It’s “Science Sunday”, when I curate something from my firehose of science information
How aging is shaking up our societies
As the beginning of the baby-boom generation reaches its 80th birthday, all developed countries are affected by historic aging, accelerated by the recent drop in the birth rate.
The budgetary shock – pensions and healthcare – will be major.
20 October 2024 (Athens, Greece) – I wanted to go a bit wider today on the “science porthole” and share a few bits from the Le Monde series on aging.
In March 2024, conglomerate Oji Holdings announced that it would cease manufacturing baby diapers in its Japanese factories. It now prefers to concentrate on the much more lucrative adult diaper market. Still in Japan, “All my foreign friends find escalators incredibly slow,” said Jesper Kroll, a German economist who has lived in the country since 1985. “That’s because a decade ago, new rules called for their speed to be reduced by 15%, to make life easier for the elderly.”
Welcome to our future.
Japan is the oldest country in the world, with almost 30% of its population over 65. Italy – second on the podium – will reach the same level by the mid-2030s, followed by Germany in the next decade. According to UN projections, all developed countries will be there by 2060.
In France, where a slightly higher birth rate has somewhat delayed the impact, this demographic shift is expected to occur around the 2070s, although estimates are uncertain. Across the wealthiest nations, the population has peaked at 1.3 billion and has begun a gradual decline, with a projected loss of around 100 million inhabitants by the end of the century, according to the United Nations. In Japan, the total population has been falling for 15 years, now at a rate of 2,300 people a day.
“Good news”
In economic terms, this slow but inevitable demographic phenomenon represents a major upheaval. Said Vincent Touzé, an economist at the French Observatory of Economic Cycles (OFCE):
It means we’re living longer, including in good health. But we still have to deal with the consequences. First and foremost, it’s good news. It means we’re living longer, including in good health. But we still have to deal with the consequences.
Jesper Kroll (the chap I noted above) also stressed one positive aspect:
In Japan, the balance of power between employees, who are fewer in number than before, and companies has shifted. In a company like Mitsubishi, young people used to beg for a job just a few years ago; today, they ask what the company can offer them. Salaries, once based purely on seniority, are more regularly linked to performance, and the Japanese now change companies more often during the course of their careers. Women’s participation in the workforce has also risen sharply.
But the huge downside comes from public finances.
Japan, with a debt level of 260% of gross domestic product (GDP), foreshadows the future for most European countries. According to estimates by the British bank HSBC, the UK’s debt is set to rise by 35 percentage points of GDP by mid-century due to demographic effects alone, increasing from nearly 100% of GDP today to 135%. For Eurozone countries, the increase would be 25 points on average by 2045, with France seeing a 30-point rise, according to the European Commission. At a time when debt is already a major issue and spending on defense and climate transition is urgently needed, budgetary trade-offs are likely to become increasingly difficult.
Economically, the aging of the population has three main effects:
1. slower growth
2. higher public spending
3. political and social risks
The slowdown in growth is straightforward: the active population, in other words, those with jobs, is shrinking:
• Over the past decade, Japan has lost an average of 1% of its population aged 16 to 65 each year.
• Italy has seen a decline of around 0.5% per year and has lost around two million people in this age category over the same period.
• Germany faces a comparable situation. Unless there is a sharp rise in productivity, fewer people working means less growth. And that means less tax revenue.
At the same time, the rise in public spending is just as straightforward. We have to pay more for pensions, healthcare and dependency care.
The European Commission did the math: It estimates that, on average, in the eurozone, countries will have to spend an additional 1.2% of GDP per year by 2040 because of the demographic effect. Fewer people need to finance more spending.
Rapid demographic decline
Aging is nothing new, but it has “accelerated” since the Covid-19 pandemic. The drop in the birth rate we’ve seen over the last four or five years has been particularly sharp. For a long time, demographers thought that the birth rate would gradually fall toward Japan’s level, around 1.2 children per woman, which is already a long way from the natural replacement rate of 2.1.
But Korea is now at 0.7. That would be enough to cut Korea’s population by 60% by the end of this century. We’re talking about a demographic problem that not many people have grasped yet.
In May, the Korean president, Yoon Suk Yeol, announced a “national emergency” due to several factors:
• overly long working weeks
• huge disparities between men’s and women’s salaries that discourage people from taking maternity leave
• unaffordable housing and a sharp drop in the number of marriages.
There are many explanations for this phenomenon, but the sudden drop in births has taken everyone by surprise.
Based on this, many believe that the UN’s median projection of a slow population decline in the richest countries is probably wrong. They predict a much faster decline, which would drastically alter the outlook. Instead of a decline of 100 million people by the end of the century in these countries, it would be 450 million people, meaning a third fewer people.
The phenomenon is spreading to many emerging countries, where people are getting old before they get rich:
• In Thailand, the working-age population (16-64) has been declining for a decade.
• In China, it is stagnating, and the end of the one-child policy in 2016 has had little impact on the birth rate: with 9 million births and 11.1 million deaths, its population declined in 2023 for the second year running. The authorities in Beijing are beginning to consider raising the retirement age, currently 50 for women and 60 for men.
Under these conditions, countries are faced with particularly difficult political choices. You have to raise taxes, or lower pension levels, or raise the retirement age.
But each of these options is extremely unpopular.
Another solution could be to increase the active population, for example by getting more senior citizens to work or by increasing immigration. Here again, the debate promises to be tense. However, one of these things will have to happen.
In practice, countries mix and match measures. In one part of the series, Le Monde noted:
In Japan, pensions were increased in 2023, but by less than inflation. As for healthcare reimbursements, they have been restricted, with high earners paying 50% out of pocket, compared with 10% until recently.
Pension systems everywhere are becoming less generous:
• Germany raised the retirement age from 60 to 65, then to 67.
• In Sweden, it will be 64 by 2026, but above all, the system requires financial equilibrium.
In concrete terms, pensions are reduced if financial ratios are not respected. This was particularly the case after the 2008 financial crisis. Emmanuel Macron’s pension reform is unlikely to be undone, though minor “cosmetic” adjustments may be made. The demographic math is there, and I don’t see how it can be repealed.
As in France, these changes often take place amid immense political tension. Elsa Fornero, Italy’s minister of labor and social affairs from 2011 to 2013, still remembers with a shudder her opponents’ cries:
La Fornero al cimitero” (“Fornero to the cemetery”). It’s with a feeling of vertigo that I remember, minute by minute, the 20 days that led to the reform.
In the midst of the eurozone crisis, Italy’s back was against the wall. In just a few weeks, Fornero had to reduce access to early retirement and push back the retirement age, sparking widespread public outrage. Matteo Salvini, leader of the far-right League party, capitalized on this anger, promising to repeal the reform. When he came to power, he merely scaled it back.
What about immigration? In response to labor shortages, even traditionally less open countries are shifting their stance. In 1985, there were 300,000 non-Japanese living in Germany. Today, it’s 3.2 million.
The subject is obviously a hot one, as evidenced by the rise of the far right throughout Europe and the U.S. Even so, immigration may be easier politically than other options such as cutting pensions and limiting health reimbursements.
Finally, the environmental aspect of this debate often goes unmentioned. Le Monde pointed out that population decline is a good thing for the planet: from the point of view of sustainable development, a population that doesn’t explode is positive.
But the problem is how to manage the period when the number of elderly people will be very high in relation to the working population.
It’s going to be a question of two or three generations.