of the life expectancy estimate)—is declining in the US. It is possible that Chinese could soon work longer than Americans.

Additionally, while it is true that replacement-level fertility in the US and continued immigration would prevent the country from aging as rapidly as Europe and Japan—and perhaps even China—the generational gap between old and young Americans bodes poorly for the future of US supremacy. Specifically, young Americans today face a host of serious challenges that will affect their long term economic prospects and, when aggregated, mean that the US in 2030 may be worse off than today.

First, the US has the highest rate of child poverty in the developed world.

Second, trends in education, particularly among minorities, are particularly worrisome considering that minorities will make up an increasing portion of the adult population over the next 20 years. Minorities accounted for 92 percent of the nation’s population growth in the decade that ended in 2010, but blacks and Latinos lag far behind whites in earning a college degree. For those that do manage to get an education, student debt is astronomical, while many recent graduates struggle to find employment. How will this generation take care of retired baby boomers when their own needs are so great?

Third, home wealth has been an important safety net for elderly Americans for generations. The current generation of young Americans differs from previous generations because many can’t afford their own homes. Their needs in old age will be greater than today’s elderly and their demands on state higher. As a result, it is entirely possible that today’s youth will be the first generation in a long time that will not be better off than their parents.

Bucking the Trends

Despite the preceding evidence, there is still reason to give credence to discussions about China’s demise and continued US supremacy. Chinese leaders are right to be worried about the divide in living standards between rural and urban inhabitants. There is also much uncertainty as to what today’s Chinese youth will want as adults. How might they be shaped by their greater educational opportunities, and in what ways will this translate to political demands?  Will they push China to adopt a more democratic political system where power is less centralized and interest groups gain influence?

The United States of America still has several aces as well. American creativity and ingenuity have historically played an important role in economic growth. The sheer size of the US economy and the country’s ability to recover from crises may also be important.

There are ample opportunities for the US to cement its place as the world’s most powerful state by turning more attention to domestic matters, specifically strengthening education—particularly for minorities—and balancing entitlement commitments with other national priorities, like defense. But rest assured, the Chinese will be working on their own domestic issues, as well.

Jennifer Dabbs Sciubba is Assistant Professor in the Department of International Relations at Rhodes College, Memphis, Tennessee, USA.