This Time is Different for Fiscal Policy – Ageing Proceeds Fast

By Michał Podolski
BANGKOK, Thailand, Jul 25 2024 – Several Asia-Pacific countries are ageing fast. This transition is neither unique nor limited to the region — it is a global megatrend. However, this time it is different. Why? Because ageing proceeds quite fast.

While France and Sweden took 115 and 85 years, respectively, to progress from being an ageing society (with 7-14 per cent of the population aged 60 or older) to an aged society (14-21 per cent aged 60 or older), the same transition in China, Singapore, Thailand and Viet Nam is expected to take only 19-25 years.

Compared to other global megatrends that are shaping economies, such as digitalization or climate change, demographic shifts remain relatively foreseeable and slower by nature. This provides some soothing yet misleading comfort to policymakers. The impact these shifts have on economies is far from being simple, and analysts struggle to fully understand and/or quantify them.

The economy is the people. Therefore, demographic shifts stand out as one of the most influential factors shaping any aspect of an economy. Changing demographics means altering the essence and purpose of all economic activities.

As the purpose changes, so do the needs. Changes in productivity, the share of population in job markets, fiscal policy conduct and effectiveness, and how monetary policy affects economies – all these processes introduce high uncertainty into long-term economic and fiscal policy planning.

Why do the analysts struggle with quantifying the economic impact of ageing? The net change is a sum of multiple factors, often working in opposing directions. As people age, their productivity tends to fall. On the other hand, this trend is offset by technological progress, though to a largely unknown extent, making the net impact difficult to predict.

Ageing societies also exhibit a shift in consumption from durables (e.g. cars) to essential services (e.g. health care), thus affecting a country’s composition of demand for goods and services and tax revenues. Ageing also changes labour force participation. In simple terms, the share of working people in aged societies is lower than in young ones.

Furthermore, the more developed a society is, the greater the temptation to withdraw from the workforce as older people have the possibility to withdraw faster from labour force and enjoy the comfort of retirement. In contrast, in developing societies older people must work up until very old age to avoid poverty. No stone remains unturned.

Why is that all troublesome from the perspective of fiscal policymaking?

First, policymakers would like to know how much of goods and services are and will be produced so that they can plan how to redistribute them through taxes and fiscal expenditures. In plain words, policymakers need to know how to cut and redistribute the “economic pie” (GDP) – and it is not easy to predict its size in the future.

Second, some fiscal expenditures increase and some fall as societies age. Fiscal expenditures on pensions rise along with health care and other forms of social protection. In contrast, education expenditures fall given less demand for children education.

Third, the exact scale and time of these shifts is not easy to determine.

However, Governments do not have to remain passive observers of the demographic shifts, as they have multiple tools to soften the negative impact and boost positive processes. For example, premature retirement results in excessive burden on the fiscal system. Reskilling and upskilling of older people do retain them in work force, increase economic output and reduce poverty among older persons.

At the same time, governments may implement society-wide policies that support healthy and active ageing. With the help of modern technologies and experience from other aged countries, such as Japan, much can be done to keep people active into old age.

All such actions not only improve quality of life and economic performance among older people, but also, directly alleviate the fiscal burden of pension systems as retirement is postponed.

Finally, all the challenges highlighted above and policies needed to address them are closely linked. Therefore, policymakers should seek to address few problems at a time looking for synergies.

For example, greater investments in health care, education, social protection, and environment protection do not only improve the quality of life but also allow people to stay employed for a longer time period.

A better environment improves people’s health condition, which supports economic activity and decreases public spending needs for social protection and health care. In turn, saved social protection and health care expenditures can be used to support other development priorities.

This holistic approach must become the norm of government policy planning. Socioeconomic policies must embrace the idea of synergies between their goals, so that spending on one policy target also supports other goals.

For more insights into how demographic shifts are reshaping Asia-Pacific economies, fiscal policy, and the overall development agenda please delve into the Economic and Social Survey of Asia and the Pacific 2024, prepared by the United Nations Economic and Social Commission for Asia and the Pacific.

Michał Podolski is Associate Economic Affairs Officer

IPS UN Bureau

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