For most of the twentieth century the populations of the developed countries have been ageing, owing to both a long-run decline in fertility and an increase in life expectancy. This is likely to continue, as fertility rates are not expected to rise appreciably and as the postwar `baby boom' generation reaches old age early next century. Such long-run demographic changes can have profound im- pacts on the economy, both by altering the proportion of the population available for work and by increasing the demand for welfare services. The ageing of the developed countries has so far had little impact on labour supply, since it has been offset by the decline in the relative size of the child population, but over the next 40 years the ratio of `dependants' to those of working age will rise sharply in all countries.
In Discussion Paper No. 263, Peter Scott and Research Fellow Paul Johnson assess the extent to which the labour supply and welfare implications of an ageing population are determined by government policy, rather than demographic pressure. They examine the increase in old-age pension expenditures for 17 countries over the period 1960-83 and estimate the contributions to this increase of demographic change, changes in benefit coverage and changes in benefit levels. The analysis reveals a high degree of variation across countries in the relative importance of these factors, but policy changes account for over two-thirds of the increase.
Scott and Johnson use IMF forecasts for the major industrial countries for 1975-2025, based on two different sets of assumptions about fertility and life expectancy. In all the countries examined, except Canada and Japan, pensions constituted the largest single item of social welfare expenditure in 1980. In Canada and the United States, the figures for the growth of pension expenditure relative to GDP (assuming unchanged policies) actually decline until 2010, and rise only moderately thereafter. France and the UK have rising expenditure ratios, with the 2025 figures less than 50% above those for 1980. Italy and Germany experience larger increases, while the ratio of pensions to GDP for Japan is more than twice the level of any other country except Italy.
The authors also consider the impact of expenditure on health care and education, again assuming unchanged real benefit levels. The figures imply a large increase in real social welfare expenditure up to 2025, ranging from 70% in Canada to 361% in Japan. When viewed as a percentage of GDP, however, the increases are less dramatic; in one scenario social welfare expenditure will actually fall as a proportion of GDP in Canada and Britain, and the increases in the other countries are all under 12%. Such increases should not impose intolerable burdens provided that the steady increase in welfare and health expenditure on older people is not continued.
Scott and Johnson note that, between 1960 and 1983, many nations successfully bore a doubling of real pension expenditures. Moreover the present proportion of elderly people in Germany, Austria and Sweden is only slightly below the level expected to be the peak for the North American population in the next century. They conclude that the most important determinant of the ease or difficulty with which developed countries will cope with the ageing of their populations over the next 40 years will be the overall rate of economic growth. This challenge will be made harder, however, by the projected rise in the proportions of LDC populations of working age

The Economic Consequences of Population Ageing in Advanced Societies Peter Scott and Paul Johnson

Discussion Paper No. 263, July 1988 (HR)