Challenges, opportunities in a ageing world

Globalisation has enabled the rise of developing nations - the G8 have become the G20. And while no one believes that the playing field between developed countries like the United States and in Europe and other nations will be completely levelled any time soon, it will undoubtedly be flatter.

According to a recently-released report by Nomura Securities, all regions will see a rise in median population age, with developing countries experiencing the most rapid growth rate. This higher median age is the result of three factors.

First, says John Llewellyn, Senior Economic Policy Advisor for Nomura (a post he previously held at the Organisation for Economic Cooperation and Development (OECD)), people everywhere are living longer except in the very poorest countries. On average, life expectancy is increasing three months each year. A child born today will likely live eight years longer than his or her parent.

Second, birth rates are declining. This trend began with industrialisation in the 1840s. As incomes increase, birth rates fall. And lastly, notes Llewellyn, in countries like the UK, Canada and the US, the much publicised 'baby boom' occurred following World War II. Boomers now account for about 30 per cent of these workforces though they will start retiring in droves within about three years.

In developed countries, the conventional view is that older populations will strain pension schemes and ratchet up health costs. The primary concern is expressed in what demographers call the old-age dependency ratio which is the number of working age persons (15-64 years old) per older person (65 and older).

This ratio, which is expected to double by 2050, is presumably a measure of the financial burden that older people place on younger people. Observers have sometimes hyped the importance of this measure by suggesting that the result could well be inter-generational conflict. Observers also believe that employers will have to retool corporate systems to deal with older workers. This means redesigning incentive structures to entice older employees into staying in the workforce. Many think this includes giving older workers more flexible working hours (so they can spend time on other pursuits) and providing training.

This economic reordering also involves a less visible but powerful shift from old to young. In developed countries, the population is getting significantly older. By 2024, for example, more than one-third of Japan's population will be over age 65 making it one of the oldest in the world, according to the McKinsey Global Institute. That flips economic dynamics upside down in countries like Japan. When current retirees were 35, the Institute notes, they saved 26 per cent of their disposable income. That has now fallen to just 6 per cent. Retired households will also exceed those in their prime savings years, so that overall savings are likely to fall further.

Without savings, Japan's financial wealth will decline and eventually fall. Moreover, Japan has been a net exporter of savings. However, in the future the opposite is likely to be true and Japan may become a net borrower. Thus, as its large current account surplus dries up, other nations - particularly the United States, will have to find other sources.

In Europe, a similar situation is being played out in countries like the United Kingdom, Germany and Italy but with variations. Together these countries are expected to account for a loss of $4 trillion (Dh14.69 trillion) in financial wealth through 2025 than if growth rates were to continue at historical levels. The same is true in the United States where concerns are particularly acute with regard to the social security system that provides old-age benefits.

Why is this of concern to a place like Dubai? Perhaps the most worrisome aspect is the possibility that financial markets will be adversely affected. High savings during prime working years by baby boomers increased the supply of investable capital causing interest rates to decline. Now as boomers draw against their investments, the supply of investable capital will constrict driving up real interest rates and reducing the values of bonds and corporate shares.

That, the scenario suggests, is likely to further slow economic growth. Higher interest rates would mean higher borrowing costs which effectively reduces the number of productive investments companies can make. Basically, the effect is similar to the recent financial crisis, though perhaps less severe. From regions with excess liquidity, like the GCC countries, this could also mean opportunity.

Additionally, the Nomura report has identified a number of business opportunities that are likely to evolve from the ageing trend. These include, for example, growth in the sales of nutritional supplements in the consumer sector, generic drugs in pharmaceuticals (based on a desire for more cost-effective medications), and package holidays in the leisure industry.

Rethinking old age

The reality is that while ageing is an interesting development in human civilisation, characterising it as a crisis is bit florid. The United Nations Programme on Ageing, for example, notes that currently one out of every ten person is 60 years or older. That is expected to rise to one in five by 2050 and one in three by 2150. But time horizons like these suggest a gradual process of adjustment, not generational chaos. Indeed, one could argue that the ageing anomaly is not that populations are getting older, but that they were considered old in the first place. Llewellyn has reached a similar conclusion. For example, it's typically assumed that an older population will significantly increase medical costs.

But Llewellyn notes that the increases begin about 36 months before death with the preponderance of these costs near the end. Healthcare costs will increase, he says, but this "will be small compared to healthcare costs in the last year of life."

Also, though older people are less productive especially in jobs requiring physical labour, the loss is exaggerated. This is especially true for knowledge workers despite minor declines in cognitive ability. For example, older people are less able to make intuitive leaps as well as younger people. Still, research has amply demonstrated that older people often more than compensate for loss of mental acuity by using age-accumulated wisdom. "Loss of productivity can also be offset with training," says Llewellyn.

The productivity issue is also rooted in the self-concept assimilated by older people. People are 'old' because they are told they are old. They are told they are old, particularly in developed countries, because of retirement systems. Retirement systems, in large part, are poorly conceived responses to the obsolete need to provide jobs for the boomers when they came of age. Older workers were shunted onto the golf course to make way for job-seeking boomers. Absent the clear-the-decks motive, older workers are thrown into an entirely different light. For example, evidence from the US suggests that staying on the job may have a positive impact on both mental and physical health.

Barriers to re-admitting older people into productive society are formidable. So far, few companies have done much to retain older workers. Deep-set bureaucratic biases also persist. In France, for example, youth employment concerns from the 1980s still dominate official thinking.

This is "bad economics," says Llewellyn because the idea that only a fixed number of jobs exist to be shared by everyone is fallacious. "Supply creates its own demand," he observes. So if older workers continued to be productive, demand for products and services would increase as will. Moreover, older workers would earn their own way posing no burden on younger generations.

"The psychology of getting older has to change." Llewellyn seems cautiously optimistic noting, for example, that government bureaucrats face no budgetary reason for removing the constraints on productive ageing. Meantime, they must continuously grapple with how to fund retirement and other old-age related programmes. "Besides," says Llewellyn, "economic thinking has moved on a bit."

- Rod Monger is an independent journalist who writes on economic, business and political issues.