Challenge Of Ageing Population

Challenge of Ageing Population

Synopsis: The ageing of the population has become on of the major talking points of modern economics and its implications for world growth in the future. This essay examines the causes of the demographic shift by focusing

on the changes in mortality and fertility experienced by the developed and developing world. It then attempts to answer some of the questions about the economic implications of ageing populations, including implications for future economic growth, the government's fiscal position and the level of national savings. It concludes by presenting policy options that the government may adopt to offset the negative effects associated with population ageing.

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Around the world most developed and rapidly developing economies are beginning to be confronted with the same problem - the ageing of the population. While it may seem like a recent phenomenon, demographic data indicates that it has been slowly occurring over the past two centuries. What is remarkable is the accelerated pace at which it has been occurring in developing countries, and as such affects virtually all advanced economies throughout the world. We will examine through the rest of this essay the causes and implications of this demographic shift for the World's economies, as well as some suggested remedies.

The ageing of the population implies that the average age of the population is increasing. This is occurring as a direct result of declining mortality, people are living longer, and declining birth rate, there are fewer young people. These two demographic variables seem irrevocably linked to growth in developed countries, with mortality and fertility falling as countries become more prosperous.

Mortality appears to fall first as an economy experiences strong growth. Weil (2005) identifies three forces that account for the mortality transition:

i) Improvements in the standard of living.

ii) Improvements in public health measures

iii) Role of medical treatments in curing diseases.

All of the above forces generally can be causally linked to improved economic conditions, and thus the direct link between falling mortality and economic growth.

Now while decreases in mortality have been significant, this is not sufficient to explain the ageing of the population in itself. This is especially the case because much of the reduction in mortality has been in the earlier years of a human's life, particularly infant mortality. Which without the subsequent fall in fertility would result rather in a massive increase in population growth and a decline in the average age of the population as the youth percentage increases.

Rather what we notice is a significant decline in fertility rates. If we examine the trends in developing countries, where both the mortality and fertility transitions have been much more abbreviated and pronounced then the fertility transition occurs soon after the mortality transition. Before we examine the economic explanations it is important to first understand what exactly is meant by fertility.

"Demographers measure fertility by constructing an indicator called the total fertility rate (TFR), the number of children that a woman would have if she lived through all her childbearing years and experience the current age-specific fertility rates at each age." (Weil, 2005). Fertility rates have been falling in developed countries and are also falling in the newly industrialised countries in Asia. In the majority of developed countries, including Australia, the fertility rate has fallen below the replacement level.

This raises the question what is it about economic growth that causes women to have fewer children. First we need to distinguish if the decline in fertility is desired or undesired. The diagram below maps the total fertility rate for various countries against their desired fertility rate.

What is striking about the result is the close correlation between these two variables, with the TFR almost always greater than the desired fertility rate. This suggests that the fall in fertility is actually as a result of a fall in the desired fertility of woman. So the real question to answer is why desired fertility falls. Weil (2005) identifies four channels that may explain "what it is about development that leads to lower fertility:"

i) The effect of the mortality reduction: With a significantly reduced mortality families need to have less children to produce the same number of surviving adults

ii) Income and Substitution effects: higher incomes raises women's relative wages and thus the opportunity cost of children go up relative to household incomes.

iii) Resource Flows Between Parents and Children: In poorer countries children are often a form of insurance against old age, and are able to pay their own way at a much younger age than in developing countries.

iv) Quality-Quantity Trade Offs: A lot of spending on children is voluntary and may indicate that parents are choosing to invest more in a smaller number of children.

Despite the exact reasons for the mortality and fertility transitions, they are realities that are occurring and thus it is important to understand the implications for countries. As already mentioned the mortality transition tends to occur before the fertility transitions. As a result there is a period in which the country will experience a period of heightened population growth before fertility begins to decline. This raises the question what are the effects of heightened population growth for a country.

The Solow growth model with technological growth offers insight into the consequences for an economies level of income per capita and rate of economic growth as a result of changes in its level of population growth. Lets first have a quick overview of the model.

It uses the result that :

Where is the output per effective unit of labour (Y/(AL)) and is the capital per effective unit of labour (K/(AL)). This then generates the result

Where s is the saving rate, n the population growth rate, d the depreciation rate and g is the balanced growth rate which corresponds to gk and gA in the steady state. The Solow growth rate presumes that in the long