Demography is destiny by Leith van Onselen

Late last week, the World Economic Forum (WEF) published a fascinating article on the UN Population Division’s latest projections for global population growth (h/t Bernard Hickey).

Below are some extracts from WEF’s article:

“Demography is destiny” is an old phrase and may seem an exaggeration. However, there is no doubt that two major demographic trends–an ageing population in developed and emerging economies, and high population growth in parts of the developing world will have an enormous impact on our prosperity in the future.

An ageing population in North America, Western Europe and most of the BRICS will cause major challenges to already stressed government budgets and healthcare programmes. Shifting government programmes and social attitudes to support an active ageing population will be key to prosperity in the future of these economies. The challenges are enormous as are the opportunities if the skills and wisdom of the “silver generation” can be fully harnessed.

The challenge of population growth is perhaps even greater… It took only 12 years for the world’s population to grow by 1 billion to an estimated 7 billion people by next month. The UN Population Division estimated in 2008 in its medium scenario that global population would stabilize at 9 billion in 2050. Recently, it changed its opinion; it now sees global population increasing to 10 billion by 2100.

More importantly, this future population growth to 10 billion is only one scenario in a large range. Under low-growth scenarios, population could stabilize by 2040 at around 8 billion. Under high-growth scenarios, it could grow to as much as 12 billion by 2060 and 16 billion by 2100.

Clearly, our collective efforts to address poverty, food security, climate change and other resource challenges are hugely affected by whether the global population peaks at 8, 10, 12 or 16 billion. As one commentator said: “Anything below the 10-billion line is opportunity; everything above is catastrophe.”

So according to the UN projections, the global population will not just balloon in size, but also age rapidly.

As I was interested to see how Australia fit into this picture, I extracted the relevant data from the Australian Bureau of Statistics (ABS) long-term population projections, which were released in 2008 and provide population projections under three scenarios:

High growth scenario (Series A), which assumes an increase in the fertility rate, higher net overseas migration than existed in 2008, and an increase in life expectancy;
Medium growth scenario (Series B), which largely reflected the trends in fertility, life expectancy at birth, and net overseas migration that existed in 2008; and
Low growth scenario (Series C), which assumes low assumptions for fertility and net overseas migration.

The assumptions underpinning these projections are provided in the table below:

First, consider Australia’s projected population growth under these three scenarios:

By the year 2100, Australia’s population would be around 50% larger under the Low Growth Scenario, 100% larger under the Medium Growth Scenario, and 175% larger under the High Growth Scenario.

Moreover, Australia’s population is projected to age rapidly under all three scenarios.

First, consider the share of Australia’s population aged 60+ and 80+ under the Low Growth Scenario:

Share of Older Pop'n (Low Growth Scenario)

Now consider population ageing under the Medium Growth Scenario:

Share of Older Pop'n (Medium Growth Scenario)

And now the High Growth Scenario:

Share of Older Pop'n (High Growth Scenario)

Incredibly, by the year 2100, Australia’s older population – those aged over 60 years of age – is projected to reach 20.1 million under the High Growth Scenario, which is almost as large as Australia’s current population!

Below I have also converted the ABS data under the three scenarios into Dependency Ratios – defined as the ratio of the non-working population, both children (<15 years old) and the elderly (over 65 years old), to the working age population.

First, consider Australia’s dependency ratios under the Low Growth Scenario:

As you can see, Australia’s total dependency ratio is projected to increase sharply, from around 50% currently to just over 70% by the end of the century. This increase in the dependency ratio is driven by a steady increase in the proportion of the population aged over 65 (the standard ‘retirement age’), offset partly by a reduction in the child dependency ratio (i.e. those aged under 15 years of age).

Now consider the projected dependency ratios under the Medium Growth Scenario:

There is minimal difference under this scenario, with the total dependency ratio increasing to just under 70% by 2100.

Finally, consider Australia’s projected dependency ratio under the High Growth Scenario:

Amazingly, the high growth scenario provides the worst outcome, with Australia’s total dependency ratio projected to increase to nearly 80% by the end of the century. Although the old age dependency ratio is much the same as under the low growth scenario, the proportion of younger people is significantly higher.

Hence, based on the ABS’ projections, the calls for Australia to increase its immigration and/or birth rates in order to mitigate the impacts of an ageing population appear to be misguided. And this view was recently supported by the Productivity Commission in its submission to the Minister for Population:

…several studies, including some undertaken by the Commission, indicate that policy-induced changes to Australia’s population are unlikely to significantly affect the ageing trends.

Improvements in longevity are the major cause of population ageing over the long run. In recent projections, Commission researchers estimated that an increase in the long-run total fertility rate from 1.85 to 2.10 births per woman — even if it could be achieved — would be associated with only a 1.1 percentage point reduction in the proportion of people aged over 65 by 2051.

Similarly, substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age. The Commission has estimated that an increase in annual net migration from 150 000 to 300 000 would lower the proportion of those aged 65 or over by less than 3 percentage points by 2044-45. As an illustration ofthe challenge, the Commission showed that delaying an increase in the dependency ratio by 40 years would require a net migration-to-population ratio of 3 per cent per year, leading to a population of around 85 million by 2044-45.

It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts.

While it is undeniably true that population ageing will have wide ranging impacts on the Australian economy – from reduced consumption expenditure, to slower asset price growth, and reduced government taxation revenue and higher spending on health and aged care – endless population growth and immigration is not a sustainable solution to Australia’s ageing ‘problems’.

In the long-run, the only way to mitigate the effects of population ageing is through: (1) greater productivity growth; (2) higher workforce participation; and (3) tightening eligibility requirements for entitlements, such as the aged pension, aged care, and subsidised health care.

Think about these facts the next time a population booster argues for a higher immigration intake to alleviate pressures arising from an ageing population.

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