Senescence or Senility - A Problem of Population Aging

Owing to the heavy investment in health in the last few decades, lifespan of the populace has increased significantly. According to the World Health Organisation, by 2030, roughly 17% of the population will be aged 60 or over. This shift in demography is called population aging. It began in high income countries, such as Japan, but in the future, it will affect middle to low-income countries the most, such as India.

To understand this effect, one can refer the Theory of Demographic Transition, as proposed by Warren S Thompson and Frank W Notestein, which explains the concept in three stages. In the first stage, both birth rate and death rate, the most influential factors of the size of the population, are high. Countries in this stage are usually underdeveloped. With improvement in health infrastructure, death rate falls drastically during the second stage whereas birth rate does not decline at the same rate. This leads to an increase in population and is also one of the driving forces of population aging. Developing countries fall under this category. In the third stage, birth rate drops as well, possibly because of social capillarity, i.e., choosing to increase one’s own social and/or financial mobility instead of increasing family size. Countries that fall in this category are well developed, typically with capitalistic market structures. This theory explores a natural transition that will occur as countries progress economically.

It is widely believed that investment in factors of human capital formation, viz., education, health and skill development will have a positive impact on the economy. In an interesting take, Philipov, Goujon, & Di Guilio, (2014) state that such financing of human resources will have a negative effect, i.e., leads to an increase in the senescent population. In accordance with the above stated theory, demographic trends show that since the previous century was an age of sustained population growth, the 21st century would be one of population aging. Coupled with declining birth rates, it is predicted that by 2050, the number of people aged 60 or above will be 2.1 billion. This poses a unique set of problems which include increase in old age dependency ratio, decline in the working population, increase in health care costs, excess of savings over investments, etc.

From an economic point of view, the biggest issue is that an aging population puts budgetary pressure on society as a whole (Lee & Mason, 2017). As suggested in the Life Cycle Theory of Consumption by Modigliani and Ando, only the working population, i.e., people roughly between the ages of 25 and 59, produce more than they consume. Amongst children and the elderly, the latter tends to consume more. Since a fertility rate of 2.1 has to be maintained for the population of a given area to remain stable, a push to increase birth rates, in developed countries, will add more pressure to the prime age workers. This phenomenon is quantified by the support ratio which is the ratio of producers to consumers. Support ratio is projected to drop significantly in countries like USA and China by 2050 which means that there will be a forced reduction in consumption unless labour supply increases.

Whilst there exist many stereotypes with regards to the productivity of older workers, studies reveal that since disease free life expectancy is also on the rise, the labour force can continue to work for an increased number of years without significant decline in productivity. This is evident from the study conducted by Youlu & Ying, (2020) in China which concludes that healthy human capital has a positive impact on the labour capacity of the Chinese elderly. Another factor to consider while dealing with retirement age is the amount the state and employers are liable to pay out as pension. For instance, the Indian government spent roughly Rs. 1.66 lakh crores for pension payments in 2019-20, which was more than its salary expenditure in the same fiscal year. Thus, investment in retaining older workers should be considered as a viable alternative, as it would provide the youth enough time to equip themselves with more skills while also making the maximum possible use out of the accumulated knowledge of the existing workforce.

Every coin has two sides and the flip side to extending retirement age, especially in a country like India, is the problem of unemployment of the youth. Unemployment in the cohort of people aged 20 to 24 stands at 37%. Lack of vocational training, issues of skill mismatch and the ongoing digital revolution only add on to such woes. However, there exists an argument that increasing the retirement age has an overall positive impact on the economy, as it cuts down expenditure on pension and thus, allowing the state to spend more on job creation. Therefore, a nuanced policy that combats the problem of population aging but which does not endanger opportunities for youth employment is the need of the hour.

A study by Acemoglu & Restrepo, (2017) presents a different perspective. It reveals that there is no strong negative correlation between an aging population and GDP per capita. Such a trend can be explained as a result of technological advancement. Many tasks which were earlier performed by hand are now automated and thus increase efficiency to such an extent that the negative effects of population aging are countered. However, this may be a case of ‘correlation does not mean causation’. In line with the authors, more research has to be undertaken to solve this puzzle.

Factoring all related aspects into account, the best possible way forward is to learn from other countries who have or are currently facing the same issue. For example, Japan adopted a system of voluntary re-employment for retirees who can work as part-time employees in different capacities with corresponding pay. In the US, retirees work longer and generally rely on their own assets to support them during retirement. Continuing to invest in health infrastructure will ensure that labour can participate in the market for a longer period of time.

In conclusion, it is important to understand that all factions are important. Human capital is not merely an economic concept, rather a socio-economic one. Thus, conscious policy making, keeping in mind the needs of all stakeholders, will help in accelerating prosperity.