We are not fully aware of how dramatic the challenge of retirement is because the tools used to gauge aging do not reflect reality. Why? Because the changes associated with aging are not simply a result of demography today, but also how societies handled retirement in the past.
The old-age dependency ratio (OAD), the number that compares those aged 65 years or over to those of working age, is an important measurement to judge population aging. It is also considered a rough indicator of the size of the economic dependency of the retired upon those of working age, but it is so far off the reality that it is dangerously misleading.
To explain why requires looking at numbers. As of 2010, the old-age dependency ratio in Germany is 30.6. That is, there are almost 31 people age 65+ to every 100 aged 15 to 64. This is high. Back in 1950, the country had only 10 people aged 65+ to every 100 of working age, but it is part of the extraordinary aging process modern societies today are moving through.
According to the OAD provided by the UN Population Division, by 2050, Germany is expected to have 60 people aged 65+ to every 100 of working age, an OAD ratio of 59.9. One could imagine that the country would have time to age gracefully over decades and introduce suitable policies and initiatives to adapt. However, the OAD fails to capture the fact that almost every third German is already drawing a pension.
To make that clear, of Germany’s current population of 82 million people, some 25 million already receive a pension. In fact, today, there are actually three retirees for every five people working, a significantly different time frame to that implied by the OAD.
The OAD is so far off the reality as to be meaningless, perhaps even dangerously misleading WHY THE DISCREPANCY?
The OAD is based on the age structure of a society and how it is impacted by demographic aspects such as fertility, mortality and net migration. It does not take into account labor dynamics and the way these shape the relationship between economically active and inactive individuals.
YOUNG – AGING –AGED – SUPER-AGED
As a convention, a country is considered young until 7% of its population becomes 65 years or older. The country is then said to be aging. When it exceeds 14%, the country is considered aged and by passing the next 7% threshold, or 21%, the country becomes super-aged. Germany, Italy and Japan are said to be super-aged today, but another 10 countries could join them by 2020, including the Netherlands, France, Sweden, Portugal, Slovenia and Croatia.
Among the working-age population there are many people not actively participating in the labor market. These include those studying or unemployed, stay-at-home men and women, as well as those younger than 65 but already in retirement. In some countries the number of these retiree are considerable. In the past, when unemployment rates rose, governments used early retirement as a method to clear job queues and provide work opportunities for youth.
Italy took this approach. In the 1970s and 1980s, policies encouraged an early exit from the labor market and the effective average retirement age, the age at which people actually retire, fell from 65 in 1970 to 59.9 in 1997 (OECD). In 2012, the effective retirement age in Italy was still only 61.1, and the Italian statistical office reported that in 2013, 25% of pension beneficiaries were younger than 65.
Italy and Germany are the world’s oldest countries after Japan and both face severe demographic challenges. Yet, the OAD figure fails to reveal the actual economic dependency of retirees on the society today. To get a more accurate measure it is better to directly look at the number of pension beneficiaries (old-age, survivor or disability pensions irrespectively of age) in relation to the number of those currently working, creating a “retirement dependency ratio.”
Today, there are three retirees for every five people THE MISSING RETIREES
When this is completed the retirement picture changes dramatically. The graph shows the pressure that pensioners place on the economy as measured by a retirement dependency ratio is far higher than demographic indicators suggest. While the OAD currently indicates an average of 25 elderly for 100 persons of working age in the 12 countries examined, for every 100 working individuals there are actually more than 50 pension recipients.
Even in Egypt, a country with low social security coverage and so a lower number of people receiving a pension, the share of pensioners to working people is larger than the share of people aged 65+ to individuals of working age. The discrepancy is accentuated in eastern Europe, where the ratio between retirees and employed is among the largest in the countries studied due to the combined effects of encouraging early retirement and the outflow of the young after the fall of communism.
Also notable is that the differences between countries in terms of retirement dependency ratios are more pronounced than those in their demographic structure. Compare Australia, the US and Poland: although they all have an OAD below 20%, their retirement dependency ratios range from 30% in Australia, to 39% in the US, up to 63% in Poland.
Similarly, despite being the eldest country in the world, Japan’s retirement dependency ratio matches that of Romania, a much younger country. This indicates economic policies and labor market dynamics have a more important influence than demographic forces in determining the economic burden of an aging population.
This is good news, as it indicates no retirement dependency pattern is inevitable for a country. The degree to which the old-age dependency ratio will burden the working population depends on future employment levels (especially among the young, women and elderly) and on making the elderly less dependent on public transfers to ensure the quality of the retirement years.
Don’t misunderstand me: a high old-age dependency ratio indicates that we are living longer lives. This increased longevity is a positive for all of us. However, for the sake of our societies and economies, we should be concerned about not creating a high retirement dependency ratio.