Calin Aneculaesei
Aug 18 · 6 min read
Photo by Matteo Vistocco on Unsplash

Cause

The cause of this phenomenon is different in each country. One major, universal factor is the great increase in life expectancy in the past 50 years from 71.1 years old in 1960 to a peak in 2014 at 81.4 if we use the United Kingdom as an example. Another big factor is a steady decrease in fertility rate after the Second World War wherein 1960 around 3 children were born per family. This has drastically decreased to around 2 overall making it so that the generation born in the post-war baby boom reaching retirement age at the same time as people stop having as many children as before to support this new ageing population. This has become a massive problem seen most clearly in Japan. On this graph, this is clearly visible with the largest bulk of the population having a median age of 65~.

With the retirement age in Japan being only 60(to be raised slowly to 68 in the next 10–20 years) it means that the largest part of the population is not contributing to the economy. This has caused concern as the number of working-age people in the country has slowly decreased while this massive bulk of the demographic goes into retirement age. On top of this Japan has one of the world’s lowest fertility rates with it being 1.26 at its lowest in 2005 according to WHO which has resulted in heavy economic strain due to a decreasing supply of labour in the economy. The impact of this was heavily felt in 2018 where for the first three months Japan’s economy was only one of two economies in the world to contract rather than grow, with the contraction rate being -2.5%~.

The Problem of Labour and Money Flow

A big part of this contraction in economic growth is the undersupply of labour experienced by the Japanese economy at a time where the need for labour is greater than ever. This has resulted in Japan‘s policy on immigration leaning towards allowing more immigrants in than ever before, which for many is seen to be a strange phenomenon due to Japans history of Isolationism. A study in 1993 found that around 63% of those surveyed were fine with immigration being used to fill unskilled labour shortages which is quite high compared to the acceptance of immigrants to fill unskilled jobs in other developed countries which shows that the people of Japan are adapting to this new system much faster than the population of other developed countries.

Another factor is the spending habits as well as the spending power of the elders. The spending patterns of someone at retirement age doesn’t resemble the spending patterns of someone of working age in any way. Elders will usually skip on many items that are a staple of most working-class citizen’s basket. As a result, someone who is at pension age is much more prone to save rather than spend. Their spending power will also decline as it is most likely that their pension will be a lot lower than their previous salary or the average wage that they have been earning throughout their life. This would lead to a decrease in an economy’s potential as labour has been removed from the economy and has been replaced by an expense, leading to a contraction in the production possibility curve of the economy due to the removal of an economic asset.

The elderly also cause instability in markets due to their irregular spending habits. Usually, elders tend to stay away from luxurious and expensive products as they do not see the need for them, which creates stagnation in some sectors of the economy. Also, they are more prone to save their money which stagnates the economy as this takes currency out of the circular flow of the economy. This means that less money is reinvested which limits economic growth due to less money being available to stimulate industry and therefore, the multiplier effect of money being put in the economy is not present at all. This would have the long term effect of decreasing the growth in jobs and in industry, leading to an eventual recession as seen in 2018 Japan.

Possible Solutions

Something that may not be so obvious is the fixed retirement age based on life expectancy. Retirement age and life expectancy are the keys to solving this puzzle in my opinion.

First of all, we should take a look at the age of retirement. Here we see that the higher the retirement age the more the elderly will work which will increase the labour pool of the economy and lessen the time that the government would have to pay a pension. This would also plug the leakage in the circular flow of income due to less money needing to be taken as a tax to pay for pensions. But ethically speaking we cannot just keep raising the age of retirement to suit our needs a balance has to be found with this policy. Retirement age should be chosen on a job by job basis due to different jobs having different impacts both mentally and physically on a person. I suggest a lower retirement age for jobs that are intensive in both but an overall rise to lessen the burden of pensions on the economy.

Secondly, we should look at the way in which life expectancy affects the economy. Here we see that an increase in life expectancy, which is seen in most developed countries nowadays, would put a bigger strain on the government. If in a country the life expectancy is lower would mean that the government will benefit from an economic point of view as they have to pay fewer pensions due to fewer years of someone’s life being lived as a pensioner. Therefore we must think about the retirement age as a ratio of one’s life spent in retirement rather than the number of years one spends in retirement. This method means that retirement age can be calculated fairly across all countries even if there is a difference in life expectancy.

If we continue with the Japanese government we can see that their fixed retiring age is 60 and the life expectancy is 84 years old. This means that the government will have to pay a pension to an elder for 24 years and if we take a look at the average pension pay in Japan which is about 150,000 yen (£1,105 or $1,350,00 USD) and if we times that by 288 months (24 years in months) this adds up to 43,200,000 yen (£318,154.40 or $398,074.75 USD). If we also keep in mind that 25.9% of the Japanese population is over 65 it quantifies the burden pensions put on the Japanese economy. Although I’ve used Japan in this example it doesn’t mean other countries aren’t experiencing the same effect. Many developed western countries are experiencing the same thing which has put a great economic strain on all of their economies.

Conclusion

Overall to fix this problem we need to do at least one of two things. Either we somehow get the elderly involved in the economy or lessen the strain of pensions on the economy. For the first idea, programs could be implemented to allow the elderly to engage in the local economy through volunteering activities that require minimal physical and mental effort from the elderly, otherwise, this policy couldn’t be ethically viable. These could include teaching/doing talks at local schools which would allow for further insight into their country’s history through direct access to a primary source or small manual labour tasks such as crocheting.

For the second idea, a system of progressively raising the retirement age as life expectancy rises would have to be implemented. To make this “fair” a formula would have to be used where the retirement age would have to be worked out by what percentage of a person’s life would be spent in retirement. Currently, in Japan, a person spends approximately 29% of their life in retirement. If the progressive retirement age is implemented this ratio would have to be preserved with exception to be made if the person was working a mentally or physically intensive job to make this policy ethically viable. This would lessen the strain of pensions on the economy.

1-One-Infinity

By Medium Partner Program Friends — a publication about what unites us all.

Calin Aneculaesei

Written by

Student of History and Economics with an intrest in Politics and Psychology. Sign up to my newsletter: https://bit.ly/2Hr2fJ6. Contact: aneculaeseicg@gmail.

1-One-Infinity

By Medium Partner Program Friends — a publication about what unites us all.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade