1. QNB Economics
economics@qnb.com
March 1, 2014
Weekly Commentary
Age Matters for Economic Performance
According to a recent UN study, between 2010
and 2050 about 1.25bn people will be added to
the global population aged 60+, while the
number of people under 25 is projected to hold
steady at 3bn. This implies that an
increasingly smaller share of the population
will be working, the so-called support ratio,
while older people will depend on public
transfers, their children or their own assets to
sustain their old-age consumption.
Declining support ratios are already an acute
problem in countries like Germany, Japan and
Spain. These countries all experienced a baby
boom after World War II. As that generation is
now retiring, the support ratio is falling
rapidly. According to a 2011 International
Monetary Fund (IMF) study, declining support
ratios in these countries are expected to
depress economic growth by an average 0.7
percentage points (pps) a year over the next
four decades.
Declining support ratios will also be a problem
in China, albeit somewhat later in time. As
part of the one-child policy, China experienced
a significant decline in the average fertility
rate between 1979 and 2009. As a result, its
Support Ratio and GDP Per Capita, 2010-50
(% and USD)
1. 0
Support Ratio, Annual Growth Rate, 2010-50
Age matters for economic performance. When
comparing the growth rates of advanced
economies, many commentators often forget
that Europe and Japan have a larger
percentage of their population above the age of
60. Such aging population has a direct impact
on economic performance, fiscal policy and
asset allocation. It is also a critical indicator for
long-term financial sector developments.
Nigeria
Ke nya
0. 5
P h ilippines
In dia
0. 0
Positive GDP
effect
In donesia
Brazil
-0. 5
Ch ile
Negative GDP
effect
USA
C h ina
Spa in
Ge rmany
J a pan
-1. 0
0
10,000 20,000 30,000 40,000 50,000 60,000
GD P Per Capita, 2012
Sources: IMF and QNB Group analysis
support ratio has started to decline recently
and will become more acute as the population
born prior to 1979 starts to retire. The IMF
estimates that the overall impact on the
Chinese economy will be lower average
growth rate by 0.4pps a year between 2012 and
2050. In the United States, where population is
aging more slowly, a larger share of the
population is made of immigrants from other
countries, and life expectancy is lower, the
IMF estimates that the impact of declining
support ratios on growth will be 0.3pps over
the same period.
The biggest policy challenge of declining
support ratios is how to pay for old-age
consumption. In countries with welldeveloped pension and social safety nets,
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2. Weekly Commentary
governments are increasingly seeing a larger
proportion of their expenditures devoted to
pension benefits for older people. Since 1990,
public pension spending has increased by
1.25% of GDP in advanced economies. Without
an increase in the retirement age or a reduction
in pension benefits, such trends could
jeopardize public finances and lead to
unsustainable public debt burdens. Taxing the
young to pay for the old also has its limits. As
in the case of Greece and Italy, excessive
taxation leads the young to emigrate, thus
further exacerbating the declining support
ratio. An alternative is to facilitate
immigration, like in the United States, so as to
increase the share of the working population.
In countries without social safety nets, it is left
to the younger generations to support their
parents through family transfers. This,
however, also has a similar impact on private
finances as public finances to the extent that
younger generations have to work harder to
support their older parents and may not save
sufficiently for themselves. Where tradition
requires younger generations to care for the
old, the extent to which such family transfers
work well depends critically on current
economic conditions. The experience in these
countries during a recession suggests that the
old are the ones that pay the highest economic
price when the economy turns sour.
QNB Economics
economics@qnb.com
March 1, 2014
The final way to pay for old-age consumption
is for the old to sell their assets. In advanced
economies, the largest asset usually
accumulated during a lifetime is in the form of
real estate. As the support ratio falls, retirees
may use the equity accumulated in their house
to finance their consumption. This could result
in the outright sale of the house or, as in recent
years in the United States, a reverse mortgage
where the owner of the house receives
monthly payments from a bank in exchange
for giving up an ever larger equity share in
their house. In this context, declining support
ratios could be a leading indicator of lower real
estate prices.
Population aging has also significant
implications for the financial sector. In
countries with aging populations, the demand
for pension annuities, reverse mortgages, and
private medical and disability insurance are
likely to rise. In addition, private asset
management will grow in importance as public
pensions will increasingly become a less
reliable
form
of
financing
old-age
consumption. Overall, the financial sector has
a critical role to play to smooth consumption
across different age groups, a function that is
likely to rise in significance over time.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
joannes.mongardini@qnb.com.qa
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
rory.fyfe@qnb.com.qa
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
ehsan.khoman@qnb.com.qa
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
hamda.althani@qnb.com.qa
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