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December 2, 2009updated 13 Apr 2017 8:55am

A global challenge on a massive scale

Hammering home the reality of the economic and social challenges facing countries worldwide, the US Census Bureau has published a wide-reaching study which highlights the average age of the worlds population increasing at an unprecedented rate

By Stafford Thomas

Increasing longevity worldwide is one of the biggest success stories of the modern era but has also brought with it the major and growing challenge of coping with ageing populations. For life insurers, pressure being brought to bear on governments to find solutions appears to hold significant potential.

 

Hammering home the reality of the economic and social challenges facing countries worldwide, the US Census Bureau has published a wide-reaching study which highlights the average age of the world’s population increasing at an unprecedented rate. The study was commissioned by the National Institute on Aging (NIA), part of the US National Institutes of Health, and produced by the Census Bureau.

Putting the scale of the demographic change into perspective, the Census Bureau estimates the number of people worldwide aged 65 and over in mid-2008 stood at 506 million and will increase to 1.3 billion by 2040. The Census Bureau stressed that this means in just over 30 years, the proportion of older people will double from 7 percent of the total world population to 14 percent.

“Aging is affecting every country in every part of the world,” stressed the director of the NIA’s division of behavioural and social research, Richard Suzman.

“While there are important differences between developed and developing countries, global aging is changing the social and economic nature of the planet and presenting difficult challenges. The fact that, within 10 years, for the first time in human history there will be more people aged 65 and older than children under five in the world underlines the extent of this change.”

Falling populations

In the study, the Census Bureau noted population aging is driven by two factors: declines in fertility and improvements in health care.

In more developed countries, declines in fertility that began in the early 1900s have resulted in current fertility levels below the population replacement rate of 2.08 births per woman. Illustrative of declining fertility, in the US in 2006, 20 percent of women aged 40 to 44 had no biological children, while in 2005 in Italy and Austria, 15 percent of women aged 65 were childless.

The Census Bureau anticipates that more than 20 countries will experience population declines in the coming decades. Russia’s population, for example, is expected to fall by 18 million between 2006 and 2030, a decrease of about 13 percent.

Nine other countries are projected to experience a decline of at least 1 million people during the same period. They are Japan, Ukraine, South Africa, Germany, Italy, Poland, Romania, Bulgaria and Spain.

Japan is of particular note for having one of the world’s lowest fertility rates – 1.4 births per woman – and an average life expectancy of 82, the highest in the world. Between 2006 and 2030, Japan’s total population is projected by the Census Bureau to decrease by 11 million and the population aged 65 to increase by 8 million, thereby increasing the proportion of older people from 20 percent to about 30 percent in 2030.

Also of note is South Africa, a life insurance market worth almost $9 billion in annual new individual premium income. Primarily as a result of the increase in mortality precipitated by HIV/AIDS, the Census Bureau predicts that the country’s population will decline by nearly 6 million people (12 percent) between 2006 and 2030.

South Africa has the highest HIV/AIDS prevalence in the world, the impact of which has been seen in the average life expectancy of its population falling from 60 years in 1996 to 43 years in 2006.

Dependency ratio rising

Rising numbers of older people and falling fertility rates have a particularly significant consequence: an increasing dependency ratio.

Among the most informative studies on the dependency ratio are those undertaken by Eurostat, the EU’s economic data unit which defines the dependency ratio as the number of people aged 0 to 19 and 65 and over divided by the number of people aged 20 to 64. In other countries the ratio is based on other definitions, of which the most accepted is the number of people aged 0 to14 and over 65 divided by the number of people aged 15 to 64.

In the EU15 (the 15 member countries prior to 2004), Eurostat data shows the dependency ratio rising steadily, and in 2008 stood at an average of 50.3, up from 48.4 in 1999. Within the EU15, the dependency ratio varies from a low of 38.4 in Slovakia to a high of 53.4 in France.

However, more pertinent is the old age dependency ratio (OADR), which is based on the number of people aged over 65 divided by the number of people aged 15 to 64. According to Eurostat, across the full 27 EU member countries, the average old age dependency ratio stood at 25.4 percent in 2008 (using the working age group definition of 15 to 64 years) and is rising steadily under the combined impact of a decline in the working age population and a rise in the older population group.

Eurostat predicts the OADR will rise to 31.1 percent by 2020, 50.4 percent by 2050 and 53.5 percent by 2060. By 2050, Eurostat predicts there will be 294.4 million people in the working age group in the European Union (EU) and 148.4 million aged over 65, while net migration is assumed to have fallen to zero.

The impact of this was the subject of a recent report by the European Commission and the Economic Policy Committee, submitted to EU finance ministers. The report highlighted that, while the EU now has four people of working age for every older citizen, it will have only two workers per older citizen by 2050.

Given current policies, stressed the report, the pension, health, and long-term care costs associated with an aging population will lead to significant increases in public spending in most EU member states over the next half century. In the absence of policy changes, the report warns that GDP growth rates will fall across the EU and the potential EU economic growth rate will be cut in half by 2030.

The impact of ageing populations will not be spread evenly through the EU, however. Significant pressure is expected to be experienced by Central and Eastern European (CEE) member states. For example, the OADR in Poland is forecast by Eurostat to rise from 18.9 percent in 2008 to 55.7 percent in 2050 and 69 percent in 2060, the highest level predicted for any EU country.

Also, among the highest OADRs predicted in the EU by 2060 are CEE member states Latvia at 64.5 percent (25 percent 2008), Czech Republic at 61.4 percent (20.6 percent) and Hungary at 57.6 percent (23.5 percent).

Among the EU15 member states, Spain is set to show the steepest rise in OADR, from 24.1 percent in 2008 to 59.1 percent in 2060. Germany also faces a particularly steep rise, from 30.3 percent in 2008 to 59.1 percent in 2060; as does Italy, from 30.5 percent in 2008 to 59.3 percent in 2060.

Faring comparatively well in Eurostat’s analysis is the UK, which is predicted to see its OADR rise from 24.3 percent in 2008 to 42.1 percent in 2060. Only Luxembourg is predicted to have a lower OADR in 2060, 39.1 percent.

European Union not alone

Rising OADRs are not, of course, unique to the EU. In the US, for example, a study by the Congressional Research Service (CRS) estimates that primarily as a result of a surge ‘Baby-Boomer’ retirements, the country’s OADR will rise from about 20 percent in 2010 to 25 percent by 2020, 39 percent by 2050 and 40 percent by 2060. For its estimates, the CRS defined the working age group as being persons aged 20 to 64.

Other developed economies face a situation similar to that of the US. Canada, for example, can expect its OADR to rise from 19 percent that pertained in 2005 to 38 percent in 2030, and 45 percent in 2050, according to data published by the United Nations’ Population Division (UNPD).

Similarly, the UNPD forecasts that Australia and New Zealand’s combined OADR will have risen from 19 percent in 2005 to 34 percent in 2030, and 44 percent in 2050.

However, of the world’s major economic powers none face a challenge of the magnitude presented by Japan’s ageing population. Presenting an ominous picture, Japan’s National Institute of Population and Social Security Research forecasts the country’s OADR will rise from an already high 34.4 percent in 2006, to 52.8 percent by 2020 and an incredible 81.9 percent by 2050. By 2050, the institute predicts, Japan’s population will have declined to 95.2 million, down from 127.7 million in 2006.

Also of significance, the US Census Bureau highlighted that the most striking increase in the proportion of very old people will occur in Japan where, by 2030, almost a quarter of all older Japanese are expected to be at least 85 years old.

Developing economies take the lead

Though proportions of older people typically are highest in more developed countries the Census Bureau stresses this situation is changing fast stresses with the most rapid increases in older populations occurring in less developed countries.

According to the Census Bureau, in 2008 62 percent (313 million) of the world’s population aged 65 and older lived in developing countries. By 2040, today’s developing countries are likely to be home to more than 1 billion people aged 65 and over, 76 percent of the projected world total.

In terms of sheer numbers, the two most populous nations, India and China, are the most impacted by this trend, with their combined 65-and-older population predicted to increase from 166 million in 2008 to 551 million in 2040. Of the latter total, China is estimated to account for 329 million and India 222 million.

The Census Bureau emphasised that one of the most significant characteristics of the developing world’s ageing population is its rapidity compared with that in developed economies.

For example, the Census Bureau estimates that in China it will have taken only 26 years (2000 to 2026) for the number of people over 65 years old to increase from 7 percent to 14 percent of the population. In Brazil this process is anticipated to take an even lower 21 years (2011 to 2032).

This rapid ageing of populations contrasts with, for instance, France, where it took 115 years (1865 to 1980) for the number of people over 65 years old to increase from 7 percent to 14 percent of the population. In Sweden it took 85 years (1890 to 1975) and in the UK 45 years (1930 to 1975). In the US, the Census Bureau anticipates it will take 69 years (1944 to 2013).

The result for many developing countries will be a rapid increase in OADRs. Indicatively, the UNPD estimates the OADR in China will rise from 11 percent in 2005 to 24 percent in 2030 and 43 percent in 2050. In Brazil, the UNPD estimates the OADR will increase from 9 percent in 2005 to 20 percent in 2030 and 41 percent in 2050.

Commenting on what it termed the “compression of aging,” the Census Bureau noted: “Some less developed nations will be forced to confront issues, such as social support and the allocation of resources across generations, without the accompanying economic growth that characterised the experience of aging societies in the West. In other words, some countries may grow old before they grow rich.”

From an economic growth perspective, India stands out in terms of a having a more gradual ageing of its population. Based on the UNPD’s estimates, India’s OADR will have risen from 7 percent in 2005 to 12 percent in 2030 and 23 percent in 2050. In addition, the 14 percent OADR level is anticipated to be reached in India in about 2035, giving India a more manageable 30 years for the increase from 7 percent.

Time for action

In its overall assessment of the global ageing phenomenon, the US Census Bureau emphasised that, in addition to the obvious strain rising aged populations will place on state-funded pension schemes and the working population supporting them, there are other significant implications. For example, lower fertility rates suggest that in many countries traditional familial support of ageing parents by their children is likely to wane.

Health care funding also requires close scrutiny, advised the Census Bureau, which cited a study conducted by the World Health Organisation and the World Bank, Burden of Disease.

In the study, the two organisations warn of a very large increase in disability caused by increases in age-related chronic disease in all regions of the world within a few decades. Specifically, the loss of health and life worldwide is predicted to be greater from noncommunicable or chronic diseases such as cardiovascular disease, dementia and Alzheimer’s disease, cancer, arthritis, and diabetes than from infectious diseases, childhood diseases and accidents.

In concluding, the Census Bureau stressed: “Some governments have begun to plan for the long term, but most have not. The window of opportunity for reform is closing fast as the pace of population aging accelerates.”

Fortunately determination to tackle challenges of global ageing is mounting as evidenced by a study released in October 2009 by the Commonwealth of Nations (CoN) ahead of the annual meeting of CoN finance ministers Meeting.

CoN is an intergovernmental organisation comprising 53 countries including the UK, Australia, Bangladesh, Canada, India, New Zealand, Nigeria, Pakistan and South Africa. Formerly the British Commonwealth, CoN member states have a total population of almost 2 billion people.

As could be expected, the CoN study undertaken by its Commonwealth Business Council (CBC) tackled the key issues of ageing – increasing OADRs and related health issues – head-on.

Highlighting that the OADR in CoN developing member countries is expected to at least double over the next 40 years, the CBC stressed income security in old age, already low, is at risk of diminishing further in four-fifths of the CoN because of low pension coverage, inadequate funding, lack of annuity insurance or negative real investment returns.

The CBC’s study’s authors stressed: “The pressure on policy makers to marshal sufficient public and private resources to meet age- and health-related challenges is already intense.”

To address the situation, the study’s authors made three key recommendations:

• Encourage the development of a competitive market for life insurance and pension annuities;

• Review the governance and investment strategies of pension funds; and

• Consider hybrid solutions to pension provision.

Life insurers’ key role

Of particular significance, the authors of the CBC study highlighted the vital role the life insurance industry can play in finding solutions in the provision of pensions and health insurance in developing economies.

However, the CBC study noted that, while life insurers are positioned to provide a wide range of annuity products with a variety of options, the market for annuities remains fairly small or nonexistent in many parts of the developing world.

On a positive note the authors stressed: “This is set to change as defined contribution schemes proliferate and mature.”

To enable insurers to fulfil their role, the CBC urged governments in developing countries to promote flexible annuities markets. This, advised the CBC, can be facilitated by liberalising and strengthening the life insurance industry.

“Pension system reforms should ideally include measures to liberalise the life insurance industry and develop the domestic government bond market,” wrote the study’s authors.

“This three-pronged approach is mutually re-enforcing and offers broader welfare benefits, which include the development of a deeper annuities market.”

The CBC noted that the potential for expansion of regional capital markets and insurance and contractual savings markets is particularly positive in smaller CoN member countries in the Pacific and Caribbean regions.

Smaller CoN member countries in the Pacific region include Papua New Guinea, Samoa and Solomon Islands. Smaller CoN member countries in the Caribbean region include Barbados, Bahamas, Jamaica and Trinidad and Tobago.

However, the outlook for development in other smaller CoN member countries is not as positive. According to the CBC study authors, in these countries low incomes, limited financial sectors, high inflation, a lack of familiarity with insurance products and a lack of reliable actuarial data could hinder the development of the life insurance industry.

The authors concluded pension reforms in such countries may therefore have to remain focused on providing an annuity in the form of a state-funded universal flat-rate old-age cash benefit.

Their view echoes the US Census Bureau’s warning that some countries may grow old before they grow rich.

POPULATION DECLINES

Over 1 million: 2006-2030

 

Population decline (m)

Decline (%)

Russia

18

12.7

Japan

11.1

8.7

Ukraine

7.2

15.6

South Africa

5.8

11.9

Germany

2.9

3.5

Italy

2.8

4.7

Poland

2

5.3

Romania

1.5

7

Bulgaria

1.4

18.4

Spain

1.4

3.1

Source: US Census Bureau; LII

EU: Old age dependency ratio  

 US: Old age dependency ratio

Japan: Old age dependency ratio  

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