Wednesday, September 27, 2006

A Political Response to Changing Demographics?

This one is another one of those small posts which show the effects of demographics in developed economies. Here at DM we talk about all aspects of the changing demographic indicators and realities. In the realms of politics however there is a lagged effect in terms of how policy makers view and (are able to?) respond to the changing demographic profile of their countries. This is quite natural since policy makers need to worry about election and re-election. In that ligth a proposal to open the gates for unskilled immigration as proposed by Edward a couple of days ago seems as political suicide in many developed countries, at least for now. We of course would like to see such courage and prevision but we must also be realistic. So where are we then?

Basically many governments of developed economies have begun responding to changing demographics in one key area; namely in the area of growing life expectancy and longetivity. In essence many developed economies are becoming aware (they are beginning to feel it as well) that the dependancy ratio is rising and as such pensions schemes, health care schemes and in fact general welfare schemes are being modified accordingly. The general consensus seems to be something like; we need to work longer as function of rising longetivity and go quicker through the education system (specifically coined in a Danish context) in order to ameliorate the dependancy ratio. As always there is of course an article to go along; this time from The Guardian about the pressures on UK's pension system.

'Britain's pensions deficit could be larger than official figures suggest because workers are living longer than predicted, the regulator said yesterday.

Employers, already under pressure to plug deficits in their final-salary schemes, could be forced to inject further finance into their retirement funds to honour obligations to staff, said David Norgrove, who chairs the pensions regulator board.

(...)

A recent report by the Institute of Economic Affairs, a rightwing thinktank, argued that the increasing life expectancy, coupled with falling investment returns and low interest rates, had increased the public-sector pension deficit by a quarter to more than £1 trillion. The deficit in the private sector is estimated to be about £100bn on liabilities of £900bn.'

The obvious question which must come on the back of my post is whether it is enough? Is it enough to tweak existing structural mechanisms to better fit the compositional effect of an ageing population? Well at the offset it makes perfectly good sense; we are living longer and therfore we also need to push retirement age accordingly; this is logical. But at the end of the day it is probably not enough (fertility is low and falling as well) and certainly this is not a viable solution for a countries like Japan and Italy, or Germany for that matter. Here at DM (this includes our commentators as well!) we are still trying to get to grips with explaining what is actually going on as we move forward. However, we are getting there and it seems clear that the current political response to changing demographics is inadequate in many countries. So what should they do?

30 comments:

S.M. Stirling said...

Even if politically possible, mass immigration would not solve but simply defer the problems caused by unsustainably low birth-rates.

The immigrants themselves will eventually age, and be replaced by smaller and smaller cohorts, while falling birth-rates in the source countries dry up the supply. What are countries to do, scour the world for younger populations?

In some cases, immigration would defer the problem in one place only by precipitating it in another -- Moldova comes to mind, or even Poland -- by subtracting already-scarce workers and starting ever-accelerating population shrinkage.

In others, of course (China in the immediate future, and then India a generation later)immigration isn't possible on a scale big enough to be even temporarily helpful.

All this is evasion. TFR's much below replacement level create problems which cannot be solved. Lowest-low levels create problems which bid fair to be catastrophic.

Therefore in those areas the TFR's must be pushed up to or near replacement level; even if they are, demographic lag will create serious difficulties. If it isn't done... frankly "falling into an abyss" is the phrase that comes to mind.

Soonest begun, soonest done. Social changes sufficient to alter the incentive structure must be undertaken, and urgently.

Anonymous said...

What's been happening in the United States is that average retirement ages keep falling even as lifespans increase and birth rates decline. The traditional retirement age of 65 is but a fond memory; today 55 is the new 65, so to speak, and retirement as young as 50 is far from unknown.

Peter
Iron Rails & Iron Weights

S.M. Stirling said...

"What's been happening in the United States is that average retirement ages keep falling even as lifespans increase and birth rates decline."

-- some memes are so powerful that no amount of evidence will stop them popping up again...

US birth-rates stopped falling and began to increase again in the _1970's_ but it just doesn't sink in.

DO said...

an odd post, if only because it entirely failed to mention what is surely a crucial part of any attempt to come to grips with the problems brought about by population aging: pro-natalist policies.

a number of commentators have argued that decling birth rates can largely be explained as a function of the high cost of family formation. if so, this is clearly one area in which government policy could usefully intervene -- by, for example, supplying mothers with generous birth allowances, low interest housing loans, and etc.

oldciver said...

the US is facing problems in the next 25 years. If natalist program were based tomorrow, the resulting kids would barely be entering the labor force (much less their peak productivity years) by the time we needed it.

CV said...

'an odd post, if only because it entirely failed to mention what is surely a crucial part of any attempt to come to grips with the problems brought about by population aging: pro-natalist policies.'

Hi Do,

Thanks for stopping by and thank you also for addin DM to your blogroll; oh yes we have our watchlists in place :)

Pro-natalist policies eh? Let us first operationalize fertility as a result of two things; the quantum effect (quantity-quality trade-off; basically we choose to invest more in fewer children) and the tempo effect (birth displacement rate; we are having our children later).

Now, where should pro-natalist policies be placed and directed. Surely first and foremost to amend the quantity effect but this would be very difficult if we held tempo effect constant since there would be an upper limit here as to how many children we would be ready to produce given we still have less time in which to produce them. So basically any pro-natalist policy would have to be directed at both the quantum and tempo effect in order to work.

I think that Oldciver has an important point here in the sense that even if the transmission mechanism of such a policy was instant and 'effective' it would be too late for many societies do anything about it.

Moving further I have have a hard time seeing such a measure work at all actually since the trade-off (from women's POV) of getting a contribution to bearing more children versus the model of having fewer children and at the same time be fully integrated in the labour market would almost certainly fall out to the latter. In the end pro-natalist policies would try to encourage a behaviour based on the benefit of the collective and since the quantum and tempo effect is also (I suspect) driven by individualism I just do not see it work.

Having said that though I can't say that pro-natalist policies wouldn't be a possibility in some societies but in terms of actually ameliorating the demographic decline it would resemble applying a small bandage to an open head wound (forgive me my gory methapor :))

S.M. Stirling said...

As to pro-natalist policies, a simple and effective one would be a deduction on all personal taxes running something like:

1st child -- 10%
2nd child -- 20%
3rd child -- 30%
4th child -- 40%.

That is, those with four children would pay no personal taxes at all.

_That_ would get results, and quickly, since in high-tax-regime countries it would fully compensate for the lost income and opportunity costs.

As an additional bonus, it would tend to concentrate childbearing among those most able to self-finance. The impact would be proportional to income.

Simple, elegant and effective, if also expensive.

S.M. Stirling said...

"the US is facing problems in the next 25 years. If natalist program were based tomorrow, the resulting kids would barely be entering the labor force (much less their peak productivity years) by the time we needed it. "

-- what problem is this?

The slow upward drift of US birth rates has given us about an optimum result.

Obviously, TFR's at 1960 levels (approaching 4) would be 'too much of a good thing'; the world is not infinite and neither is North America. Furthermore, that would drive the dependency ratio up again.

The current situation (TFR's around replacement level) will eventually give us the optimum sustainable long-term population profile; a pyramid, but a tall skinny one, with median age remaining constant over time and successive generations of roughly the same numbers.

It's the "inverted pyramid" of low TFR's and successively smaller generations that's the insoluable dilemma.

Of course, the 'boomer bulge' will have to pass through the US system first, but that's a temporary problem.

But since the number of young people in the US is NOT falling -- the current numbers entering school are at record highs -- we're better placed than almost anyone else to do this.

S.M. Stirling said...

The tax-deduction policy I mentioned would also give potential parents a strong incentive to have the children early, since it would apply for the rest of their lifetimes.

The best way to secure the optimum from the program would be to have four children in rapid succession as early as possible.

Edward Hugh said...

Do,

Just following up briefy on what Claus has already said, this is an issue we have thought about a lot.

Certainly policies to encourage those women who want to have children to actually have them are welcome, and much needed in some societies.

But the issue isn't an obvious one. Headline-catching cash awards may produce a short term spike in births but they do not alter things in the longer run. Substantial 'family friendly' policies are interesting, but they are expensive, and this is just where we hit the problem. Most of the societies where such policies are badly needed are also now under severe fiscal pressure, and they need to encourage more female participation in the labour force to make up for the declining cohort size. So in many ways they are between the proverbial rock and the hard place.

Elderly dependency ratios are rising fast, and with this public deficits. Cutbacks rather than expenditure increases are normally on the agenda, and ageing societies have a growing proportion of elderly voters, a detail which doesn't escape the notice of the politicians who need to run for election.

The IUSSP had a debate on the effectiveness of pro-natalist policies at their Tour's congress last summer. You can watch the video here:

http://www.canalc2.tv/video.asp?idvideo=3815

You can watch 4 eminent and well informed demographers hard at it debating the pros and cons. Curiously the two males thought such policies might be effective, while the two women were not convinced.

Personally I found Anne Gauthier's well researched contribution pretty convincing.

Edward Hugh said...

"But since the number of young people in the US is NOT falling -- the current numbers entering school are at record highs -- we're better placed than almost anyone else to do this."

Really I think that Sterling isn't far from the mark here. The US position is *much* better than virtually anyone else. But then, if you think the US has problems, just imagine the rest.

Where the US is affected is via those famous 'global imbalances' and the current account defecit issue. You get hit indirectly.

OTOH I am not as convinced as Sterling is that US fertility is as stable as he is arguing. We may be in for a surprise here. But that is a longer term question.

Health costs, especially in the light of the arrival of the shorter lived metabolic syndrome (diabetes, obesity) phenotype is a much bigger issue in the US. You may have two different generations in need of intensive health care simultaneously. Financing this will be an important issue.

Anonymous said...

So what should they do?

Firstly they can immediately cap the dishonesty by saying tax instead of pension. Also, people have to get used to the idea that they are not entitled to other people's money, and so the law will be changed to reduce benefits and so the tax burden on workers.

In the end the whole criminal system must be scrapped and personal savings accounts introduced -- something like the 401-K plans in the US. With no pre-tax contribution limit and some employer matching, most people will be able to save enough to finance their own retirement.

As they say: better a bad end than endless badness.

oldciver said...

"-- what problem is this?"

The problem of dealing with Social Security, Medicare and Medicaid over the next 25 years.

Yes, Im quite aware that the purely demographic aspects of the problem are even worse in Europe and Japan. OTOH, my understanding is that health care costs are more controlled over there, which at least offsets. And we are already running significant deficits, even at close to full employment. We face severe fiscal problems. That our major trading partners also face serious problems of their own is not necessarily a comfort. Nor is dismissing a problem facing us for a good generation or more as "temporary" terribly useful.

Edward said...

"Nor is dismissing a problem facing us for a good generation or more as "temporary" terribly useful."

I'm inclined to agree with this. The great contribution of Keynes to economics was really to do with this, time horizons, hence his oft-quoted, but little understood "in the long run we're all dead".

At the end of the day it matters little what the rpojections are for 2050 (or even 2025), what matters is what happens between now and 2015 (say).

This matters because this whole process is to some extent 'path dependent' and the outcome of this short term will have imporatnt consequences for winners and losers in the longer run.

If only those who risk becoming losers would heed this, instead of becoming defensive!

I think you are right oldciver to draw attention to the health issues in the US. Incomes for the lower skilled (those who have children early) are likely to be flat - or even trending down - and health contributions are set to rise and rise.

"is that health care costs are more controlled over there"

It isn't so much this as the fact that there is no more money to pay, at least at the public level, and this exercises the mind amazingly. The debate in Germany at the moment is an interesting one.

joeimp said...

Any material amount of tax credits, family allowances, tax deductions, etc. for having kids would receive little support politically. The left perceive it as encouraging women to stay at home - which they dispise. Those on the political right, especially those with an economic libertarian bent, would say it smacks of big government engaging in socialistic income redistribution.

The fundamental problem is that most of the OECD belives fundamentally that the individual should be taxed. I say taxes should be at the family level - i.e. a divisor equalling the size of the family should be applied to family income. This would allow for significant tax savings because of the way progressive taxes and tax exempt income would be applied to each family member, as opposed to just the two parents.

This is a fundamental shift in mentality for taxation, that, one accepted seems intuitively fair. I understand that France has been doing something like what I am proposing. This policy smacks of fairness AND is pronatalist.

It could even be phased in by lowering the individual tax rates and introducing a "family tax". For those with the large families the "family tax" would be quite low because instead of lets say the man getting taxed progressively on $80,000, him and his wife, and their 6 kids would each be taxed on $10,000 of income ($80k/8 family members). The "family tax" for a single person making $80,000 would be quite high because the divisor would be 1, and not 8.

In Canada right now a family with one income earner making $150k per year and having 10 kids pays more tax than a couple of DINKS making $150k between them. This tax perversity has to go.

S.M. Stirling said...

As to diseases caused by obesity and so forth, the US is simply a little ahead of the curve. Even countries like China and South Korea are now having problems of this nature, and the developed world as a whole is on a relentless upward trajectory.

This will only be cured by the "magic pill", when it's eventually developed. Until then, the combination of increasing affluence on the one hand and a genetic inheritance which economizes effort and seeks to maximize concentrated food intake on the other will make the problem worse and worse.

Lecturing people on changing their lifestyles is completely ineffective.

S.M. Stirling said...

"Where the US is affected is via those famous 'global imbalances' and the current account defecit issue. You get hit indirectly."

-- In fact, the demographic contrast gives the US substantial advantages.

It makes other countries willing to run current-account surpluses with the US (exporting more than they import) indefinitely because their flagging internal demand requires an export orientation.

S.M. Stirling said...

"I'm inclined to agree with this. The great contribution of Keynes to economics was really to do with this, time horizons, hence his oft-quoted, but little understood "in the long run we're all dead".

-- well, no. As the saying goes, we do not inherit the earth from our ancestors; we hold it in trust for our descendants.

Demographics in particular is a long-term business.

You have to see things coming at least 25 years ahead, and more commonly 50 or 75, if you have any sense of responsibility for the long-term national and social good.

The demographic hole into which the lowest-low fertility countries are toppling HAS no short-term solution.

Looking at it from a 15-year timeframe is equivalent to jumping off the Empire State Building and saying as you pass the 36th floor:

"What's the problem? I'm doing fine so far."

Trying to rearrange the deck-chairs on the Titanic by, for example, encouraging more labor-force participation at the price of driving down TFR's even further is a classic case of eating the seed corn.

Getting through the next 15 years is not the problem. It's what comes after; what we hand on to our successors.

Concern for what happens after I'm gone is why I'm interested in demographics at all.

Edward Hugh said...

"You have to see things coming at least 25 years ahead, and more commonly 50 or 75"

Just to clarify Sterling, I'm not saying you *only* have to think about what happens 15 years from now, I am saying that what happens 15 years from now will affect what happens 50 and 75 years from now, so we need to consider this as an important input. We have to get from here to there.

As I say on the Ireland post, this is all about 'transitional dynamics', viz:

I think what you are missing here, Sterling, is what we could call the 'transitional dynamics' of the situation. This, in economic terms, is what will make the difference between having a hard or a soft landing.

A hard landing would definitely mean a global economic crash, so I think it is well worth trying to avoid this.

Basically, if you 'melt down' all the accumulated assets of the big older generations (like happened in Bulgaria in 98) you are heading straight for trouble.

So keeping the ship afloat is important while we make the transition.

Low levels of fertility are more or less inevitable, there are sound economic reasons why people only have one or two children. As to extinction, I think we'll deal with that when we get there. One thing is sure, you and I won't be around to see it :).


Too many economic studies focus on the longer term without asking themselves what happens next. If Italy goes bust, this will rickershade all round the global markets, and pension funds could melt under the pressure. I don't want this, so if we handle this better we will be more likely to be able to address the longer term problems.

Right now Italy has *no* resources to give to supporting fertility, it is cutting virtually every area of social spending. And if you simply try to divert resources from the old to the young, the old will vote in a bunch of irresponsible populist politicians, and we will get the crash we all want to avoid.

"As the saying goes, we do not inherit the earth from our ancestors; we hold it in trust for our descendants."

Of course I agree with this (and global warming etc come to mind here), but do we actually need 9 billion descendants? Is this a magic number or something?

Edward Hugh said...

"It makes other countries willing to run current-account surpluses with the US (exporting more than they import) indefinitely because their flagging internal demand requires an export orientation."

Yep, but this in itself is not without problems, as the question of the sustainability of the US CA deficit arises. Claus is rather good on this (and here).

Edward Hugh said...

Incidentally, as general economic background to this debate, this conference held in Australia this summer is of interest (I must post on this): Demography and Financial Markets . In particular the papers by David Bloom and Ralph Bryant are a useful introduction to the issues involved. Kotlikoff, OTOH, is an example of the rather useless speculation about what might happen later in the century (I think he is even wrong about this), without really thinking about how we get from here to there.

This paper "The Young, the Old, and the Restless: Demographics and Business Cycle Volatility" by Nir Jaimovich and Henry Siu is very interesting on the US dimension. As they conclude:

”changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies”.

And this of course is simply one small detail in a very complex picture.

ramki830 said...

Well the topic and the comments were extremely interesting...

Thought i would do a bit of loud thinking of how could governments/politicians address this issue of Changing Demographics/Falling TFRs/ageing...

1.A good and fair idea could be a blanket exclusion of all elderly citizens who did not have kids from all kinds of benefits/free healthcare and any other state funded welfare programs. Those who are infertile could be suitably exempted.

2. And expanding the idea stated above, a special punitive tax could be levied on the retirement savings of those who chose to be without kids. The freedom of individuals who dont want to embrace parenthood should be respected, but they should in turn pay for the associated (demographic) costs.

3. Another idea could be to make it somehow legally binding on children to bear the health care expenses of elderly parents.
This idea may not be acceptable to some,and may sound regressive; But we could have a open mind on all kinds of solutions. This may incentivise people to have children if they know that their kids would fund their hospital bills when they get older. (not sure if this is a law anywhere in world).

4. IMHO, one of the major drivers of falling TFRs is increasing participation of women in workforce. So, Governments can think of providing direct subsidies for those women who take a break from their jobs to bear children. Like,say women who have 2 kids, could get a State pension for the first seven years after retirment.

These are some of the solutions that maybe considered - provided the politicians are really interested in addressing the problem. But the nature of problem and nature of the politicians is such that the problem may not be addressed till it grows to threaten the survival of everyone...

S.M. Stirling said...

"but do we actually need 9 billion descendants? Is this a magic number or something?"

-- who is "we"? Italians certainly aren't in the position of facing imminent overcrowding.

They're facing _extinction_.

In any case, there will never be 9 billion people.

S.M. Stirling said...

To be blunt, a nation that does not reproduce itself is committing collective suicide -- auto-genocide.

Worrying about short-term matters in this situation like cutting your throat and then worrying about the bloodstains on your shirt.

ramki830 said...

Well to join the debate, its difficult to set ourself a target figure of ideal human population size on the planet like say 9 billion.

IMHO, 9 Billion may not be necessarily high. But what causes the problem is the skewed distribution of this 9 billion... it is likely that if we touch 9 billion population, we may have as much as 50% of that in just one continent.. and as much as 20% of this 9 billion would be in India (which has only 2.4% of world's land area). That is not at all desirable...

I would therefore argue against a One size fits it all approach. Some like India, Sub Saharan Africa would continue to need programs to curb TFRs. But some others, esp Scandinavian Nations, Russia need immediate initiatives to boost TFRs.

Edward said...

"I would therefore argue against a One size fits it all approach."

I agree with this. I think we need two different policies towrds fertility at one and the same time.

I only mention the nine billion figure (and Sterling may well be right, it may well be eight) to illustrate a point: there is no 'natural level' of human population, and it is hard to think of a desireable one.

Having 8 billion people with one billion using a lot of energy and the rest poor is one question, having all 8 billion consuming energy like the US and Europe do now is quite another. So the climate situtaion may cut across things.

Obviously technological developments in energy would be most welcome, but again these are hard to predict in advance.

So I think there are a lot of issues knocking about.

I still want to emphasise that although we should do everything in our power to make it easier for those who want children to have them, in a democracy you can't force people to have children.

And in economic terms - if we take a recent debate from Italy as an example - some people earn 600 euros a month, and others 3,000. The parents of those who earn 3,000 have normally had less children later. These things are connected, and in economic terms the 3,000 a month person has the 'effective labour' of five people, so nothing here is very simple. Many parents will want to have one or two children who each earn 3,000 a month rather than 5 who earn 600. This is a perfectly rational choice, and it is being made, every day, right across the planet.

So we need to devise strategies that help us live with this.

"A good and fair idea could be a blanket exclusion of all elderly citizens who did not have kids from all kinds of benefits/free healthcare and any other state funded welfare programs."

Would they also be excluded from contributions? Some people are born sterile, others have trouble finding mates, yet others are gay. How do you handle this?

There is some parallel here with the smoking debate. It is often said that the smoker is a cost to the health service. I doubt this is the case. Smokers tend to die young, and hence probably are net losers in the welfare system.

If you have social insurance (and even more private pension schemes) you simply cannot exclude those who have paid from the benefits of their contributions. And if you try to you may find they decide to emmigrate somewhere else in protest at your actions. Certain principles of elementary justice are bound to apply in democracies.

And the boomers, remember they have all paid for the generation before them, it is hard to turn round and say, now there is no pension for you. Again you violate basic groundrules.

It is entirely inconsistent to have a private market for pensions and then try to say who should get what and on what terms among the contributors.

Of course, under private pension systems those hwo have no children do get a kind of premiumm, since they have saved the money others have spent on children, and can thus, if they chose, invest this in getting a bigger pension.

otoh those who have children may receive help (in terms of time and affection) to enable them to better get through their old age.

A mixed bag really. Incidentally, in monetary terms the evidence seems to suggest that elderly parents keep sending money down to their children and grandchildren and not the other way round, although, of course, at the moment we still have viable pension systems.

ramki830 said...

Well, thanks for the replies. I could add on some points.

1. Yes indeed, the ideal Population size for our planet would be also tied to the kind of lifestyle/consumption patterns followed and also the availability (or lack of) any viable alternatives to Crude Oil (afterall the shadow of Peak Oil still hangs on.) I suppose that even if we are far in excess of the ideal population size, the way ahead would be a gradual (and not abrupt) downsizing of population to the ideal size.

2. When i suggested blanket exclusion of those who refuse to have kids from any state funded welfare programs, i obviously mean that people who are sterile should be exempted from such a ban . As far as homosexuality is concerned, it depends on whether the individual is having an alternative sexuality due to Destiny (act of god) or Choice. In the latter case, the individual must bear the costs of his/her choice.

3. My comments on exclusion were limited only to any kind of state funded welfare programs for elderly. Not on the private pension schemes. But you may agree with me that in any private pension system, those individuals with no kids contribute more to the pension plan and hence get more benefits as they retire. Those individuals with kids would contribute less and get a raw deal . It is this distortion that must be addressed. That can be done by a special tax on pension benefits on those who chose not to become parents.


Of course it may be very hard in a democracy to press for such changes, but then who bells the cat?

4. In any case i feel that the bigger need is that we should incentivise women who want to have kids. That is going to be the real issue. Motherhood used to be a matter of compulsion earlier ; But with rising participation of women in workforce (even in 3rd world) plus increasingly competitive workplace, plus increasing choices for consumer spending and entertainment (to fill the non working hours), opting for motherhood is becomming an unattractive option for women. IMHO, addressing this is the biggest challenge ahead.

S.M. Stirling said...

In the American context, it's becoming clear that the link between income and delayed or reduced fertility has broken down.

In fact, large families -- 3 or more -- are becoming increasingly common among the middle to upper-middle classes.

Most of the post-1980 uptick of fertility among native-born Americans seems to be coming from 3rd and higher births, not from a drop in the number of women who have none at all or only 1.

Fred said...

>And the boomers, remember they have all paid for the generation before them, it is hard to turn round and say, now there is no pension for you. Again you violate basic groundrules.

But the boomers changed the groundrules first. The boomer's parents were raising four children while taking care of their own parents. But the boomers only are raising two children. So the boomers changed the worker to elderly ratio.

Nobody said...

I can relate to ideas raised by SM and Ramki. However, I would notice that a prerequisite for addressing such problems is a very practical out of box thinking free of ideological constraints, a commodity now almost absent in the Western and even non Western world. But fundamentally what we should be striving for is to stabilize the society demographically aiming at TFR of something like 2-3. This requires two sets of measures: one to encourage people to go for two and three children, the second is to discourage them from going further than that. That's why we are basically talking about both pro natalist and anti natalist measures since the point is not about increasing or decreasing fertility but about stabilizing it at replacement or slightly above replacement levels.