Growing old before getting rich

Madhur Jha Global Economist & Head, Thematic Research

15 Feb 2017

Asia’s old age time bomb – why now is the time to take action

In the West, ageing populations has been a theme for decades, but in future the most rapidly ageing societies will be in Asia.

Already, China has 131 million citizens over 65, more than twice as many as Japan, Germany and Italy put together. And Asia is getting old much faster than Europe and the US did last century.

This means that some countries in Asia, such as Thailand and China, will grow old before they get rich. These countries need to find ways to manage their already rapidly ageing populations or they will end up stuck in the middle-income trap.

In contrast, Japan, Korea and most of the rest of the OECD had relatively young populations when they hit the high-income bracket.

Korea and Singapore are already ageing, which means that between 7 and 14 per cent of the population is 65 and over. By 2030, more than one in five Koreans and Singaporeans will be seniors, making the countries statistically ‘hyper-aged’, like the UK and Germany. Thailand and China will be hyper-aged by 2035.

Will this result in growth slowing?

Ageing impacts economies, primarily because it reduces the supply and quality of labour. After decades of enjoying a demographic dividend, China, Korea, Hong Kong and Thailand will start to see an economic drag from ageing before 2020, and Singapore before 2025.

Despite multiple new policies, attempts to raise fertility rates across Asia have so far proven unsuccessful. For the major economies, including China, Thailand, Japan, Singapore and Korea, fertility rates remain well below the 2.1 it would take to replace the current population.

Managing the ‘silver economy’

However, whilst the greying of Asia is unavoidable, the economic effects may not be.

By making even modest improvements in the quality of labour through investing more in education, China could postpone the effect of ageing on economic growth by as much as ten years.

On current trends, China is set to have the world’s biggest pool of educated workers within the coming decades, which will help underpin economic growth, before the impact of ageing sets in, but more investment would stave off the effects for longer.

China is facing a ‘4-2-1’ phenomenon

Asian countries – with their relatively low government debts – can also help by taking on some of the increased costs of ageing through the pension system.

The rapid rise in the number of seniors is challenging the traditional Asian family values system where the younger generations look after the older. China, for example is facing a ‘4-2-1’ phenomenon, where the only child is responsible for two parents and four grandparents. It’s unlikely that the younger generation will be able or willing to afford such a burden.

Pension systems remain unsustainable in many parts of Asia, with China’s nationwide pensions possibly running deficits as early as 2030, followed later by Thailand, Korea and Vietnam.

Government action needed

Governments need to step up their efforts to support ageing populations, through health care provision and social security. Countries like China and Thailand will have limited time to tackle the challenges, before the ageing effect kicks in.

They will also need to implement policies that mitigate the structural decline in the labour force as their working populations shrink. This will be a priority for Asia’s advanced economies, too – Japan, Hong Kong, Singapore and Korea. In particular, they need to maintain or improve labour-force participation rates.

Raising female participation rates will have the biggest immediate impact. Countries like Korea, Singapore, China and Japan have launched various initiatives – including child-care subsidies and allowances and employer incentives – to become more family friendly. This is likely to be the quickest way of mitigating the impact of ageing.

Mitigating the consumption effect

A greying population could also affect consumption and investment, though, again, this need not be the case. There’s a considerable growth potential in the senior consumer markets in emerging Asia, particularly in China.

The trend in more developed markets may point the way. In the US, for example, by 2020, only 11 per cent of investable assets will be held by people younger than 45. As their economies develop, we should expect spending patterns to mirror more closely what is happening in the West.

We expect spending patterns to mirror more closely what is happening in the West

While governments in Asia have shown willingness to tackle the challenges of ageing demographics, their continued attention to balancing the negative effects with rising consumption among the ‘silver economy’ will prove crucial over the longer term.

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