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Wednesday, 24 February 2010 15:15

Demographic ageing is not a problem

A study  based on the year 1997
 
1.  Introduction
The high level of consumption per head of the population in our wealthy part of the world has grave consequences that can be felt globally. That is why it is appropriate for us to aim for a
gradual decrease in population through a restriction in the number of new births. What is encouraging in this context is the autonomous drop in birth rates taking place in various countries in Western Europe. The downward trend in birth rates is so pronounced that eventually a decrease in population will occur in many European countries.
 
There is, however, widespread concern about the growing percentage of older people within the population. In essence this concern stems from the fear that there will be too few active people available – i.e. people in work – to guarantee a reasonable quality of life for the total population (and the elderly in particular). The implicit assumption is that each parent generation should be followed by a generation of children of equal size. The consequence of this line of reasoning would be that a population, once it has grown to an undesirable size, can never be brought back to a size more in accordance with the production of its own basic materials and the capacity of its local environment.
 
It is this fear of ageing, above all, that makes any policy aiming at a lower birth rate a forbidden subject for many Dutch people. That is why we want to show, with relevant numerical data, that, although the ageing of the population in the coming 40 years will have far-reaching consequences, we do not need to worry about our capacity to deal with this challenge.
 
2. The composition of the population in the Netherlands in 1997
The spectre of our inability to pay for the financial consequences of an ageing society is based on the reasoning that a great number of active (working) people are needed to support a limited number of inactive individuals. In this reasoning older people and the inactive are grouped in the same category.
 
Below we will show that the current Dutch situation is also one in which a large inactive group is supported, seemingly without negative consequences for the gross national product. For a large part, these are in the under-65 age group. According to data from the Dutch Census Bureau (CBS), on the 31st of December 1997 the Netherlands had 15.654.000 inhabitants, divided up as follows according to age group:
 
Age
Number
Percentage
00-19
3,809,000
24.3 %
20-64
9,735,000
62.2 %
65+
2,110,000
13.5 %
Total
15,654,000
100.0 %
 
In comparison to other western European countries the number of elderly people in the Netherlands in 1997 was on the low side. In the other western European countries the percentage of old people was between 15% and 18%. The percentage of young people was around the European average. In discussions about the ageing society emphasis is often laid on the percentage of older people, as if it provided the main measure of the number of inactive people. This reasoning is misguided. The table below shows that the current situation is also one in which a small active group supports a large inactive group thanks to high labour productivity.
 
 
Number of people
Proportion to number of jobs
Number of jobs (20-64 years) 1)
6,224,000
100
Unemployed (WW- unemployment benefit)
374,000
6
Unemployed (Benefits)
420,000
7
Unemployed (WAO disability insurance benefit)
860,000
14
Work programme, job pool
77,000
1
Early retirement and flexible pensions
150,000
2
Subtotal
- reduced pay
- redundancy schemes
- functional superannuation
150,000
2
Higher education (20years and older)
300,000
5
Unemployed not receiving benefits:
- seeking employment (200.000)
- not seeking employment (married
 women, widows)
1,180,000
19
Subtotal 20-64 years
9,735,000
156
Older people (> 64 years)
2,110,000
34
Young people (<20 years)
3,809,000
61
Total population
15,654,000
252
1) Of the young people between 15 and 19 years 176,000 have a job.
This makes the total number of people working 6,400,000.
 
These figures indicate that there are 152 inactive individuals for every hundred active ones, and only 34 of these 152 are in the elderly category. Older people are a minority within the inactive group. We can conclude from this that a small working population can support an inactive group successfully. In judging the effects of the ageing society this fact plays an important role. The ratio between the number of active and inactive people is all the more remarkable when we take into consideration the fact that average working hours in the Netherlands are far below those in other European countries.
 
Only 58% (3,698,000) of the 6,400,000 employees in the Netherlands have a full-time job. In 1997 the 36-hour working week became the norm for a full-time job in many sectors. This was certainly not a voluntary choice on the part of employers; the unions see to it that no possibilities are offered for working more hours for a higher wage. It must be assumed that a number of employees would opt to work more hours if they had the choice. This is why the 36-hour working week can be identified as a hidden form of unemployment.
A 36-hour working week generally amounts to some 1,620 to 1,632 working hours a year. This number should be further reduced by hours of absence through illness (5% to 6%) and increasing absence related to a variety of provisions for maternity, confinement and parental leave.
 
There is another group of employees in permanent part-time employment. Taking into account part-time jobs of 12 hours a week and more this applies to about 1,920,000 jobs. These employees work an average of 20 hours a week. The choice for a part-time job is not always completely voluntary. In some cases employees accept part-time jobs because there are no other jobs available. This too is a form of hidden unemployment. Nowhere is Europe is the percentage of part-time employment as high as it is in the Netherlands.
 
A third group is that of flexible jobs, such as working through an employment agency. It applies to a group of around 783,000 people. This too is often an involuntary “choice” since a large number of temps would rather have a permanent job.
 
The above facts show that a large and hidden form of unemployment exists in the Netherlands. The number of pensioners is actually negligible when compared to other groups of (involuntarily) inactive people. A gradual increase in the number of older people will, therefore, not lead to an equal decrease in the working population, but will rather lead to a welcome decrease of the involuntarily inactive group initially. This will allow the production of goods and services to continue at the same level.
 
Differences between age groups in the Netherlands
In judging participation according to the different age groups (see appendix 2), there are two groups that stand out. What stands out first of all is the low participation within the age groups of 15-19 years and 20-24 years. This is a result of extending (degree) courses and of the greater influx into higher education. The number of young people following higher education has risen from 20% in 1975 to 43% in 1997. If we take into account the fact that higher education is basically meant to educate people to take up leading positions, then this percentage must be perceived as very high. It seems unimaginable that there could be an appropriate job available for every graduate that would fit in with the level and content of their qualifications. A recent study has shown that, already, 38% of employees have a job for which they are overqualified.
 
Partly because of the unfavourable conditions for employment in the past few decades, many young people opted for lengthy study trajectories. This led to a great number of graduates from higher education. Employers engaged these graduates not so much for their knowledge but because a degree is seen as proof of intelligence and drive. In many cases this has lead to the displacement of those trained in lower, middle and higher vocational education. As this is the case, efforts could be made to create a different, more efficient educational system, without harming the Dutch economy. The Dutch educational system should waste less of students’ time and prepare them for an earlier entry onto the labour market. Courses should be shorter and more compact. The intake in higher education should be restricted to the most talented (15 to 20%). Secondly, what stands out is the low participation of older people. Because of the lack of employment in past decades there has been a steady outflow of older people through redundancy schemes, early retirement and regulations for disablement insurance. The effect is still visible in the form of low participation in the 50-64 year age group (see appendix 2).
 
3. Future composition of the Dutch population
In order to make the extent of the ageing of the population visible we have made use of the simulation programme Poptrain, issued by the Dutch Interdisciplinary Demographic Institute (NIDI) in The Hague. This programme makes it possible, by entering a number of variables, to calculate (on the basis of the actual population in 1995) the development of the population and a number of its consequences over the years up to and including 2050. Using this programme we have calculated two variant models.
 
Variant A:
This variant is based on a fertility rate of 1.70 children per woman and a net immigration of 35,000 people a year (the NIDI’s default setting). This corresponds to the middle variant prognosis of the Dutch Census Bureau (CBS) in 1996. The fertility rate is based on 75% of women having children and an average number of children (per woman who has children) of 2.27 (0.75 x 2.27 is 1.70). In this model the highest population is reached in 2032, after that it slowly decreases. This gives us the following series.
 
2032:
17,110,000
2040:
16,989,000
2050:
16,654,000
 
There are indications that this prognosis is on the low side. Some researchers start from a fertility rate of 1.80. If that were to become a reality, in 2050 the Netherlands would have a population of 17,284,000. In the case of a complete replacement (2.10 children per woman) the population would reach 19,277,00 in 2050.
 
Variant B:
A fertility rate of 1.30 in combination with a migration rate of 0. The fertility rate of 1.30 indicates, for instance, that 75% of women have children and the average number of children (per woman who has children) is 1.73. (0.75 x 1.73 is 1.30). The peak in population would already be reached in 2002. After that the population decreases. The series is as follows.
 
2002:
15,660,000
2040:
13,201,000
2050:
11,694,000
 
If a change in the fertility rate were to occur, the strongest pressure of demographic ageing will occur around the year 2040. After that, not only will the younger generation decrease but the older generation will also, therefore relieving the pressure of a high number of older people. This is why we have based ourselves on the effect on the year 2040 in the following discussions. Although the percentage of older people increases strongly in variant B, this does not result in a catastrophe. There are a number of factors that contribute to this. These relate to developments in the demand for goods and services as well as developments in demand and supply in the labour market.
 
Developments in the demand for goods and services in the Netherlands
  • The increase in the number of older people accompanies a decrease in the number of dependent young people. This influences the structure of collective facilities. The rising costs of pensions and care for the elderly are compensated by the declining costs of bringing up children, which also include the costs of family allowance, medical care for children, education and study grants. The extension of infrastructure, which currently swallows up a great deal of resources, will not be necessary in a future in which the population is decreasing.
  • A saturation effect will also occur in the private sector. There will no longer be any need to provide more housing. On the contrary, people will be able to move out of bad housing, without anybody having to provide replacement housing. The ageing of the population will also lead to a decrease in demand for furniture, furnishings, etc.
  • This development could be reinforced, if a scarcity in base materials forces us to adopt a more sober lifestyle.
 
Developments concerning demand and supply in the labour market:
  • Also as a result of further automation and improvement of working methods a situation will arise in which a smaller number of employees can provide the same production results.
  • The government could aim to encourage young people to join the labour market earlier. Courses could be shortened and the number of people going into higher education could be limited.
  • There will be more job opportunities for the 25 – 64-year-old age group. There will also be more opportunities for women returning to work, those declared unfit or partially disabled and employees who have lost their jobs because of circumstances. This will lead not only to a sharp fall in the costs of benefits and but also to higher incomes.
  • There will be possibilities for converting part-time jobs into full-time jobs.
  • Possibilities could be created to enable people to work longer hours. Many Dutch employees would welcome the possibility of working, and being paid for, more than 36 hours a week or of trading in holidays.
  • Labour participation within the 55 – 64-year-old age group will increase. A gradual raising of the retirement age is a possibility.
  • If a shortage of employees were to occur – which is not to be expected on the basis of our analyses – an appeal could be made to the large group of people just above the retirement age to keep participating in the work process, as a wholly voluntary decision.
 
As a result of the far-reaching growth of labour productivity and the expected increase in the average number of hours worked by employees, the average gross wage per employee could rise. Because of this net wages will not fall, although the larger number of older people might cause a rise in social insurance contributions. Even though a number of uncertainties make it somewhat risky to offer predictions about the labour market in the year 2040, we have still tried to calculate the number of employees that could be available in that year. In this calculation we have based ourselves on variant B, maintaining 65 as the retirement age.
 
Our prognosis is set out in appendix 3. It seems that despite a fall in the population as a whole of 2,5 million the number of available employees only decreases slightly: from 6,400,000 to 6,231,000. If we relate the number of employees to the size of the total population we even observe a notable increase: participation increases from 40.9% to 47.2%.
 
4. The older employee
Our aim should be to keep older employees within the sphere of employment for as long as possible. In the future the following factors might contribute towards achieving this:
  • A smaller influx of young people will, in itself, lead to older employees having more possibilities either to keep their position or to look for another job.
  • More attention needs to be paid to working conditions. We need to prevent employees becoming prematurely unfit through unnecessary stress and pressure of work.
  • Better tools and equipment will make it possible for older employees to carry on working for longer.
  • Insofar as the work is physically demanding, the aim should be to divide work in a suitable way between the older and younger employees in an organisation.
  • In the case of professions that are very demanding physically, there should be a functional superannuation: the employee can then move into another profession.
  • Possibilities need to be created for people to work after retirement, substituting for other employees or working on a part-time basis. The pension system should not preclude the possibility of earning some extra income.
 
5. The retirement age
  • When the Pensions Act was passed in 1919 the retirement age was set at 65 years. Although the physical condition of 65-year-olds in 2010  is better, thanks to improved living conditions, than that of the average 65-year-old in 1919, the retirement age has remained unchanged. In practice there are few employees who actually work until retirement age, as is shown in appendix 2.
 
  • It would be useful to decide on a fixed superannuation age. This would prevent unemployment amongst school-leavers and would also save having to discuss, in each case individually, whether an employee is too old for the position or not. A fixed date for superannuation would, furthermore, provide a basis for pension funds and individuals to base their pension plan on.
 
  • At the moment the average retirement age is around 60 years; this does not involve the actual pension (The AOW or Old Age Pension is received from 65 years) but usually some form of early retirement, pre-pension scheme or superannuation There is, however, a minority of employees who actually reach the 60 year mark: many have already become unemployed, declared partially disabled or unfit or have left the work process through a redundancy scheme.
 
  • The government is aiming for a speedy reduction of these regulations for 60 to 65-year-olds. Sometimes the unions cooperate in this (early retirement schemes have been reduced in order to make the 36-hour week affordable).
 
  • In our opinion a short-term phasing out of these regulations is not advisable and could even be harmful. At the moment the regulations are perfectly affordable; the percentage of older people is remarkably low by European standards. The detrimental consequences of a sudden raising of the retirement age are: a fossilisation of organisations (older employees who had been expected to leave, staying on after all); unemployment amongst school-leavers and missed opportunities for people to move beyond both visible and hidden forms of unemployment.
 
  • Abolition would (possibly) result in a sudden reduction in the collective tax burden. However, in all the subsequent years this burden will grow as a result of ageing, without there being any source of compensation. In the case of a gradual rise in the retirement age, the gradual increase in costs of the Old Age Pension would be compensated by the gradual decrease in costs of early retirement schemes.
 
  • In our opinion the government should aim for a gradual raising of the retirement age. In accordance with the actual situation as it is today, this age should be set at 60 years for those born in 1939 and earlier. From this starting point, the retirement age should be raised very gradually, by 3 months for each birth-year, until 2024, when, for those born in 1959, the age at which the Pension is first received, 65, will once again be the normal retirement age.
 
  • If a shortage of labour were to occur due to extreme circumstances (a scenario that is not anticipated in our calculations), one possible option would be to create possibilities for older people to keep working for longer, if they so choose. Considering the general state of health of the Dutch population it is conceivable that a number of older people would be willing and able to do this.
 
  • In this way, planning in advance, we can create the space for a decrease in younger generations. A raising of the retirement age is fully justified. Older people nowadays are considerably fitter than they were in the past. Medical care has improved, while living conditions have become less taxing. Many ailments that used to lead to permanent disability can now be treated with relatively straightforward operations or with medication. This is a development, which will continue and expand in the coming century.
 
6. The pension system
The fear of low birth numbers stems from the fear of an inadequate pension provision. A secure pension provision is a binding condition if we are to create support for a decreasing population.
 
Our current pension system consists of a current-income financed system, on the one hand, and of capital funding system on the other. In a current-income system, working individuals give up part of their income to the inactive group of the same year. This is the way the Old Age Pension works; as do the early retirement schemes. In the case of capital funding, workers build up a capital sum through payments (to a company pension fund, for instance) during the course of their career, which is paid back to them after retirement in the form of a pension. It is not customary for the insured to have an individual claim to a part of the pension fund capital. At best, the insured individual knows the amount of the pension he or she is to receive, but not the amount of personal capital that the pension fund contains.
 
Some argue for a shift towards a capital funding system: the people who are active today should be made to save a much larger part of their income in order to prevent problems in the future. In our opinion this tactic conceals a considerable risk. If these savings become greater than the demand for capital for investment, then it could lead to a growth in unemployment and an increase in national debt.
 
Apart from the above-mentioned macro-economic risk, the capital funding system has a second disadvantage. This is the fact that the resulting return of investment is highly susceptible to fluctuations in interest and inflation. If inflation rises, or if interest and returns fall, a pension fund will not be able to meet the expectations of the employees who rely on it. Furthermore, an increase in life expectancy, resulting from developments in medical science, could also lead to deficits in the case of a pension system based on capital funding. 
 
In order to prevent the fear of an ageing society a system is needed that provides security for all employees and all older people. It should have the following characteristics:
  • The indexation of pensions should be linked to the incomes of the working group. We need to prevent older people falling behind in relation to the younger generation. Politicians should not call the solidarity between younger and older generations into question.
  • Taking into account the great diversity in career patterns, the pension would ideally be related to the payments made in the active period. This would prevent breaks in pension contributions occurring. An expected claim on the pension fund should be shown, consisting of the payments plus the compensation for inflation (and, potentially, an itemisation of the interest). The amount of the pension should ultimately be related to the amount saved in this manner. In this way individuals saving for their pensions hold on to their rights to the amounts paid into the fund.
  • The pension system can be a mixture of a current-income system and a capital funding system, as is the current system. Circumstances on the national capital market and on the European capital market should be a determining factor in deciding the balance between the two systems. After all, nobody (young or old) would profit from the pension system leading the economy into crisis.
  • Differences occurring between the pension remittances paid out by different funds should be avoided. These could be the result of variations in age distribution, amongst other things. An amalgamation of the pension funds (fusion or pooling of results) is therefore advisable.
  • Taking into account the enormous positive and negative risks involved, the government should provide some guarantee for the investment results of organizations. Surplus profits made by pension funds could be pruned away by the government, while an insufficient return on investment should be compensated by means of general funds. This is a viable option because bad investment returns resulting from inflation or low interest always result in an advantage on the part of the government or private debtors. This provides an opportunity to prune away any resulting surplus through taxation.
 
7. Conclusions
A decrease in population is, as we have indicated in the introduction, an absolute necessity, if we are to achieve a number of essential goals:
  • A reduction in damage done to the environment.
  • A reduction in the inconvenience caused by overpopulation.
  • The preservation of wildlife areas.
  • A reduction in the consumption of natural resources in the Netherlands and in other countries.
  • A reduction in our dependency on imports from outside, which would make us less vulnerable, economically as well as politically.
 
A gradual decrease in the size of the population need not, as some fear, lead to economic problems. Those who fear such problems fail to take a number of positive developments into account:
  • Currently there is a large group of people outside the labour process; there is a high rate of hidden unemployment. Fewer young people entering the labour market will lead to a reduction of this hidden employment. This is why the decrease in the working population will be limited.
  • Because of technical developments and because of possibilities for extending working hours the average production per employee will continue to rise in the coming forty years.
  • Ageing will not only lead to an rise in government spending (the Old Age Pension, homes for the elderly, nursing homes), but also to savings in other areas of the government budget (child support, education, public housing, infrastructure).
 
That is why we conclude that ageing will not become problematic in the case of a gradual decrease in population.
 
Appendix 1.
Prognosis from 1995 onwards (Poptrain 1997)
 
Scenario A
1998
Scenario A
2040
Scenario B
2040
Population (total)
15,659,376
16,988,761
13,201,122
Births
190,780
165,444
78,401
Deaths
139,090
224,443
219,907
Immigration
35,000
35,000
0
 
 
 
 
Percentage 00-19
24.33 %
21.58 %
15.25 %
Percentage 20-64
62.17 %
53.52 %
53.03 %
Percentage 65+
13.50 %
24.90 %
31.72 %
Percentage 65-69
3.96 %
6.02 %
7.57 %
Percentage 70+
9.54 %
18.88 %
24.15 %
 
 
 
 
Number 00-19
3,809,926
3,666,175
2,013,171
Number 20-64
9,735,434
9,092,385
7,000,555
Number 65+
2,114,016
4,230,201
4,187,396
Number 65-69
620,527
1,022,171
999,229
Number 70+
1,493,489
3,208,030
3,188,167
 
 
 
 
Green pressure
39.13 %
40.31 %
28.77 %
Grey pressure
21.72 %
46.53 %
59.83 %
Total pressure
60.85 %
86.85 %
88.60 %
 
 
 
 
Cost of Old Age Pension
€ 17,583 million
€ 35,185 million
€ 34,829 million
 
 
 
 
Number of pupils
3,245,400
3,156,573
1,795,852
Number of patients in nursing homes
57,592
141,390
139,857
Number of patients in care homes
130,859
341,608
338,443
 
 
 
 
Expenditure child support
€ 2,886 million
€ 2,777 million
€ 1,525 million
Expenditure education
(State + local government)
€ 19,145 million
€ 18,621 million
€ 10,594 million
Cost of nursing homes
€ 2,744 million
€ 6,736 million
€ 6,663 million
Cost of care homes
€ 2,672 million
€ 6,976 million
€ 6,911 million
GP, specialist and physiotherapist­ consultations
€ 59.1 million
€ 69.93 million
€ 58.27 million
Cost of medical consultations
€ 2,836 million
€ 3,357 million
€ 2,784 million
 
 
 
 
Housing demand (extra)
74,702
4,928
- 47,414
Housing demand (replacement)
15,298
60,000
60,000
Housing demand (total)
92,300
64,928
12,586
 
 
 
 
Cost of housing construction
€ 10,471 million
€ 7,365 million
€ 1,428 million
Costs are indicated in euros, not in Dutch guilders
 
Appendix 2.
Rate of participation in age categories in 1997
Age group
Total
Working
Percentage
15-19
915,000
176,000
19
20-24
998,000
613,000
61
25-29
1,279,000
1,015,000
79
30-34
1,306,000
992,000
76
35-39
1,255,000
908,000
72
40-44
1,167,000
848,000
73
45-49
1,147,000
808,000
70
50-54
1,020,000
632,000
62
55-59
786,000
329,000
42
60-64
690,000
79,000
11
Total 15-49
10,563,000
6,400,000
60
Total 20-64
9,648,000
6,224,000
64
Source Dutch Census Bureau (CBS)
 
Appendix 3
This table shows how an increase in the number of older people
 can be compensated by a related decrease in other inactive categories.
Age
Situation
Number
%
Number
%
 
 
1997
1997
2040
2040
00-19
Not working
3,633,000
23.2
1,813,000
13.7
00-19
Working
176,000
1.1
200,000
1.5
20-64
Working
6,224,000
39.8
6,031,000
45.7
20-64
Unemployment benefit
374,000
2.4
50,000
0.4
20-64
On benefits
420,000
2.7
50,000
0.4
20-64
(Partially) disabled
860,000
5.5
360,000
2.7
20-64
Work scheme/job pool
77,000
0.5
0
0.0
20-64
Early retirement flexible pension
150,000
1.0
0
0.0
20-64
Reduced pay
150,000
1.0
40,000
0.3
20-64
In higher education (20 years and upwards)
300,000
1.9
100,000
0.8
20-64
Not on benefits, seeking employment
200,000
1.3
20,000
0.2
20-64
Not active, not on benefits
980,000
6.3
350,000
2.7
65-99
Not active
2,110,000
13.5
4,187,000
31.7
All
Total population
15,654,000
100.0
13,201,000
100.0
 
 
 
 
 
 
All
Working population
6,400,000
40.9
6,231,000
47.2
 
Appendix 4
Works consulted:
  • Dutch Interdisciplinary Demographic Institute: NIDI-Bundel no 35 bevolkingsvraagstukken anno 1994 (especially chapters 5 to 14)
  • NIDI Bundel no. 50 bevolkingsvraagstukken anno 1997 (especially chapter 3)
  • NIDI programme Poptrain 1997
  • The 1997 Budget (Miljoenennota)
  • Dutch Census Bureau, Statistical Yearbook 1996-1997-1998
  • Dutch Census Bureau, various data relating to the labour market and employment (provided on demand)
  • Ouderen voor ouderen, demografische ontwikkelingen en beleid (Scientific Council for Government Policy, 1993)
  • Toekomstverkenning arbeidsmarkt en scholing tot 2007 Ministry of Social Affairs and Employment (October 1998)
 
This report was compiled in December 1998 by the Demographic Ageing work group of the Ten Million Club Foundation.
 

World population