Economists were long concerned about the effects that an increasingly large population would have on international economies. However, studies showed that population growth did not significantly threaten the economic well-being of countries, particularly developed ones. In fact, trends in developed countries seem to indicate not only a slower population growth but also an aging population: total fertility rate decreased, total mortality rate decreased, life expectancy increased, and immigration decreased. Furthermore, the fact that the Baby boom generations in developed countries are reaching retirement age further contributes to the population aging already faced by these countries. Thus, economists have begun to consider measures to balance out the effects of population aging between present and future populations. The focus of this paper will be the impact of population aging on Australia and Japan, according to data obtained by Ross Guest and Ian McDonald, and whether these countries should respond by increasing their national savings rate. This paper will be divided into three parts. The first part briefly discusses the demographic trends. The second part focuses on the impact that an aging population has on the society and the economy. The third part discusses whether an increase in the national savings rate is actually necessary in either of these countries.
Demographic Trends
For the past couple of decades Australia and Japan have been experiencing low fertility rates, the TFR in Japan decreased to a level of 1.5 in 1994 and in Australia the TFR was 1.8 in 1998. (Guest and McDonald) This low fertility rate has played a significant role in the demographic transition occurring in both countries due to the fact that they remain under the replacement fertility level. However, past trends also show that decreasing fertility rate has being accompanied with decreasing mortality rate, indicating that life expectancy is increasing, which further contributes to the problem of population aging facing developed countries. Japan has being the country with the longest life expectancy in all industrialized countries. (Guest and McDonald) Unlike in Japan, Australia has been going through a period of low immigration, with a net immigration approximately 0.54 per cent of the population Australia is not only unable to benefit from the higher fertility of immigrants they are also lacking replacement workers. (Guest and McDonald)
Impact of an aging population
The impact of an aging population, as seen particularly in Japan and Australia, is most evident in the workforce. With a significantly large number of people over the age of 74 the workforce is faced with an increasingly smaller number of workers. The baby boom generation has begun to retire leading to a size reduction in the work force as well as an increase in the number of dependents within the population. (Guest and McDonald) However, the decades-long trend of decreasing fertility rate in both Japan and Australia results in younger generations too small to support or to replace the baby boom cohort. Therefore, the dependents to workers or the support ratio decreases. The data shows that Australia's support ratio reached its peak in 1999, following an increase from 1975 which demonstrates the entrance of the baby boom generation into the workforce soon followed by its decline which reflects the complete opposite: the baby boom generation exiting the workforce and entering retirement. The low fertility rate in Australia also contributed to the rate of decline. (Guest and McDonald) Although the measures of Japan's support ratio showed similar trends to those of Australia it peaked at approximately 1995, five years earlier than Australia, and with a more rapid or steeper decline, which resulted from a combination of low fertility rate and increase in the life expectancy. (Guest and McDonald)
With a greater number of dependents, due to the large number of retirees, the population of a country also experiences an increase in consumption. The main force driving of this increase is the greater health care demand by the elderly. According to Guest and McDonald, the level of consumption of dependents over the age of 74 is approximately 19 per cent higher than that of other adults.
Relying solely on the fear of labor shortages and increasing consumption along with the low fertility rates, and (as was the case of Australia) a trend of low national savings, many politicians began to promote an increase in the national savings rate by approximately 5 percentage points of GDP. However, Guest and McDonald, in particular, saw the two ends of the spectrum and noticed that in fact population aging is not as bad as it originally seemed. There was indeed pressure on the resources available but with respect to living standards the presence of the older generations was beneficial. There were three explanations supporting this idea (1) the investment dividend, (2) the consumption dividend and (3) productivity effect.
The investment dividend refers back to the Solow Growth Model, which expresses population aging in terms of its effects on a population's living standard. The large retiring baby boom cohort leads to a reduction in the size of the work force, requiring fewer workers to be equipped with capital, which suggests less capital widening. Thus the decrease in the demand for capital widening allows for more capital deepening which in turn would go toward the capital-labor ratio increasing the standard of living.
Although the older generation contributes to the increase of the populations consumption it also plays a role in the decrease of consumption. The changing age structure increases the amount of elderly in the country, which in turn decreases the probably of children being born of that generation. With less fertility there would be less consumption due to the decrease in the number of children.
Finally the productivity effect states that there is an increase in the productivity since older workers are more productive than younger workers, due to the amount of experience they have had throughout their lifetime. The more you have worked the more skills you have gained through work.
Should Australia and Japan increase National savings rate?
In Australia population aging, for the most part, had a positive impact on the country's living standard, although a decrease in immigration resulted in lower living standard, the decrease in fertility resulted in higher living of standard due to the Investment dividend and Consumption dividend. In fact the living standard projected for year 2050 was 12.7 per cent if aging was excluded compared to 85.8 per cent when aging was included. (Guest and McDonald)
In the case of Australia low values of the support ratio are expected in the future so the optimal plan, according to Guest and McDonald, is to increase savings or save at high rate in the near future, when the support ratio is still relatively high which would then smoothen consumption in order to allow for the changing age structure of the population. However, higher savings would only be beneficial in Australia because it is preceded by a period of little of no aging. The fact that Australia has a period of high support ratio allows it to add wealth for the future consumption.
However, when focusing solely on the standard of living, Guest and McDonald, noticed that is not imperative for the national savings rate to increase because there would no significant change in the path of living standards as savings rate increases. In fact the increase in savings rate would reduce the living standards of the less well off in order to benefit the better off
Japan, on the other hand, does not have a period of little or no support ratio, because it is further down the aging track than Australia, since it started approximately five years earlier than Australia. Japan is well into the period of decreasing support ratio (and increasing dependency) due to lower fertility and greater life expectancy. This more rapid decrease implies that, for optimal consumption smoothing, Japan has to decrease its saving rate. (Guest and McDonald)
Bibliography
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Guest, Ross S.; McDonald, Ian M. (2001), "Ageing, Optimal National
Saving and Future Living Standards in Australia", Economic Record
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Guest, Ross; McDonald, Ian (2001), "National Saving and Population
Ageing", Agenda v8, n3 (2001): 235-246.