Saturday 8 June 2013

Ageing: From peril to promise

Asean societies are ageing, but this should be welcomed rather than feared
By Kanwaljit Soin, Published The Straits Times, 7 Jun 2013

AGEING is often regarded as a negative word. But is it really a harbinger of woes? A closer look suggests that many of the problems expected in South-east Asia as the population ages can be managed more easily than is generally believed. In fact, with careful planning there are good reasons to expect a society with a significant proportion of older people to be markedly richer.

Ageing societies are generally defined as having a rising percentage of the population over the age of 65. Since 2010, several Asean countries, including Singapore and Thailand, have fallen into this category. By 2020, countries such as Vietnam, Indonesia, Myanmar and Malaysia will join the group. By 2050, all the Asean countries except the Philippines, Laos and Cambodia will become aged.

Factors underlying this trend include increased longevity, declining fertility, and the effects of the baby boom in the late 1940s and 1950s. Urbanisation is also increasing life expectancy by making it easier for populations to access health services. Migration may also play a role, with Indonesia, the Philippines and Vietnam being labour exporters and Singapore a labour importer.

Demographic changes such as these matter because at both the beginning and end of life, there are extended periods of dependency. The elderly and children consume more resources than they produce through their own labour.

For the last 30 years or so, Asean has had a demographic profile that has supported economic growth. With large numbers of young people joining the workforce, the region has benefited from what has been called the "demographic dividend". At the same time, decreasing fertility has enabled a greater proportion of young women to participate in the labour market.

Now that these countries are ageing, will the elderly be a burden on these economies?

Older and richer

ACADEMICS Andrew Mason from the University of Hawaii and Ronald Lee from the University of California at Berkeley have shown that there are essentially three basic sources of old-age income support.

These are private transfers, public transfers and asset-based reallocations. An asset acquired in an earlier period of one's life can be used to support consumption in later life either from income derived from the asset or by disposing of the asset.

Familial transfers (private transfers) fund about one-third of the life-cycle deficit for the elderly in Thailand. In Indonesia and the Philippines, the elderly rely almost entirely on assets. And in the Philippines, the elderly provide as much support to their families as they receive. Where Indonesia, the Philippines and Thailand are concerned, the elderly are net taxpayers under the current tax and spending programmes and therefore net public transfers are zero.

All this suggests that these countries will not see their fiscal support ratios decline in the next 40 years. The fiscal support ratio is defined as the ratio of aggregate taxes to aggregate benefits. When this does not decline, it indicates fiscal sustainability as far as population ageing is concerned.

In any case, the role of the public sector is small in Asean when it comes to public transfers to the elderly. The issue of fiscal sustainability matters less because there are few large public transfer programmes in the first place.

The needs of a growing elderly population can also be met through greater reliance on life-cycle saving. If this is put into practice, then population ageing will lead to an increase in assets, and this in turn will have favourable consequences for economic growth. The academic studies mentioned earlier suggest this scenario will lead to a "second demographic dividend" which can bring about higher standards of living that persist long after the positive effect of the first demographic dividend has ended.

The demographic profiles of 2050 may seem too remote to matter much to us now. However, we have to remember that the elderly population of 2050 is the working population of today. Their current behaviour, especially their saving habits, will affect their prospects in retirement.

Singapore is an interesting example because it has institutionalised this saving approach to ageing through its Central Provident Fund (CPF) scheme. Singaporeans are required by law to save a high fraction of their earnings (about 30 per cent) through mandatory contributions to the CPF. The fund enables one to pay for the purchase of a home. It also provides an old-age pension through enforced savings accumulated during one's working life. The result has been high rates of saving, investment, and economic growth.

This is quite different from the pension systems in other countries such as those in Europe and Latin America. These provide for retirees out of current taxes and therefore have no positive growth effects.

Fewer babies to spend on

ANOTHER concern associated with population ageing is that the workforce will decrease, lose its vigour and jeopardise prosperity, which depends crucially on the size and quality of the workforce. However, a 2010 analysis by academics David E. Bloom, David Canning and Gunther Fink in the Oxford Review Of Economic Policy counters the specific argument about a shrinking labour force. It is true, they argue, that the labour force participation rate has been declining and part of this change can be attributed to population ageing.

However, we have to factor in the falling fertility rates in this equation. Because of the decreased fertility, the labour force as a share of the total population has been increasing, and is expected to continue doing so through 2050. Thus, one of the most widely cited fears about population ageing - that there will be a crushing rise in elderly dependency unless the labour force participation of the elderly drastically increases - appears to be unfounded. The age dependency ratio will increase, but the youth dependency ratio will decrease as well. Thus, the total dependency ratio is hardly affected. In other words, the increase in elderly dependants will be more than offset by a decline in youth dependants.

Living longer but healthier

THE effect of a "compression of morbidity" phenomenon in which anti-ageing technologies and healthier lifestyles have increased lifespans has also led to the retirement age being raised in many countries. In Singapore, the retirement age has been raised to 65. Because they are more healthy and active than their predecessors, it is safe to assume that many baby-boomers, especially those not in manual labour, will be able to work productively much longer than previous generations.

The promise of population ageing lies in the fact that it should lead to an increase in the accumulation of assets. This is because an increase in life expectancy leads to a longer expected retirement. thus, the tendency to accumulate more during the working years will increase.

With lower fertility, fewer resources will also be devoted to child rearing and more to savings for retirement.

Older individuals are generally wealthier because they have had more time to accumulate savings and assets. Hence, a population composed of more old people will have greater wealth per capita. Difficulties will occur only if governments adopt policies that adversely affect the ability of current workers to prepare for their future retirement.

To gain the full benefits of an ageing population, incentives need to be put in place to change the behaviour of working populations so that there is greater reliance on life-cycle saving. Incentives are also needed to encourage healthy ageing, lifelong learning, and a labour market that does not include age discrimination.

Calibrated international migration from more youthful countries should also be encouraged. This is feasible because some countries in Asean are ageing less slowly than others and the common Asean market is slated to open in 2015.

An ageing society is not necessarily something to be feared. Rather, it is a promise to be embraced.

The writer, a consultant orthopaedic and hand surgeon, is the immediate past president of WINGS, the Women's Initiative for Ageing Successfully.

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