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posted on 26 March 2016

Along With America, The World Is Graying

from the Atlanta Fed

-- this post authored by Charles Davidson

Much of the world is undergoing a fundamental demographic shift. Most developed nations, in fact, are graying even faster than America. Among large developed countries, only Russia was younger than the United States in 2012, according to the U.S. Census Bureau. Japan, meanwhile, has aged more - and faster - than any other country.

This demographic wave originated as a global baby boom that started right after World War II. The boom is following its predictable course: it produced lots of children, then a quarter-century later lots of working-age adults, and now lots of elderly people, according to Population Aging and the Generational Economy: A Global Perspective, a 2011 book edited by Ronald Lee, director for the Center for the Economics and Demography of Aging at the University of California-Berkeley, and Andrew Mason, professor of economics at the University of Hawaii at Manoa.

A surge in fertility meant the portion of children in the world's population swelled to a peak in 1975, Lee and Mason write. Then the second wave began in the mid-1970s as the huge baby-boom cohort entered adulthood, initiating rapid growth in the working-age population.

Rising numbers of workers, supplemented in some countries by greater numbers of women entering the workforce, fueled economic growth. Some economists and demographers even labeled this phenomenon a "demographic dividend."

The coming Old World

Now a third demographic phase is beginning: global growth in the older population. Worldwide, the working-age population in 2011 outnumbered those 60 and older by 4 to 1, according to Lee and Mason. By 2050, that ratio is projected to drop to 2 to 1.

"This third phase of the global age transition is without precedent," they write. "Populations in the future will be much older than ever before in human experience."

This phase will present fiscal and economic challenges. Older people are net consumers - they consume more than they produce - and compared to working-age adults, more of the consumption of the elderly is publicly funded. In the United States, for example, about 35 percent of the consumption of 75- to 79-year-olds in 2011 was financed publicly, versus roughly 20 percent of the consumption of those aged 40 to 44, according to the National Transfer Accounts, a database maintained by researchers at the University of California-Berkeley and the East-West Center in Hawaii.

So far, Japan offers a cautionary example

No country has aged as much or as quickly as Japan. The share of Japanese people 65 and older, nearly 25 percent, is already larger than the portion of Americans who will be elderly in 2050, the Census Bureau reports. (See chart 5.)

Japan offers a cautionary tale in grappling with the fiscal challenges of a rapidly aging population. As recently as 1990, Japan was the youngest of the "Group of 6" large, developed countries, Atlanta Fed economist Anton Braun and coauthor Douglas Joines of the University of Southern California write in a 2015 research paper. But the graying of the baby-boomer generation, combined with low fertility rates - the same forces changing the makeup of the U.S. population - produced rapid aging. From 1990 to 2005, the share of Japan's population 65 and older rose from 12 percent to 20 percent.

Along with sluggish economic growth since 1990, the rapid aging of the Japanese population has been associated with a dramatic increase in government debt, Braun and Joines found. Japan's net public sector debt increased from 8 percent of its GDP in 1990 to 150 percent of GDP in 2012. Meanwhile, spending on social insurance nearly doubled to 31.4 percent of government general account expenditures in 2013.

The accumulating debt is worrisome, Braun and Joines point out, because the government will spend even more on public pensions and medical care as the population continues to age. In other words, the fiscal challenges will only intensify.

A key measure of a country's capacity to support pay-as-you-go programs for the elderly is the so-called old-age dependency ratio - the proportion of the population 65 and older compared to those 18 - 64. Japan's dependency ratio will peak around 2080 at some 88 elderly residents for every 100 working-age people, Braun and Joines note.

By comparison, the United States' old-age dependency ratio is expected to crest at about 37 elderly residents for every 100 working-age people in 2040, according to the Census Bureau.

Repairing Japan's fiscal imbalances will require both higher taxes and cuts in government spending, according to Braun and Joines. "We find that Japan faces a severe fiscal crisis if remedial action is not undertaken soon," they wrote.

In Braun's view, the main lesson from Japan's experience: the longer policymakers wait to take action, the worse the situation becomes, and thus the more severe the actions they must take.

For more information on the economic situation in Japan, read a transcript of the podcast with Braun and Professor Masaaki Shirakawa, former governor of the Bank of Japan.

Source

https://www.frbatlanta.org/economy-matters/annual-report/2015/fiscal-math-is-daunting.aspx

About the Author

photo of Charles Davidson

Charles Davidson

Staff writer for Economy Matters

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