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A mature response to ageing

It's time to grow up and stop treating pensioners as a problem.

Phil Mullan

Topics Politics

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Life expectancy in industrialised countries has been extending by two-and-a-half years each decade for the past 150 years (1). A cause for celebration? You’d think so.

But when this fact was reported, it became the focus for more outpourings about the problems of ageing populations – which coincided with the high-profile closure of several company final salary pension schemes. Clearly, the panic about ageing has consequences.

Fears about the unaffordability of older populations are leading to governments and other institutions taking actions that make things worse for older people. Spearheaded by the rolling back of state pension and care provision, these measures threaten to consign many individuals to a retired life of relative poverty. And yet there is really no reason why these measures should be necessary.

The ‘ageing problem’ is usually perceived through the framework of the older generation’s dependence upon the young. It is said that old people depend on younger ones, not only for care and support, but also for the economic productivity that ensures pensions can be paid and health and social costs met.

Longer life expectancy is assumed to mean shrinking workforces. Consequently, it is argued, the existence of more dependent people in their retirement years will present a greater, and unsustainable, financial weight for the relatively fewer number of workers to bear.

The most popular device used to substantiate this claim is the rising dependency ratio – or its inverse, the falling support ratio. The support ratio measures the number of people of working age for each older person. ‘Working age’ is defined as men aged between 16 and 65 and women aged 16 to 60, and ‘older people’ as everyone above those ages. It is estimated that this ratio will fall from about 4.2 today to 2.6 in 2031.

At first sight, it seems logical that, as there will be progressively fewer people of working age to foot the bill for each pensioner, the cost of supporting elderly people will escalate to a level that is unsustainable. But a fact that is commonly missed is that the number of working people ‘supporting’ each pensioner has already fallen much more dramatically – from 14 in 1900 to 4 in 1990. The support ratio is extremely misleading as an indicator of the ‘unsustainable’ burden of rising elderly dependency.

It is misleading for several reasons. Because of rising productivity, each of these supporting workers will be that much more productive in 30 years time. The worker in 2031 will probably be the equivalent of almost two workers today. The support ratio, therefore, does not compare like with like.

These statistical ratios also fail to account for the fact that the rise in the proportion of elderly people tends to be offset, at least partly, by a fall in the proportion of the young. Those below working age also require support; and over time the overall age dependency ratio is remarkably constant. It is no coincidence that total age dependency ratios are relatively stable. The inevitable corollary of ageing populations is a falling proportion of young people. Over long periods, falling fertility has been the main contributor to population ageing.

Of course, it is not inevitable that there is an equivalent financial trade-off between the average annual cost of raising a child up to working age and supporting an average person in retirement. The relative costs will vary both historically and between countries; and studies have produced estimates showing ratios both above and below equivalence. Yet whatever the precise relationship, falling youth ratios clearly bring substantial financial compensation.

It is also a myth to imagine that nobody over ‘working age’ contributes to economic wealth. In Britain in 1999, 15 percent of men between 65 and 69 were economically active, as were 30 percent of women between 60 and 64.

More significantly, millions of people of working age do not work. In Britain, this accounts for about 11million people; and in most advanced countries, the proportion of working-age people who do not work represents between a quarter and a third of the working-age population.

So a truer ratio of dependency would measure the aggregate number of pensioners (let’s ignore the fact that some work for the purposes of this illustration), children and non-working adults of ‘working age’, compared to the number of people employed.

At first sight this modification makes the dependency ratio seem much ‘worse’ – with fewer than one worker (about 0.8) supporting each dependent today. But this is a fairer reflection of just how productive each of those workers is. Already each worker can support about two people – himself and one other. In 30 to 40 years, each working person will probably be able to support four at today’s living standards, on the basis of quite modest growth in labour productivity.

Two consequences follow from looking at the true ‘economic’ dependency ratio. On the basis of the official ageing projections over the next 30 years, the increase in this ratio is anticipated to be about 14 percent, only a quarter as big as the increase in the elderly dependency ratio. This is a much less dramatic shift for the panic-mongers to point to. Moreover, labour market changes are a far more significant influence on the economic dependency ratio than shifts in the age balance.

Employment rates

Changes in labour market activity rates, and especially employment rates, affect the real support ratio much more than the changing age structure.

Participation rates (those who want to work of the working-age population) and employment rates (those in work) are more variable and volatile than the age structure of a population. They reflect economic conditions and the level of demand for labour directly. They express wider social changes too – such as the increase in numbers of women in work, and the way that the expansion of higher education has reduced the number of younger workers.

As a result of this variability and volatility, participation and employment rates are also – at least potentially – more under society’s control than the age structure.

Employment rates fluctuate for social and economic reasons between countries, regions and times. For example, the national employment rate varies from about 50 percent in Italy to 60 percent in Germany and France, to 70 percent in Britain and to 75 percent in the USA and Japan. The reasons for these differences have nothing directly to do with population ageing. Levels of economic activity, labour market structures and socio-cultural differences (for example, in rates of female employment) are the more important determinants.

This means that if, in abstract numerical terms, demographic ageing were to produce any net decline in the real support ratio, there is plenty of scope for the active labour force to grow and compensate.

The idea that ageing brings a potential labour shortage cannot be substantiated. This is particularly true in relation to the future employment rate among older people. The greater capability of older people and, for many, the greater wish to work, could result in a labour force that is more than adequate to cope – even were the impossible to happen, and productivity stagnated for the next 30 to 40 years.

The UK Government Actuary’s Department estimates that the numbers of people at work in 2030 will be 27.2million – 44.5 percent of the total population of 61.1million. This is compared with 27.6million in 1999 – 47.8 percent of a total 57.7million. To maintain the same ratio of workers to dependants in 2030, then, would require 47.8 percent of 61.1million, which is 29.2million workers. This means getting another two million people into work.

An extra two million workers in Britain would mean an increase in the employment rate by about five percent. This is far from a major challenge, especially over a period as long as 30 to 40 years. For example, if Britain raised its current employment rate to the level of the USA today, that would do it.

Much of the average five percent change required across the working population could result from increased participation rates, where participation is currently relatively low. Female activity rates today are about 72 percent, against the male 84.5 percent. If female rates continue to rise and plateau at only 80 percent, most of the increase is achieved. Given that the baby boom generation of women is the first to be more equally engaged in social production, we can anticipate that participation rates for women in their 40s and 50s and, perhaps to a lesser extent, 60s will increase markedly over the next 20 years.

The example of female employment shows how ‘spontaneous’ labour market changes can offset the economic impact of ageing populations. It also shows the potential for policy measures to increase employment rates to the benefit of all – working and non-working.

The early retirement trend of the past 25 years shows another source of additional labour. Prior to 1980, about 75 percent of men between 55 and 64 were economically active; today it is 40 percent. Earlier retirement gained momentum mainly for economic reasons, and certainly not for demographic ones. Early retirement became a more acceptable substitute for even higher levels of unemployment, and state benefits and occupational pension schemes were often geared to promote this outcome.

Politically, early retirement was convenient for governments; and financially, it was attractive to companies, especially those with final salary pension schemes.

A reversal of the social and economic pressures encouraging or fostering earlier retirement would allow higher rates of productive employment and also give people a greater freedom to choose what to do with their lives. Early retirement is not only an enormous waste of potential – it is likely that many of these early retired would choose to work if they had the opportunity.

In general, older people both below and above the current pension age are more capable of work than in the past. Ageing populations are healthier and fitter populations. This is not just some happy coincidence. One of the reasons populations age is the direct and indirect impact of reduced morbidity at all ages. This especially applies to developed countries, where the greatest ageing effects from falling fertility have mostly run their course.

Ageing from above (relatively more living longer) grows in relative importance to ageing from below (relatively fewer being born, resulting in a rise in the average age of the population). Because people enjoy healthier lives they are more likely to live longer and be healthier at an older age.

Healthier older people undermine the assumption that ‘elderly dependency’ and falling support ratios are inevitable, and somehow natural. Lower age-related morbidity means that older people will be able to work longer. There is no fixed age at which people become unable to work. Being 50 or 60 or 65 or 75 today is not the same as it was 75 or 30 years ago, nor will it be the same as in 30 years time.

Far from the actual labour market shrinking as populations age, it has enormous potential to expand, as improved health mitigates any physical reason for either early retirement trends or for forced retirement at age 65.

People over the designated pension age do not suddenly change from being a productive citizen to being a worthless dependent. Even today, it is wrong to assume that all people above state pension age have fallen out of the labour market. And as healthy life expectancy continues to rise, the numbers of old people capable and keen to work will rise too.

When these factors are taken into account, it is clear that there is great potential within British society for regional, gender, and particularly age-related shifts in employment rates to compensate for any age-determined adverse movement in the real support ratio. Even if each of these shifts were to happen partially, it would be sufficient. So why the level of concern about our ageing society?

Fear of the future

Concerns about ageing are not rational responses to economic or labour market trends. There is no demographic inevitability leading to a falling support ratio. Rather, these concerns reflect the general sense of foreboding that people currently feel about the future.

Two major problems result from this fear about ageing. Actions that are being taken in response to the perceived ageing crisis are making the future a less hospitable place for all of us. And panic-mongering about the burden of an ageing population is reinforcing the stigma surrounding old age.

This has a real impact upon the way in which society is organising around demographic changes. Most industrialised societies have so far failed to adjust appropriately to the extension of healthy life expectancy. If the support ratio does fall it will be because society fails to make work available for those who want it – especially older people.

Instead of embracing the circumstances where older people can play full active and independent lives for longer, we do too much to encourage, if not force, older people to shut down too early. Employment legislation, pension regulations and retirement practices perpetuate outdated social conventions in treating people designated as ‘retired’ as being past their sell-by dates. From being productive citizens in work one day, we move into retirement and a state of dependency the next.

This is not driven by physical or mental incapacities, but simply by a social incapacity to cope with greater longevity. And in consigning older people to this reduced status, we produce the genuine problem of social and economic dependency.

The problem is not ageing but our failure to embrace the opportunities ageing brings with it. We need to make it possible for older people to live active and independent lives for longer. There is spontaneous pressure in this direction, but a number of social and institutional barriers, from forced retirement to the assumption of a fixed state pension age, are holding it back. We need to remove these barriers and make retirement flexible, reversible and a matter of choice.

If compulsory retirement – especially applying to many public sector workers – were ended and attitudes became more amenable to later and flexible retirement, a spontaneous force would offset the additional financial cost of more dependent elderly. More of the non-dependent elderly would contribute through work to help expand national economic output, and paying more taxes to fund welfare programmes.

This would surely be far better than consigning sixty-somethings, and even fifty-somethings to the scrap-heap, and then bemoaning the burden they place upon us.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA))

Read on:

spiked-proposals: Pensioners, by Phil Mullan

Going for grey, by Phil Mullan

(1) Science, 10 May 2002

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Topics Politics

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