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Die Presse

(Translated from German)

10 June 2006

Demography Dividends of Aging

by Martin Kugler

Medium-term aging increases per capita income. The long-term consequences are not known.

Japan set a new world record last year: The island nation has overtaken Italy as the most aged society in the world. Already, every fifth Japanese is over 65. According to prognoses, in 30 years every third Japanese will be of retirement age. Japan is surely only the most extreme case: Practically all countries in the world have a problem with aging. Economists are themselves united on the fact that this demographic development will have dramatic effects on the economy. How these appear, however, is most disputed. Indeed, it is even unclear whether in the long-term the consequences are positive or negative.

Science examines the medium-term developments ever more clearly, however. Concretely: what direct effects does the "demographic transition" have. By this term, population researchers refer to the typical mechanism of development: First the number of deaths sinks owing to medical and social progress. In Europe this already began in the nineteenth century, in the Third World only after the Second World War. The consequence was rapid population growth. With time however a second trend begins: Birth rates begin to fall off sharply, since reproductive behavior is largely determined by cultural and religious factors. The direct consequence of this is, in any event, the aging of the society.

Researchers like the US economist Andrew Mason or the Japanese demographer Naohiro Ogawa linked the demographic transition in recent years with the economy: They postulate that aging throws off two dividends, which increase per capita income. The first "demographic dividend" is a consequence of the fact that in the course of population growth, the portion of individuals working in relation to pure consumers (under 15 and over 65 years) grows. The number of the available workers is an essential determinant for the efficiency of a national economy. Whether the potential is also used, is another question, which depends, among other things, on the functioning of the job market or on wage policy.

After 30 years the contribution of the first dividend becomes smaller, as even more people retire from the labor force. In Austria it already tilted to the negative at the turn of the millenium, in Japan in the 90's. The fact that the economic stagnation of Japan began at the same time is no miracle for demographers: "we forecast that, but no one listened", said Ogawa on Thursday at the conference "Impact of Ageing" in Vienna.

Aging produces a second dividend: Because of higher life expectancy, people change their savings behavior - and the capital accumulation makes higher growth possible. This effect is particularly pronounced in states where pensions are saved and is less strong in countries with a public pension system (like Austria). The second dividend - which is twice as high as first - continues substantially longer: It is positive for at least 40 years in nearly all states. For Japan, Ogawa estimates that until 2025 it supplies a positive growth contribution.

In sum, the demographic dividends explain a large part of economic growth: Mason computed that for the period 1970-2000 in industrialized countries half the increase in the per capita income is to be attributed to the demographics. It is otherwise in developing countries: There only the two dividends ensured that per capita income rose at all.

Link to the article (in German):

http://www.diepresse.com/Artikel.aspx?channel=e&ressort=eo&id=564274&archiv=false[ ]