Tuesday, August 10, 2010

Population problem? It’s called longevity

Population growth advocates often rely on the ‘age dependency ratio’ as their core economic argument.  This ratio is the population aged over 65 divided by the population aged 15-64.  To give this measure meaning there is an assumption that people will not work beyond age 65 and will therefore be need to be financially supported by those at a working age.  Workers will get less of the return on their productive output because it needs to be shared with more non-workers.  Essentially, the percentage of people in the formal economy will decline. 

I have a different opinion on the age dependency ratio. I see it as a shining beacon of success.  People are working for shorter periods of their life.  We as a group are finally taking some of our productivity gains of the past half-century in the form of leisure time. 

Whether or not you agree this a problem, the suggested solution of population growth is, in reality, counterproductive, and will only aggravate the situation.  An increase in the dependency ratio is principally caused by improving longevity. If each generation lives longer than the last we will face this problem even with a growing population. Simply adding more at the bottom of the population pyramid to keep it bigger than the top has the apt label ‘population Ponzi scheme’. Indeed, to counteract this trend would require a significant increase in the natural birth rate, or age biased migration policies, or even the extreme scenario of sending migrants back home when they hit 65.  None of these are desirable.

Australia’s age dependency ratio is 16th out of this comparison of 20 developed nations; none of whom appear to be in a hurry to stimulate population growth to ‘solve’ this problem. Sweden, Norway, UK, USA, Denmark, Germany and Canada all appear to cope quite well with their demographic fortunes.  Our culture, financial structures and welfare system, are still adapting to a population pyramid becoming more cylindrical.

Notably, on one side of the debate are the vested business interests. Businesses which face demand limits per person (a single person can only consume one of the same newspaper per day) and are limited to domestic consumption (which foreigners are interested in Australian newspapers) have the most to gain from population growth.  The other side includes a fair swag of the rest of us, including Dick Smith, who will be a guest in many living rooms Thursday night when he airs his anti-population growth documentary.

Overcoming the apparent economic strain of age dependency issue is extremely straightforward.  People need to save during their productive years to be self supporting during their retirement years.  Isn’t that the point of superannuation?  This dissaving during retirement also shifts wealth to the next generation.

There are a number of other factors at play which are consistently overlooked in the age dependency argument.
  1. People will work longer.  Seventy will be the new sixty.  A gentleman I used to work for is 65 this year and is looking to acquire new skills for the next phase of his career.
  2. People will spread their work time over the life much better, possibly taking intermittent retirements between careers.  They will probably work part time and casually long after 65.
  3. The participation rate may improve
  4. Productivity of the workforce will improve
  5. The population aged under 15, who are also dependent, will shrink
My policy prescriptions to ease Australia to social and economic security with a cylindrical population pyramid include:
  1. Have the population minister put forward a stable population by 2030 as a goal for Australia
  2. Encourage older people still dependent on welfare into casual/part time work.  This can be achieved by allowing up to, say, $15,000 to be earned before they lose any pension payment
  3. Remove the baby bonus
  4. Possibly phase in a reactive immigration quota based on last year’s population change to meet the target set in point 1
  5. Allow proceeds from the sale of a principle place of residence for those above 65 to be exempt from affecting social security allowances for a fixed time period – maybe 5 years.  This encourages financial independence in the long run.
  6. Incrementally increase the pension age starting at a future point.  In Germany it is now 69. We could make it say 66 on 2014, 67 in 2017, 68 in 2020, 69 in 2023, 70 in 2024.
We need to be clear about the future we want for this country.  The population choice is one we can make as a society to provide the country we desire for our children and grandchildren.


  1. Another great post Cam. I have been wanting to write on this issue for weeks but keep getting side-tracked on housing-related stuff. You have summed up the economic arguments beautifully.

  2. yes cam - this makes a lot of sense - boosting immigration and the birth rate is a simple short term reaction to the symptom of age dependency -the tax system needs to offer better outcomes for those who support themselves at 65 + . hopefully your generation will not be sooo dependent?? keith

  3. I just found out about your site through Van Onselen's Blog, and I must say I realy enjoyed it. A lot of original writing, and you give a good case for deflation.
    I must say that part of the problem is that governments wasted all the money of social security and didn't save(like people would have done if they were allowed to save by themselves)
    In the United States, for example, the baby boomers deposited about 2.5 Trillion U.S dollars over 40 years. If we were under a gold standard and they would just buy gold and store they would have had about 7.5 Trillion dollars.(Average price of 400 dollars since 1970)
    Now divide that by 30 million boomers and you get more than 200,000 dollars per boomer. If they retire for 20 years(say from 64 to 84) that's 10,000 dollars per year. That is about the sive of a social security check. Governemts can't pay the money since they wasted it on other things throught the years.
    So core problem is the fact that governments have nationalised the savings of their people.
    In a free market most of the people would be able to retire at 64 and some would need to work more.
    Keep on the good work!

    If you want you can visit my site, where Leith posted a guest post.
    Australia’s Housing Bubble- Past the Point of No Return