Squaring the ageing circle is one of the most pressing economic challenges of our time

Life expectancy is increasing as the working-age population dwindles, how do we maintain our quality of life?

November 29, 2021
Senior citizens in Japan. With one of the world's fastest ageing populations, the country has become a real-time experiment in how other countries might face the challenges brought by low fertility and low mortality rates © Jeremy Sutton-Hibbert / Alamy S
Senior citizens in Japan. With one of the world's fastest ageing populations, the country has become a real-time experiment in how other countries might face the challenges brought by low fertility and low mortality rates © Jeremy Sutton-Hibbert / Alamy S

Although living to a ripe old age is a cause for celebration, everyone knows we will eventually run up against quality of life and care problems as our capacities diminish. Less well known, though, is that ageing societies pose totally different problems for the economy and financial stability. The former is about us and our relatives, and primarily related to higher life expectancy. The latter is about us as a society, and is primarily about the slump in fertility. We can adapt to ageing only if we develop good coping mechanisms.

With fertility having fallen in the UK to 1.63 babies per woman—well below the population replacement rate of 2.04—we aren’t having enough children to become workers to replace the baby boomers, who are steadily withdrawing from the labour force. UK fertility is by no means the lowest in the world, but our age structure is rising steeply. In the mid-sixties, just after the last baby boomers were born, the over-65s represented 12 per cent of the population. Soon they will account for about 20 per cent, and about 25-30 per cent by the middle decades of the century.

By contrast, the UK’s stagnant 39m-strong working-age population, in the 20-64 bracket which accounted for over 60 per cent of the population a decade ago, is predicted to drop to about 51 per cent by mid-century. That means that the old age dependency ratio (older citizens as a proportion of working-age people) is going to rise from about 32 per cent today to about 47 per cent by 2050. That’s the same as saying that today’s 3.1 workers per older citizen will have dwindled to two by 2050.

Our demographics are worrying but, with relatively better coping mechanisms, the UK is a sort of tortoise in the ageing stakes around the world. Other slower-ageing places include the United States, Scandinavia, Australia and Canada, and numerous emerging countries where the big ageing trends won’t kick in for another 15 or more years. The hares, by contrast, include much of western and eastern Europe, Russia and China.

Rapid ageing is unique in human experience, and of concern because a stagnating or falling working-age population is associated with weaker economic growth, lower savings and investment, and, as a result, lower productivity, which is at the heart of living standards.  

The relentless rise in age-related spending on health, social care and pensions is also a big deal, with major tax implications. In the October Budget, the government reported that about half of the additional £30bn added to departmental budgets is slated to go to health and social care. Age-related spending, already predicted to rise to just over 14 per cent of GDP by 2024-2025, is inevitably going to grow further.

How can policymakers help us to cope with ageing?

There are only three things that can be done to compensate for the hit to the working-age population. None involve central banks. In Japan, the world’s real-time ageing experiment, the Bank of Japan (and its huge recourse to quantitative easing) has had no role—though the government has had some success in developing new coping mechanisms. It will be the same in the UK and elsewhere. 

Immigration can, at the margin, boost the labour supply, but few countries are keen on this nowadays. Countries with traditionally high immigration rates like the US, Canada and Australia have enough incomers to keep their working-age population stable. In the UK, by contrast, post-Brexit immigration policy may remove a prop we have relied on. Faster-ageing Japan and Germany have both allowed greater immigration in recent years, to change the structure of their societies. 

Policymakers need to try and increase the participation in work of two groups who are typically under-represented, namely women and older workers. In the UK, labour force participation—the proportion of the working-age population in work—is quite high, at about 80-90 per cent for people aged 30-60. After that the rate drops off precipitously, to about 20 per cent for those aged 65-69, and even more rapidly thereafter. Even though the participation rates of older men and women have risen in recent years, the levels remain relatively low.

By the age of 65, the majority of citizens are not working or looking for work, with only 40 per cent of men and 30 per cent of women still working. In the 50-64 age group, three times more women than men work part-time in less well-paid and less satisfying jobs. Increases in the statutory pensionable age—due to rise to 67 from 2026-2028 and 68 from 2037-2039—and changing attitudes towards the employment of older people have helped to expand participation overall. But much more needs to be done with respect to training and up-skilling, as well as workplace culture, conditions and facilities. With more older people at work, contributing to output and paying tax and national insurance, it’s a win-win for the Treasury and for older citizens.

As for increasing the participation of women in the labour force, most would likely have higher rates (especially in higher-skill and higher-paid jobs) if they had readily available and affordable childcare. Indeed, it is curious to note that countries with the best childcare facilities tend to have higher fertility rates. Addressing poor or expensive childcare would help to increase both participation and fertility rates. Japan, which has typically had a very low female labour participation rate, deliberately chose to try and change this about a decade ago. It has now increased that participation rate from 48 to almost 54 per cent, overall. This still lags behind the UK and US, but not by much.

Finally, productivity growth is simultaneously the most potent coping mechanism and also the most elusive, but if tomorrow’s workers are more productive than today’s, the economics and finance of the ageing problem might be solved. The government clearly has a very broad “to do” list, which spans the educational attainment levels of younger people as they enter the workforce; the training needs of workers on and off the job during their working lives; and facilitating industry-wide research and development. This includes not only green and new technology initiatives and incentives, but also creating an environment in which technological advances can spread from creators and developers to users in the more humdrum parts of the economy.

Fundamentally, the government needs to take a holistic approach to our ageing society. It is self evident that government must address the problem of who is going to look after grandma and grandpa, so to speak, and who is going to pay for it. Yet it also has to address the other half of the question, which is how—in the face of ageing-related population and labour market changes—our society can adapt and our living standards be protected. The task of developing our coping mechanisms in response to ageing is becoming more pressing and more expensive. And we don’t have that much time.