Understanding the impact of an aging population
As outlined in Economic Principals what we need and what we value changes as we go through various life stages. These individual changes also have a collective impact. This is more apparent when there is a distortion in the demographic makeup of a society, such as a generation ravaged by war. For example, World War One substantially reduced the number of men between certain ages in countries involved in that conflict. Conversely the so called ‘baby boomer’ generation substantially increased the number of people in society of a particular age range.
Society is currently undergoing a more subtle change because people are living longer. It is a change that is about to accelerate as the ‘baby boomers’ move out of the workforce and into retirement. There are several flow-on effects from this that societies and particularly governments are struggling to adjust to. Before we go into them in more detail, let’s recall that a key economic principal is that all value is relative and a core component of this relativity is life stage. This is a simple concept. What you value as a young child is different to what you value as a teenager. This changes again as you move through life as a young adult, as a single person, as part of a relationship, as a parent. It changes when you are part of the workforce, and when you retire. The collective impact of these different values, and how long we spend in each of these life stages, also has a significant impact on the economy.
For the purpose of this discussion life stage will be separated into three distinct economic stages, each with phases within them. The first of these stages we will call young dependent – most commonly childhood. During this stage an individual is not economically self-sufficient, progressing through phases of highly dependent, dependent and partially dependent. The length of time that an individual spends in each of these stages varies significantly between societies. The second stage is economic contributor – most commonly working adult. During this stage an individual is able to be economically productive. There are also several phases of this stage, although they are not always sequential. The phases of economic contributor are acquirer, provider, and neutral. The third economic life stage is old dependent – most commonly retirement. There are also several phases of this stage from self-funded, dependent through to highly dependent.
Throughout history the extended family unit supported individuals through various life stages with the economically active materially providing for the young and old dependents. The aged helped raise the young, and the term ‘it takes a village to raise a child’ had real meaning.
That was before the nuclear family. The family unit promoted as the ideal in the western world from half way through last century, consisted of a married couple and their children living as an isolated unit. It is no coincidence that this came about after the wide spread adoption of social security. It was only last century most developed countries choose to collectively support those who were unable to be economic contributors. In particular the young dependents were supported through government funded education, while the old dependants were supported via aged pensions. Other support mechanisms like fully funded health care and unemployment benefits were also introduced in many countries. Most societies were able to financially support these initiatives, and societies as a whole were richer for them.
The isolation of the family unit created a new way of life and with it new economic activity. With fewer people living in each dwelling, more housing was required. More houses occupied more land, larger cities require more infrastructures to support them, and individuals need more transport to get around. The creation of an urban society creates a great deal of economic activity. The big winners are the landholders and developers. However the urban sprawl is expensive to maintain, and the cost to the individual in terms of time lost to commuting, is enormous. The emotional strain of the nuclear family is also high. Divorce, suicide and domestic violence rates continue to climb at alarming rates as people fail to achieve the happy life continuously marketed to them through an omnipresent media.
But it is not just the nuclear family that is feeling the strain. Governments are struggling to meet the commitments they have previously made to support those who are unable to be economic contributors. The aging in the population and the increased cost of some of these individual benefits is making the existing models unsustainable in many countries. While the escalating cost of health care is definitely an issue, the underlying problem is quite simple. The relative portion of an individual’s life when they are economic contributors is getting shorter.
Two centuries ago, the age an individual became an economic contributor was much lower than it is in western society today. This is particularly true in societies in which the majority now get a tertiary education and so do not become economic contributors until their twenties. On average this has probably added at least seven years to the young dependent stage. At the other end of life, retirement is lasting significantly longer. Even 50 years ago most people spent less than a decade in retirement. Today retirement often extends for 15 years or more. Consequently two decades of dependence have been added to an individual’s lifespan, two decades that need to be funded.
There are also other knock-on effects of people living longer that impact on the generation that follows. First among these is the timing on inheritance. The most financially demanding stage of an individual’s life is as young parents. Half a century ago it was not uncommon for this to coincide with some inheritance. Today it is more common that the next generation will be either on the cusp of retirement or retired when they receive any inheritance. This has a substantial financial impact – particularly on the cost of servicing debt. The second knock-on effect of people living longer is on the cost of housing. Simply there are fewer houses to go around and so the cost of housing is higher. Combine these two factors and the young adults of today will need to borrow more money to pay for their homes and spend longer in debt before they receive any financial assistance by way of inheritance, assuming they want to emulate their parents lifestyle. This situation is a fundamental shift in the economic landscape.
Advances in medicine have also come at a cost. An ever increasing proportion of the money spent on health is spent on the aged. By some estimates over half of an individual’s medical expenses will be in the last two years of their life. An increasing number of people are questioning whether the cost of prolonging life is worthwhile, particularly if it does not also prolong the quality of life.
Prolonged life span is also changing the shape of democracy. An ever increasing proportion of voters are not economically active. Subsequently there is more concern being given to the elderly than the next generation. This is evident where governments reduce spending and support for services such as education while funding pensions and healthcare.
Perhaps we should not be surprised that the next generation are disappointed and disillusioned by their governments. The question is what are they going to do about it?
Recap
- Reward for effort – the next generation will obtain less reward for effort during their productive stage so they can fund their non-productive years
- Value is relative – different life stages value different things
- Trade requires difference in value – different circumstances create unequal values
- Money is a catalyst – delaying inheritance increases the cost of living for the next generation
- Trade creates economic ecosystems – changing demographics change the ecosystem
- Economic measurements are incomplete – moving aged care outside the family increases GDP, but actually costs society more