By: David Sinclair

As Governments (particularly Western ones) have started to see light at the end of the Covid-19 tunnel, Finance Ministers have returned to dreaming of better economic futures. “Build Back Better” has become the UK and US mantra over the past 9 months.

Governments, their economic advisors and the media, have been quick to jump back on the “ageing is a risk to our economy” bandwagon. China has decided that letting people have more children will help, whilst the new Australian Intergenerational Report and the EU 2021 Ageing Report flag concerns about the impact of ageing on the economy. The UK Fiscal Risk Report, published in July, highlighted that “Ageing is a key long-term pressure on the public finances”.

The pretty consistent global narrative is:

1. Health is expensive and the cost is growing due to ageing. Health inflates at a higher rate than economic growth. Health productivity isn’t high enough, whilst innovations and new treatments add costs and demand.
2. The cost of paying for care is growing. But while most of care isn’t provided or funded by the state (it’s done by unpaid carers), people are falling through the gaps and not getting the support to do want they want and need across their lives. The quality of state supported care and support isn’t great in many places and more spending is likely to be needed over the long term.
3. Pensions are expensive but reforms are happening (increasing age of eligibility, reducing generosity) which mean they won’t cost the state as much as we thought they might. This means though, that lots of people aren’t going to have an adequate retirement. The UK Fiscal Risks Report notes that “assuming average retirement ages do not rise commensurately, that implies people will need to save more to fund more years spent in retirement.” And they aren’t doing that.

With the “ageing tsunami” narrative back on the agenda, it’s a time for expectation management from our politicians. The UK Chancellor of the Exchequer is briefing a very tough spending review and preparing us for cuts.

It’s not a new development of course. Back in 2010, the Government’s Spending Review pointed out that we were in a new “era of substantially tighter spending”. Liam Byrne’s “there is no money left” letter for his successor as Chancellor might have been a joke but it heralded a decade where spending has been squeezed. COVID adds additional pressures for fiscal tightening.

But this isn’t just a UK issue. It’s a global one.

The recently published EU 2021 Ageing Report provides 400 pages of comprehensive analysis about the economic impact of ageing in every EU country. The Report argues that “the fiscal impact of ageing is projected to represent a significant challenge in almost all Member States.” While fertility rates across Europe are projected to increase, they are still expected to be below the population replacement rate.

The 2021 Ageing Report highlights that the EU population will decline and age over the long term and points out that the number of those aged 20-64 (“working-age population”) will ”decrease even more markedly – from 265 million in 2019 and to 217 million in 2070.

The EU analysts anticipate a growth in the number of workers. They attribute this change to pension reforms, but they still predict a fall in the labour supply.

Having said all this, the long-term picture is not as terrifying as sometimes painted. Average GDP across the EU is predicted to be relatively stable and age-related spending is projected to increase by 1.9% by 2070 (50 years’ time!).

The Australian Government has also been worrying about the cost of ageing. The recently published Fifth Intergenerational Report predicts increasing life expectancies and falling fertility resulting in slower economic growth. The authors also seem confident that “ageing will reduce labour force participation”.

The Report highlights a hit to inward migration as a result of COVID-19 and notes that that the Government was planning to invest AUS $7bn in response to the recent (and scathing) Royal Commission on Aged Care Report.

Like the EU though, it’s not clear that the numbers really are as scary as projected. GDP growth is projected at 2.6% per year compared with 3% over past 40 years. And real GDP per person is projected to “grow at an average annual rate of 1.5 per cent, compared with 1.6 per cent over the past 40 years”.

So do we need to panic?

Ageing is not going to cost as much as some people fear. The UK Risk Report recognises as much when they say “while there are certainly fiscal challenges facing the Government, including dealing with the rising costs of an ageing population and legacy of the pandemic, addressing them does not look unmanageable”.

It is notable is that very few of the panic driven headlines or reports emphasise the economic contribution older people make and how these could increase in the future (especially with an investment in health).

Too little modelling about the cost of ageing considers how an increasingly economically active older population could add to economic growth rather than take away from it. In countries that spend more in health, older people work, volunteer and spend more. (1)

The 400 pages of the EU Ageing report make no mention of older people as consumers. Yet in 2015, spending by older households in the G20 averaged 22% of GDP, amounting to almost USD 10 trillion, more than the combined GDP of Japan, Australia, Canada and Brazil.(1) This will grow as the population ages.

And perhaps the economists are also being too cautious about working longer. In 2014, workers aged 50 and over earned every third dollar in the G20 economy. By 2035, older workers are projected to generate nearly 40% of all earnings across the G20. The average unpaid contributions of older people across the EU and Turkey could be worth as much as 1.4% of GDP. That’s more than what these countries spend on defence.(1)

The models frequently assume that working age is a relatively fixed number (20-64 in the case of the EU report). Assuming that the “old age dependency ratio” is based on a fixed number of years work is simply folly. The average age of retirement isn’t fixed and will increase. And perhaps even the average age of entry to the workforce may fall if shorter degree courses emerge and we focus more learning across our lives rather than just at the beginning.

Yes we need to adapt our economies to more older people. We need to maximise consumption and economic and social contributions of all of us as we age.

But investing in health and care should be seen as a driver of growth rather than a cost of ageing.

So perhaps there isn’t really a need to panic.

Supported by Sanofi, ILC plans to this year publish country reports on the Global Longevity Dividend for the whole of the G20.

References

(1) International Longevity Centre-UK (2020). Health equals wealth: The Global Longevity Dividend.