DEPARTMENT OF SOCIAL POLICY AND SOCIAL WORK

‘Old Europe’ – pensions, taxes and alternatives

David Coleman University of Oxford david.coleman@spi.ox.ac.uk http://www.spi.ox.ac.uk/oxpop

Population ageing: an unavoidable destiny

Population ageing good for young populations. Older population structure here to stay – an irrevocable

feature of mature society. A consequence of beneficial reductions in death and birth

rates. A sustainable youthful population would require a return to

high birth and death rates. Population age-structures will eventually stabilize, given

constant vital rates (i.e. ageing does not get worse and worse).

However longer life means even older populations, but changes meaning of ‘old age’.

A warning from the 1930s. Source: Population Investigation Committee 1936 ‘The Future of Our Population?’.

Population structure circa 1700 at the then lowest possible level of mortality. Best kept in the past.

Expectation of life at birth male 37 years, female 40 years. Infant mortality = 193 infant deaths per 1000 live births.

Population aged under 15 years 28%; population aged 65 and over 7%. Growth rate zero.

Source: Coale and Demeny West Level 9 model life table. Population pyramid, stationary population with female e0 = 40 years (percent of total)

6.0 4.0 2.0 0.0 2.0 4.0 6.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

male female

The demographic transition in England and Wales 1730 – 2009. Sources: England up to 1836 Wrigley and Schofield

1981 ; England and Wales from 1837 ONS.

-10

0

10

20

30

40

50

1730

1738

1746

1754

1762

1770

1778

1786

1794

1802

1810

1818

1826

1834

1842

1850

1858

1866

1874

1882

1890

1898

1906

1914

1922

1930

1938

1946

1954

1962

1970

1978

1986

1994

2002

Rat

es p

er th

ousa

nd p

opul

atio

n

Vital Rates, England / England and Wales 1730 - 2009.all rates per thousand population. Sources: up to 1837 Wrigley and Schofield 1981, for England only. 1838

onwards, civil registration for England and Wales (OPCS / ONS).

Crude Birth Rate

Crude Death Rate

Rate of Natural Increase

Examples of youthful, and ageing, populations (one showing positive momentum; the other negative).

Population by sex and age, Uganda 1991 (percent)

25.0 20.0 15.0 10.0 5.0 0.0 5.0 10.0 15.0 20.0 25.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

Age

-gro

up

Percent by sexMales Females

Population by sex and age, Italy 1998 (percent)

10.0 8.0 6.0 4.0 2.0 0.0 2.0 4.0 6.0 8.0 10.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

Age

-gro

up

Percentage by sex

Males Females

Evolution of a new age-structure in Austria 1: 1869 – 1934. Source: Demografische Informationen 1995/6 page 109.

Evolution of a new age-structure in Austria 2: 1951 – 1995.

Evolution of a new age-structure Austria 3: 2015 – 2050.

Theoretical relationship between proportion of population of working age and total fertility.

Source: Bloom, Canning et al. 2010 Figure 3.

Causes of population ageing

Lower fertility (‘ageing from the bottom’). Always makes populations older. The main force behind population ageing during the demographic transition. In developed societies now giving way to effects of:

Lower mortality (‘ageing from the top’). Makes populations YOUNGER when death rates are high, OLDER only when death rates are low.

Total Fertility trends TFR trends Major Regions 1950 - 2006

unweighted means. Source: Council of Europe, Eurostat, national statistical offices

1.0

1.5

2.0

2.5

3.0

3.5

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

CEE unweighted meanSouthern unweighted meanFSU unweighted mean (excluding Moldova)Northern EuropeWestern EuropeUSA

TFR trends UK and comparable countries 1950 - 2009

Total Fertility trends, UK, Northern Europe and 'Neo-Europes' 1950 - 2009 (unweighted means)

Sources: Council of Europe, Eurostat and National Statistical Yearbooks

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

Mea

n To

tal F

ertil

ity

NeoEuropes mean

Scandinavia mean (excludingIceland)

UK

An uncertain future: ‘lowest-low’ fertility in the Far East

Total fertility trends, Japan and the Far East 'little dragons' to 2006Source: national statistical offices.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Hong KongSouth KoreaSingaporeTaiwan ROCJapan

Birth rates can go up…. Total Fertility trends, industrial higher-fertility countries 1945-2008

Source: Council of Europe, Eurostat and national statistical yearbooks

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.519

45

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

Denmark

France

NZ

USA

Norway

United Kingdom

Period expectation of life at birth 1850 - 2000, E&W. Source: ONS.

30

40

50

60

70

80

90

1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

Exp

ecta

tio

n o

f li

fe (

year

s)

Males

Females

Period expectation of life at age 65, 1850 – 2000, E&W.

6

8

10

12

14

16

18

20

1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

Exp

ecta

tio

n o

f li

fe (

year

s)

Males

Females

Actual and projected expectation of life at birth, UK 1981 – 2083. Source: ONS 2009.

UK population by age and sex 2006 UK population distribution by age and sex 2006

(percent)

4.00 3.00 2.00 1.00 0.00 1.00 2.00 3.00 4.00

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

males females

UK population distribution by age and sex 2056 (percent) GAD 2004-based PP assumptions

-4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

males females

A worse case: Japan 1920, 2010, 2060. source http://www.ipss.go.jp/pp-newest/e/ppfj02/suikei_g_e.html

http://www.ipss.go.jp/site-ad/TopPageData/2010.png

From ‘bonus’ to ‘onus’: India and China in 2050. Source: United Nations.

Contrasts in demographic bonus - population of China and India 2050 by age-group (millions). Source: United Nations 2006-based projections.

0

20

40

60

80

100

120

140

0-4

5-9

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65-6

9

70-7

4

75-7

9

80-8

4

85-8

9

90-9

4

95-9

9

100+

China 2050India 2050

China dependency ratio: 63.9India dependency ratio: 48.5

Problematic aspects of population ageing

Lower birth and death rates increase the aged dependency ratio, only partly relieved by lighter youth dependency ratio.

Generally adverse effects on economic production/consumption balance.

Specific problems: labour shortage, possible inflation, care arrangements for elderly, adequacy of pension provisions (last affected by longer life alone, even with constant birth rate)

Demographic dependency ratios are based upon the ratios of the population of nominal dependent ages to the population of nominal economically active age (irrespective of level of workforce participation). Conventional age-groups are 0-14, 15-64 and 65+. More realistically, as used by Eurostat, the conventional age-groups are 0-19, 20-59 and 60+. Total Dependency Ratio : Total Dependent Population = pop 0-14 + pop 65 and over * 100 per 100 Active Population pop 15 - 64 The youth and aged components of dependency can differ substantially and are often calculated separately. Youth Dependency Ratio: Youth Dependent Population = pop 0-14 * 100 per 100 Active Population pop 15 - 64 Aged Dependency Ratio: Aged Dependent Population = pop 65 and over * 100 per 100 Active Population pop 15 - 64

The Potential Support Ratio is the reciprocal of the Dependency Ratio and indicates the number of persons in the nominally active population per dependent. In view of concerns about population ageing, it is most often encountered in the form of the Aged Potential Support Ratio, the number of active persons aged 15-64 per aged dependent aged 65 and over. e.g: Yemen 2000 UK 2000 Italy 2025 Italy 2050 Population 0-14 48.3 18.9 11.4 12.4 Population 15-64 49.4 65.3 63.0 48.1 Population 65 and over 2.3 15.8 25.6 35.7 Overall Dependency Ratio 102.4 53.1 58.7 107.8 Youth Dependency Ratio 97.8 28.0 18.1 25.8 Aged Dependency ratio 4.7 24.2 40.6 74.2 Aged Potential Support Ratio 21.4 4.1 2.5 1.4

Longer life after retiring age

Projected expectation of life 2004 based projectionsUnited Kingdom

at birth age 65males females males females

2002-03 76.8 81.3 16.8 19.62011-12 78.6 82.5 18.3 20.72021-22 80.3 84.2 19.8 22.12031-32 81.4 85.3 20.6 23.0

Potential Support Ratio, UK 1980-2100 GAD PP 1998-based. Population Trends 103

Figure 7 Ratio of persons aged 15-64 to those aged 65 and over, United Kingdom, 1980-2100

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1980 2000 2020 2040 2060 2080 2100Year

Rat

io

HF - HM

PP

HF - PMHF - LMPF - HM

LF - HMPF - LMLF - PMLF - LM

See Box 4 for keyProjected

Aged potential support ratio, selected countries 2000

and 2050. Source: UN 2004 medium variant.4.17 4.00 4.17 4.17

3.70

2.63

2.13 2.00

1.52 1.45

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

UnitedKingdom

France Germany Spain Italy

2000 2050

UK population – rapid growth but still ageing Population projection, United Kingdom 2008 - 2081 (millions).

Principal Projection and variants. Source: ONS 2009.

50

55

60

65

70

75

80

85

90

95

2008

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

2061

2066

2071

2076

2081

Principal ProjectionHigh MigrationLow MigrationNatural change (zero migration)

Immigration as demographic salvation

Do we need to be saved? Why should ‘no decline’ targets be met (UN 2000)? Is zero growth or decline axiomatically undesirable?

Immigration can keep population, or workforce size, approximately constant.

But that can require very large inflows; and adjustment difficult. Immigration can 'solve' population ageing only with huge population

increases. Given sub-replacement fertility, migration to maintain constant size

must eventually replace original population with immigrant population. Does a society ‘save’ itself that way?

‘Economism’ and ‘Demographism’ tend to ignore environmental and social problems of immigration and population growth.

Potential effect of migration upon age-structure. Source Eurostat 2011 Statistics in Focus 1/2011

Indian population, England and Wales Census 2001 (percent)

5.00 3.00 1.00 1.00 3.00 5.00

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90 +

percent of population

females males

Pakistani population, England and Wales Census 2001 (percent)

7.00 5.00 3.00 1.00 1.00 3.00 5.00 7.00

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90 +

percent of population

males females

No limits to migration? Immigration and the PSR

Population Trends 103 Figure 8 Support ratio under alternative assumptions, United Kingdom, 1980-2100(a) alternative migration assumptions

0.00.51.01.52.02.53.03.54.04.55.05.5

1980 2000 2020 2040 2060 2080 2100Year

Rat

io

Zero95,000 (principal)

500,000250,000

Long-term TFR: 1.8Long-term annual net inward migration: as shown

1,000,000

Projected

0.00.51.01.52.02.53.03.54.04.55.05.5

1980 2000 2020 2040 2060 2080 2100Year

Ratio

2.5

1.61.8 (principal)2.02.25

Long-term TFR: as shownLong-term annual net inward migration: 95,000

Projected

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 2000 2020 2040 2060 2080 2100Year

Rat

io 65

69686766

7071

72Long-term TFR: 1.8Long-term annual net inward migration: 95,000

Net Annual Immigration required to maintain UK Potential Support Ratio, 2000 -

2100 (millions)

0

1

2

3

4

5

6

1998

2000

2010

2020

2025

2030

2040

2050

2060

2070

2080

2100

mill

ions

UK population size required to maintain given PSRs by immigration, 2000 - 2100 (millions)

0

50

100

150

200

250

300

35020

00

2010

2020

2025

2030

2050

2060

2080

2100

PSR 3.0 PSR 3.5 PSR 4.22

All the world must go to live in Korea

0

1000

2000

3000

4000

5000

6000

700019

95

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

mill

ions

UN Medium variant population Population from PSR replacement migration

Can higher fertility save the day? Only up to a point.

Replacement TFR (2.08) would eventually maintain population size and raise PSR to near 3. If no net migration, no popn. growth

TFR would need to rise to about 3.5 to ‘preserve’ current PSR of about 4.

That would raise population growth rate to about 1.8% per year: considerable population growth though not as great as ‘equivalent’ effect with immigration.

Effects on UK PSR of different fertility levels (Population Trends 103)

0.00.51.01.52.02.53.03.54.04.55.05.5

1980 2000 2020 2040 2060 2080 2100Year

Ratio

Zero95,000 (principal)

500,000250,000

Long-term TFR: 1.8Long-term annual net inward migration: as shown

1,000,000

Projected

0.00.51.01.52.02.53.03.54.04.55.05.5

1980 2000 2020 2040 2060 2080 2100Year

Ratio

2.5

1.61.8 (principal)2.02.25

Long-term TFR: as shownLong-term annual net inward migration: 95,000

Projected

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 2000 2020 2040 2060 2080 2100Year

Ratio 65

69686766

7071

72Long-term TFR: 1.8Long-term annual net inward migration: 95,000

How to restore UK PSR to about 4 by 2056 (i) TFR of 5.5

0

10

20

30

40

50

60

70

2006

2016

2026

2036

2046

2056

2066

2076

2086

UK population 2006-86. Major age-groups (percent of total)

.

0-14

15-64

65 and over

50,000100,000150,000200,000250,000300,000350,000400,000450,000500,000

2006

2016

2026

2036

2046

2056

2066

2076

2086

United Kingdom. Population projection 2006-2086 (thousands).

OXPOP projection

ONS Principal Projection

1.02.03.04.05.06.07.08.09.010.0

2006

2016

2026

2036

2046

2056

2066

2076

2086

United Kingdom 2006-86. Aged potential support ratio

4.0 3.0 2.0 1.0 0.0 1.0 2.0 3.0 4.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+

UK population distribution by age and sex 2006 (percent)

females males

-10.0 -5.0 0.0 5.0 10.0

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

UK Population distribution by age and sex 2086 (percent)

females males8.007.006.005.004.003.002.001.000.001.002.003.004.005.006.007.008.00

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

UK population distribution by age and sex 2026 (percent )

females males

How to restore UK PSR to 4 by 2056. (ii) increase net annual immigration to 800,000.

50,000

70,000

90,000

110,000

130,000

150,000

170,000

190,00020

06

2016

2026

2036

2046

2056

2066

2076

2086

United Kingdom. Population projection 2006-2086 (thousands).

OXPOP projection

ONS Principal Projection

0

10

20

30

40

50

60

70

2006

2016

2026

2036

2046

2056

2066

2076

2086

UK population 2006-86. Major age-groups (percent of total)

.

0-14

15-64

65 and over

4.0 3.0 2.0 1.0 0.0 1.0 2.0 3.0 4.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+

UK population distribution by age and sex 2006 (percent)

females males

-4.0 -2.0 0.0 2.0 4.0

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

UK Population distribution by age and sex 2086 (percent)

females males5.00 4.00 3.00 2.00 1.00 0.00 1.00 2.00 3.00 4.00 5.00

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

UK population distribution by age and sex 2026 (percent )

females males

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2006

2016

2026

2036

2046

2056

2066

2076

2086

United Kingdom 2006-86. Aged potential support ratio

Demography isn’t everything Ageing Vulnerability Index 2003

Public Fiscal Benefit Elder

Overall Index Burden Room Dependence AffluenceRank Score Rank Rank Rank Rank

Australia 1 -1 2 2 4 6UK 2 7 1 1 6 11US 3 18 3 4 3 1Canada 4 42 6 6 5 2Sweden 5 48 4 3 8 10Japan 6 50 9 9 1 3Germany 7 52 7 5 11 5Netherlands 8 62 8 7 9 4Belgium 9 63 5 8 10 9France 10 81 10 10 12 8Italy 11 84 11 11 2 12Spain 12 93 12 12 7 7

weight 1/3 1/3 1/6 1/6

Source: Jackson and Howe 2003, Figure 18

Managing population ageing

Improve the actual support rate (a) increase workforce participation •  retraining unemployed, discouraging early retirement and perpetual students, •  more flexible labour market arrangements •  help women to combine work with childcare (part-time work, school hours)

(b) increase the average age of retirement •  increase pension entitlement age •  remove tax and other disincentives for working pensioners •  end of ‘cliff-edge’ retirement.

Moderate financial burden •  limit state pension, 'second and third pillar' funded pensions .

Increase labour productivity

Real support ratios- lower or much lower than ‘potential’ ones

Real aged support ratio: number employed / number of pensioners

Real overall support ratio: Number employed / number of pensioners + working age not employed + children

Effect on EU15 labour force of Danish participation rates

Potential increase in EU 15 workforce , 1999, given Danish participation rates (millions)

0

5

10

15

20

25

30

35

40

Economically active Actually employed

all males females

Effects on UK PSR of higher retirement ages Population Trends 103

0.00.51.01.52.02.53.03.54.04.55.05.5

1980 2000 2020 2040 2060 2080 2100Year

Rat

io

Zero95,000 (principal)

500,000250,000

Long-term TFR: 1.8Long-term annual net inward migration: as shown

1,000,000

Projected

0.00.51.01.52.02.53.03.54.04.55.05.5

1980 2000 2020 2040 2060 2080 2100Year

Rat

io

2.5

1.61.8 (principal)2.02.25

Long-term TFR: as shownLong-term annual net inward migration: 95,000

Projected

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 2000 2020 2040 2060 2080 2100Year

Rat

io 65

69686766

7071

72Long-term TFR: 1.8Long-term annual net inward migration: 95,000

Effective retirement ages, men, 2000 – 2009. Source: OECD

57

59

61

63

65

67

69

71

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Australia

Austria

belgium

Czech  republic

Estonia

Japan

Spain

Sweden

Pension variety and reform PAYG unfunded, directly vulnerable to population

ageing, cheap to administer, state system, huge vested (voter) interest.

Occupational funded, employer and employee contribute, can promote investment, vulnerable indirectly to population ageing. ‘Final salary’ schemes now unaffordable, being dropped.

Private funded, employee only contributes, and takes risk.

But reform is difficult…..

Global defined-benefit pensions: ratio of liabilities to assets. Times 8 Feb 2011 Business p. 12. UK assets $2.3 trillion

Protests against austerity turn nasty – Greek general strike , Athens 2011. Times 24 February 2011

Conclusions No demographic ‘solutions’ for inevitable population ageing.

Some pain unavoidable. ‘Replacement’ migration for total and working-age

population difficult, for age-structure a fantasy. Return to fertility closer to 'replacement' very helpful, but still

no ‘solution’. Non-demographic management crucial. ‘Doomsday’ or ‘timebomb’ scenarios assume no adaptation

by public policy or the market. Management much more difficult if birth rates persistently

low, as in Italy, Japan. Countries in Southern Europe disadvantaged by low fertility,

low mortality, low participation rates, early retirement, , strict employment protection, high PAYG pensions.

Management needs parallel reforms of workforce participation, retirement age, pensions funding, capital investment, productivity improvement.