Denys Correll: The cost of ageing

Businesses have yet to deal with rapid population ageing, says Denys Correll. The answer is to work longer

Populations are ageing rapidly in many regions, especially in Japan and Europe. It is now a widely accepted fact. This trend has been accompanied by a worrying decline in labour force participation around the world over the past 50 years. Moreover, the ageing population is itself ageing, and men are catching up with women in the longevity stakes. These trends have profound implications for business that managers are only beginning to grasp.

No work, please, we’re old
The drop in labour force participation among the old (and even those in late middle age) has been remarkable. Only one in five over-60s was in the workforce in 2000 compared with one in three in 1950. During the same period, older women have been increasing their labour force participation, which implies an even more pronounced withdrawal by men. Interestingly, Africa has the highest rate of labour force participation by the over-60s, and Europe has the lowest, perhaps reflecting contrasting social security provision.

In Europe, the labour force share of younger people (15 to 24 years) fell from 20% in 1987 to 13% in 2000 as a result of the declining birth rate. It looks as if we are on the way to seeing labour shortages.

Not only are there more old people around, but the old are getting older. The 80-plus age group is growing faster than the younger segment of populations. The most extreme example of population ageing is Japan where by 2050 more than one in three people aged over 60 will be at least 80 years old.

Globally, the over-80s are about 1% of the population, by 2050 they will account for more than 4%. Half of the world’s oldest old population lives in six countries: China, America, India, Japan, Germany and the Russian Federation.

By 2050, 10% of the population in some 19 countries will be over 80. While the ageing population is now a problem for the developed world, it will become an issue for the developing world by 2025. By that time, 57% of the over-80s will live in the less developed world. And by 2050 the developing world will accommodate more than 70% of the world’s over-80s.

Women still live longer than men, but men are catching up. Even so, by 2050, there will still be just 78 men to every 100 women among the over-80s. There are, however, vast international variations with older men outnumbering older women in Pakistan and some Arab countries.

Who cares, who pays?
What have all these figures got to do with business? First, turn to the “old old” population – those over 80. The older population will be frail. The increasing numbers will require more and more care. The tradition of the younger female relative providing free care will be in conflict with business demand for skilled employees in the future. But if there are not sufficient paid carers, relatives will be under pressure to provide home care, causing a loss to the skilled workforce.

The birth rate will not provide enough new younger workers in the middle of this century. The nature of employment will change, with many more people having to provide care for which they are paid. And here we come to the conundrum. Who will pay for this care?

The trend in governments is to privatize care. But will those who require care have the funds to pay for it? If you argue that the older person should pay for his or her own care, pause for a moment and ponder the political reality. In democracies, the elderly are increasing as a proportion of the voting population. Some democratic governments feel caught, though in many countries the influence of the older voter is still “a latent potential power”, as one German government report put it.

If the latent power becomes real, it will be in opposition to pressure from business to reduce taxes that, in part, pay for the costs of an older population. Unfortunately, election cycles do not facilitate a long-term response to demographic trends. Unemployment is top of the political agenda now in many European countries, even though demographic trends point to labour shortages.

Early retirement
But labour shortages seem a long way off. Instead, governments and businesses have been pushing people out of the workforce by encouraging early retirement. Early retirement is often the consequence of corporate adjustment, in other words, restructuring and reducing the workforce. The cost of this adjustment is to a large degree external to the company, being passed on to the individual or to the institutions that pay the unemployment (or, often, disability) benefit or pension.

Early retirement has, therefore, led to increases in the cost of social security systems. Early retirees draw social security for longer, posing problems for both private contributory and government pension schemes. In Germany since 1960, the length of time a person is paid a pension has increased by 60%. Higher contributions will be needed to pay for these longer retirements. The same problem arises if disability benefit schemes are used as de facto early retirement schemes.

To change from a culture of early retirement to an older workforce will require mind shifts by employers, governments and workers. Early retirement has been portrayed as a desirable achievement for the worker, particularly if there is a nice redundancy package.

Importing a solution?
But who will pay for more and more pensioners? The obvious answer is that we need more workers. In Europe, we are forecasting longer working lives, increased female participation and continuing positive net migration of working-age people. Even so, the labour force decline will start to bite in the next decade. There is no sign that fertility will increase, and even if it does, the impact on the workforce is decades away. Creating a migration surplus will slow the decline in labour force participation. But the overall employment rate will decline if the rate of employment of the over-55 age group does not increase. Moreover, migration creates challenges for social integration. Racial tensions are evident in many societies. Increasing the proportion of migrants will require further thinking on how to create both economic and social integration.

Technological change is so fast that knowledge quickly becomes obsolescent. There is no strong integration of lifelong learning and employment. Moves by governments towards “user pays” education is a substantial disincentive to an older worker to learn new skills. And companies are reluctant to invest in training older workers, which they see as a short-term investment, even though many studies point to the loyalty of older workers.

By failing to commit resources to training, employers are defying the inevitable rise in demand for skilled employees. In Europe, over the five years to 2000, the low-skilled component of the workforce dropped from 47% to 38%. During the same period to 2000, the proportion for medium-skilled workers rose by 5.5 percentage points and that of high-skilled workers by three percentage points.

Early retirement is often associated with age discrimination. Companies look first to the older workers when they need to reduce their workforce, partly because of prejudices that older workers find it harder to learn new skills and are inflexible. But if older people do take longer to learn new skills, this simply increases the need for companies to have continuous training to ensure that they have a workforce that is constantly ready for new challenges.

What to do?
Governments, employers, trade unions and educational institutions can do much more to plan for an ageing population, including planning for long-term labour needs. To date, many countries have addressed particular issues but not recognized that policies are interrelated. There are strong links between employment, health, health costs and pension schemes. Undertaking reform of one component can distort other elements.

Early retirement should no longer be made to seem desirable. The reality is that once people have entered retirement and have become accustomed to it, there is little chance of attracting them back to work. This reluctance could be lessened if the rules about moving on and off retirement benefits were more flexible.

Workers understand just how much wealth they need to accumulate to ensure a good standard of living in retirement, especially now that the individual is becoming more and more responsible for paying for services like health and long-term care. Working longer is the simplest route to wealth.

The productivity of workers, including older workers, can be enhanced by employers investing in the health of the workforce. The employer can gain from providing resources for health promotion. Within companies the message can be reinforced through mobility and rotation within the company.

There are measurable benefits to a holistic approach to an ageing society and, in particular, encouraging people to work for longer. Individuals will have greater capacity to save for a comfortable retirement. Publicly funded social security income support schemes will not be subject to so much stress. People in employment will exhibit better health than those who have moved into retirement. Tax revenues will be higher. And when the older person eventually retires, he or she will have more money to spend. Good news all around.

Denys Correll
Denys Correll is a fellow of the Australian Society of Association Executives. Previously he served as director of Australia’s lobby for older people.