4
Macroeconomic and Financial Impacts

Aging populations have enormous implications for the economic underpinnings of their societies. Different countries will face these challenges differently and affect each other in the global system.

GENERAL MACROECONOMIC OVERVIEW

Axel H. Börsch-Supan

Mannheim Research Institute for the Economics of Aging and University of Mannheim


Basic economic inputs—volume of labor, productivity of labor, and capital supply—are affected by an aging society. The general view is that the volume of labor declines in an aging society. The pool of workers shrinks relative to the ranks of the retired; society has the same number of consumers but fewer workers. The general view has also been that productivity declines in an aging society, as older workers are less productive. Finally, the common expectation has been that savings decline, as older people spend down their savings and the smaller working population cannot save enough to make up the loss of elder saving. The financial base of an aging population thus appears to be a shrinking pie.

But, Börsch-Supan asked, is the pie really shrinking? Does it have to? Increases in longevity have added 30 years to life, and these are healthy, active years characterized by slower aging. The financial base of an aging



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4 Macroeconomic and Financial Impacts A ging populations have enormous implications for the economic underpinnings of their societies. Different countries will face these challenges differently and affect each other in the global system. GENERAL MACROECONOMIC OVERVIEW Axel H. Börsch-Supan Mannheim Research Institute for the Economics of Aging and Uniersity of Mannheim Basic economic inputs—volume of labor, productivity of labor, and capital supply—are affected by an aging society. The general view is that the volume of labor declines in an aging society. The pool of work - ers shrinks relative to the ranks of the retired; society has the same number of consumers but fewer workers. The general view has also been that productivity declines in an aging society, as older workers are less productive. Finally, the common expectation has been that sav - ings decline, as older people spend down their savings and the smaller working population cannot save enough to make up the loss of elder saving. The financial base of an aging population thus appears to be a shrinking pie. But, Börsch-Supan asked, is the pie really shrinking? Does it have to? Increases in longevity have added 30 years to life, and these are healthy, active years characterized by slower aging. The financial base of an aging 

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 GRAND CHALLENGES OF OUR AGING SOCIETY population shrinks, he argued, only if current retirement age is main- tained, if productivity declines, and if people fail to save after age 50. None of these need be the case. The challenge is to devise and undertake policy action that will generate different outcomes. The story in each country will vary somewhat. The fertility rate in the United States, higher than in many industrialized countries, will mitigate the dependency of the aged on workers. Global flows of capital and labor could also diffuse the effects of population aging in many countries. Dif - ferences in demography and the extent of globalization could result in significant differences across countries. No country will experience popu- lation aging in isolation, and all will be affected by it. What are the areas of agreement and controversy regarding the mac- roeconomic impacts of aging? There is substantial agreement that an aging population could pose serious challenges to any country’s financial base. In terms of basic economic inputs, the supply of labor is key to the size and sustainability of the economic pie. The years added to life as longevity increases must be active years with continued participation in the labor force on the part of the older population. Börsch-Supan declared himself optimistic that current unused capacity in the labor force could be mobilized. New laws and public policies are essential. Speaking from a European context, he mentioned changing the retirement age so that people remain in the workforce longer, making schools more efficient so that workers enter the labor force earlier, and providing child care so that women who are mothers can rejoin the workforce more quickly. Migration could also help the labor supply, but the volume provided by migration will not be sufficient. The number of new workers required to balance the aging of the population is far too large to be met by immigration. Maintaining the quality of labor is also essential. The health and human capital of aging workers are critical to their productivity. Invest - ments in health should be made across the life course. Human capital at advanced ages should be sustained and renewed through lifelong learn- ing, continued training, and utilization of experience, but age profiles of productivity are controversial. Some studies indicate that productivity declines after age 40. However, Börsch-Supan stated that the evidence for this is not solid. In his view, the best evidence indicates that productivity is flat, indeed, “astoundingly flat.” Proper management is the key factor in determining ongoing productivity of labor. Later, in responding to a ques- tion regarding globalization and the loss of jobs offshore, Börsch-Supan offered his view that jobs requiring experience will not be transferred to offshore locations. He speculated on a multitier system and a new international division of labor in which production might be offshore in developing countries while design and innovation remain in developed countries. While innovations appear to be the province of younger people,

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 MACROECONOMIC AND FINANCIAL IMPACTS he argued that actually turning these innovations into marketable prod - ucts generally requires the experience of older people. The third issue regarding the macroeconomic impacts of aging is capital or savings. Again, there is some controversy. Many analysts, par- ticularly in the United States, see old age as a period of dissaving, that is, spending accumulated savings or going into debt. Definitive evidence of this in the United States is lacking, however, and dissaving is clearly not the pattern in Europe. More research would be useful, particularly to address the interaction between policy and savings behavior. The effect of the global flow of capital also requires further research. Capital supply is not apt to be severely affected by an aging population. In terms of demog- raphy, capital supply is simply not as great a concern as labor supply. Börsch-Supan closed with ideas for a three-part research agenda: 1. Age and productivity, with attention to maintaining health and human capital in workers and changing laws and policies regard- ing retirement age. 2. Age and saving, with attention to the buffer effect that savings could provide at both the macroeconomic and microeconomic levels. 3. International spillovers, particularly the effects of reforms in Europe and growth in China and India. MACROECONOMIC AND FINANCIAL IMPACTS OF AGING Robin Brooks Brean Howard Asset Management, LLP The U.S. economy has three sectors making decisions regarding aging: households, companies, and government. Aging individuals in house - holds are making decisions on savings and consumption. Companies are responding to the expectations of an aging workforce or anticipated trends in the availability of capital. The government also considers the aging of the population as it develops projections of revenues and expenditures. For households, savings decisions are paramount. However, savings behavior is not well understood. China has a growing economy and strong growth prospects with relatively low income today and higher income expected in the future. Such a profile is not generally associated with high savings rates, yet the Chinese are perennial high savers. The United States is aging and people should be saving more, yet 2005-2007 saw a record low personal savings rate. Consumption behavior and port - folio decisions are also poorly understood. There should be a shift to safer assets over the life cycle. As human capital is depleted over the course

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 GRAND CHALLENGES OF OUR AGING SOCIETY of a lifetime, capital assets should be placed in safer investments. This is not always the observed behavior. Indeed, Brooks noted, savings and consumption decisions often appear “completely irrational” and are not captured by economic models that assume rational actors. Population aging affects the decisions made by companies. An aging workforce may influence company decisions on where to invest so as to make use of a youthful labor supply. Companies may also choose to invest away from aging populations so as to be closer to a younger consumer base. Financing decisions may be affected by the aging of the population, as companies consider paying higher dividends in anticipation of an elderly population desirous of more fixed income. As the population ages, government must consider unfunded liabili- ties. Entitlement reform becomes an issue, as does the possibility of a shrinking tax base and diminished revenues. Historically, households are a net provider of savings, whereas corpo- rations and governments use savings. The overall current account deficit has resulted in the United States attracting funds from overseas because domestic savings are insufficient. Some patterns are changing now. The personal household savings rate is rising quickly. The government is bor- rowing more in an effort to prevent a complete stall of the economy. Four other considerations should be taken into account regarding the macro and financial impacts of aging. First, generational patterns in behavior are important. Risk aversion is acquired through experience. For example, those who experienced the Great Depression save. In the current economic downturn, Brooks noted, the savings rate is respond - ing. A second consideration is financial education. Longevity and an extended retirement are new. We do not have an accumulated popular wisdom about how to prepare financially for retirement. Financial edu- cation about how to manage resources is seriously lagging. Geopolitics and global imbalances are a third consideration. Will the rest of world be willing to finance the U.S. standard of living? What will be the reserve currency status of the U.S. dollar? As standards of living rise around the world, how will that affect competition for resources and commodities? A fourth consideration is the global demographic imbalance. While there is high population growth in some parts of the world, populations are shrinking elsewhere.

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 MACROECONOMIC AND FINANCIAL IMPACTS AN INTERNATIONAL PERSPECTIVE Daid Canning Program on the Global Demography of Aging Harard School of Public Health Three fundamental issues need to be addressed regarding macroeconomic impacts of aging at the international level: (1) the impact of demographic change on income levels, (2) the experience of developing countries that will become old before they become rich, and (3) the role of interna- tional linkages in mitigating or exacerbating the macroeconomic effects of aging. A central question to these concerns is whether improvements in health and longevity will raise or lower income levels. Yet high income levels are not the goal of civilization. Canning stated, “Life itself is quite valuable. People like living a long time rather than a short time.” Simi - larly, while continuing to be active in the labor force so as to maintain income is important, leisure time “is one of the great advances of civiliza- tion. Retirement is something people enjoy.” Population aging is a new phase in the demographic transition, and therefore much is unknown. What is known is that health and longevity are both beneficial to an economy. Healthier workers are more produc- tive. Long-run effects on worker productivity follow from early childhood investments in health, including both physical and cognitive develop- ment. Investments in health during childhood also have an impact on later educational outcomes. Over the course of a longer and healthier life, an individual earns returns to education, so investments in education can be exploited for an extended period. Health in youth is also linked to health in age. Looking across the life course (not just at older age) is thus very important. While improved health and increased longevity are good for the econ- omy, population aging does raise some concerns. One is having too many people in the world. This may not be a big problem, but it is a potential problem. In terms of economic impacts, there is a shift in consumption over the life cycle. The young and the old consume more than they earn, while those in their middle years save. Allocating resources across the entire life cycle can be a challenge. A third concern is the age structure of the population and the impact of a large number of old people relative to a small working-age population. In many ways these are institutional rather than real problems, Canning said. “We have institutions which are unsuited to population aging and so the problem is to change those institutions.” In his view, institutions need to change, for example, in order to address the challenge of shifting resources across the life cycle, whether that is done through

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 GRAND CHALLENGES OF OUR AGING SOCIETY public or private transfers or private savings. However, people are often reluctant to change institutions, and the politics of changing the institu- tions is difficult. International comparisons can be made regarding the ratio of the working-age to the nonworking-age population. Around the world, as populations age, old-age dependency ratios are increasing. Yet there is also considerable variation. Compared with the rest of the world, the problem of aging in the United States is not that substantial, in part because of higher fertility rates. Low fertility is a particular problem in Europe. China will age quite fast because of its very low fertility. South- Central Asia will not begin significant aging for decades. The fertility transition is only beginning in Africa. Overall, it is important to recall that population aging is as much an outcome of lowered fertility as it is of increased life expectancy. Both factors exacerbate high ratios of depen - dency on the working-age population. Thus, far lower fertility rates have resulted in a demographic dividend, with fewer children dependent on workers. However, if fertility rates fall below replacement levels and the population ages, the result will be increasing dependency on the working- age population. The impact of population aging in developing countries raises distinct questions. Countries that get old before they get rich will face a different set of problems than developed countries. They also wrestle with the dual burden of infectious disease and rising chronic disease, as well as weak or nonexistent public transfer systems. The future of family support for the aged is unclear, because of urbanization and changes in dependency ratios. Developing countries have one major advantage: they are not locked into inappropriate institutions. Indeed, Canning said, they “can design their institutions with aging in mind.” International linkages may either mitigate or exacerbate the economic effects of aging populations. International connections occur through trade, capital flows, and migration, as well as through externalities, tech - nology, and idea flows. Regarding the latter, Canning emphasized that he meant not only inventions but also institutions. “There is a lot to be learned by looking at how different countries organize their institu - tions to deal with aging, and we can learn a lot by looking at different countries.” The fact that not all countries are aging at the same time or rate sug- gests that a global reservoir could absorb some of the impact of popula- tion aging. Excess savings or dissavings could flow abroad, thus having less impact on national interest rates. Similarly, countries with younger populations might have trade surpluses, while older countries would import. Savings and trade surpluses during dividend phases would bal - ance the decrease in surplus by aging populations.

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 MACROECONOMIC AND FINANCIAL IMPACTS Migration could also limit the problems caused by a changing age structure. However, as immigrants age, this is not as large an effect as might be expected. One very compelling problem in the area of migration is the importation of health care workers to care for aging populations. Health care workers trained at public expense in developing countries then migrate to developed countries to meet the demand for care of older people. This amounts to a subsidy provided by developing countries to developed countries. It is very difficult for a developing country to invest in its health sector or pursue a policy of expanding its health workforce when doctors and nurses have high rates of migration. This requires far better management to benefit both the developing and developed countries.

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