Growing Elderly Population
Workers wanted apply next century

Changing the balance between private and public welfare provision will not solve the long-run problems of an ageing population, economic historian Paul Johnson told a lunchtime meeting on 24 October. The fundamental problem the OECD countries would face in 2010 would not be the structure of their welfare systems, but rather the reduced productive capacity of the economy as a whole, caused by growing numbers of non-working elderly people, the tendency towards early retirement and very low fertility rates.
Paul Johnson is Lecturer in Social History at the London School of Economics and a Research Fellow in CEPR's Human Resources since 1900 programme. Financial assistance for the lunchtime meeting was provided by the Economic and Social Research Council, as part of its support for the Centre's dissemination programme.
The proportion of the population in OECD countries aged 65 and over will rise from 12.2% in 1980 to 17.9% in 2020 and 21.9% in 2040. The proportion aged 80 and over will rise even more sharply. As a recent OECD report showed, these demographic changes will impose enormous costs on public pension and health care programmes. If real pension and health benefits remain at their 1980 level, then the UK will need a growth in real earnings per worker of 0.84% per annum to pay for these demographic change, West Germany 1.8%, and Japan, which has the most rapidly ageing population in the world, 2.4%. The fiscal burden will grow to a level that may not be sustainable.
The root cause of population ageing lies not in our success in extending the life course, but in our failure to produce enough children. In 1950 all countries in Western Europe and North America had total fertility rates above the replacement level of 2.1; today only Ireland has above-replacement fertility, and in West Germany and Denmark the rate is as low as 1.4. Early next century, when the `baby-boomers' enter retirement, the ratio of workers to pensioners will change abruptly, putting into question the `implicit contracts' between generations in the economy and the family. The welfare contract is an implicit agreement between generations to pay contributions during the productive phase of the life cycle in exchange for benefits during childhood, unemployment, sickness and old age. In the early years of the next century a small working-age population will be faced with a very large retired population, increased asset accumulation among older people and a higher incidence of child poverty. These strains could lead to a breakdown of the welfare contract.
One solution would be to reduce the real value of pension benefits, a policy measure strongly advocated by the OECD. This was feasible, Johnson noted. In his own research with Peter Scott, reported in CEPR Discussion Paper No. 263, Johnson had examined the increase in old-age pension expenditures for 17 industrialized countries over the period 1960-83 and estimated the contributions to these increases made by demographic change and by changes in the level and coverage of benefits. The components attributable to policy changes displayed more variability across countries than did demographic factors, and they accounted for over two-thirds of the increase in expenditure.
Reductions in public spending may prevent Western welfare states from collapsing under the weight of their fiscal burdens, but they will not necessarily alter the economic cost of population ageing, Johnson argued. Whether retired people receive income from the state or whether they live off interest and dividend payments from their past savings, the goods and services they consume are part of the current output of the currently employed population. Even if, in the long run, income from private savings were to replace diminishing state pensions, there would be no net change in the proportion of current output consumed by the non-productive elderly.
Sustained high rates of economic growth could provide an answer to population ageing, Johnson noted. Discussion Paper No. 263 showed that, between 1960 and 1983, many nations experienced increases in real pension expenditures of over 100% without giving rise to intolerable financial burdens. Changes in the balance of public versus private welfare provision do not, however, address the long-term problems of population ageing, solutions for which should instead be sought in changing patterns of work, Johnson argued.
The recent trend towards early retirement is striking. In 1961 92.7% of men in Britain aged 55-64 were in employment, today the figure is 66.4%; while the proportion of men over 65 in employment has fallen from 23.7% to 7.6%. Some of these changes, especially in early retirement, are a consequence of affluence and wider choice for individuals over decisions about work and leisure. Increasing the labour force participation of older workers would ease the problems caused by ageing. There was no reason why the line between productive and non-productive ages had to be drawn at 60. At present, however, workers and employers have little incentive to press for an increase in retirement ages. Johnson's recent research on male participation rates across industries in the UK (in Discussion Paper No. 284) suggests that the main reason for the change in retirement patterns has been the desire of employers to shed older workers who, because of seniority bonuses and incremental pay scales, are earning more than their marginal product.

Other policies could be introduced in the longer term. The fertility rate could be increased by providing comprehensive childcare facilities and generous cash benefits for mothers. While the private cost of having children remains so high, there is little likelihood of `active citizens' responding in sufficient numbers to the public need for higher fertility. It was also imperative to make better use of the shrinking stock of human capital, increasing skill levels and productivity by channelling more resources into educating, training and retraining future generations of workers.
After the talk Johnson was asked why reductions in state pension benefits would not simply encourage individuals to save more for their old age. He referred to recent econometric research which found that no link could be proven between state pensions and private saving behaviour. Johnson did suggest, however, that there may be a case for moving away from universal state pension provision in order to relieve the burden on the government budget. In response to another question, Johnson observed that though female labour force participation rates had been more stable than male rates in industrialized countries, they were still at a generally lower level. This created considerable scope for increasing the productive potential of the economy, as did pools of unemployed workers.