Wednesday, January 11, 2012

Population Management: Aging Societies, Total Dependencies, and Fertilities

One often hears tales of woe about the future when societies will overwhelmed by the needs of aging pensioners at a time when declining fertility will result in too small a taxpayer base to support them. Japan has a declining birth rate and about the oldest population on earth, and is usually pointed at as the country facing insurmountable problems because of these effects. It was refreshing to hear a counterargument presented by Eamonn Fingleton in the New York Times: The Myth of Japan’s Failure. He provides this observation on Japan’s population:
"Take, for instance, how Western observers have viewed Japan’s demographics. The population is getting older because of a low birthrate, a characteristic Japan shares with many of the world’s richest nations. Yet this is presented not only as a critical problem but as a policy failure. It never seems to occur to Western commentators that the Japanese both individually and collectively have chosen their demographic fate — and have good reasons for doing so."

"The story begins in the terrible winter of 1945-6, when, newly bereft of their empire, the Japanese nearly starved to death. With overseas expansion no longer an option, Japanese leaders determined as a top priority to cut the birthrate. Thereafter a culture of small families set in that has continued to the present day."

"Japan’s motivation is clear: food security. With only about one-third as much arable land per capita as China, Japan has long been the world’s largest net food importer."

The notion that a country such as Japan might have a demographic master plan is intriguing. It prompted some investigation into the issue of demographics and into what does and what doesn’t make sense.

If one makes the bold assumption that mankind will survive for many more generations in stable societies, one can expect the population distribution in a nation to reach equilibrium. The obvious equilibrium state seems to be a uniform distribution of population by age, modified only by life expectancy at old age. That seems to be what the UN expects as they project the world population out to the year 2100.  What is plotted are male populations on the left and female on the right, shown as a percentage of total population for each age group.

Compare this with Japan’s population in 2010, taken from the same UN source.

Some of the fine structure in the distribution is a residual of the war and post-war years. Japan appears to be well on its way to the equilibrium distribution with the exception of the obvious decline in birth rate. One can then expect Japan to see a number of aged retirees that will grow relative to the total population for some time.

How might one interpret this as a potential burden?

The UN 2100 distribution above can be approximated as being uniform to age 65 and then declining linearly until age 100. One usually talks about demographic burden issues in terms of dependencies—the number of non-workers compared to the number of workers. Remember that there is a cost to society to support children as well as seniors. For now we will assume that children are at least as expensive for societies as senior citizens. Traditionally, a child dependency is defined as the number aged 0-20 divided by the number between 20 and 65 and then multiplied by 100. Similarly, the dependency for the aged would consider the population over age 65. The sum of these two ratios would be the total dependency. The table below provides the UN’s dependency ratios for several countries as well as those expected for the equilibrium population.

Japan’s total dependency is quite similar to that of the US and the European countries, bar Russia. Its aged dependency is right at the equilibrium value, but it is balanced by a low child value. Its aged population share will continue to grow for some time, but it will continue to be balanced by fewer youths. One should also consider that in 1965, a time some think of as our golden age, the US had a total dependency ratio of 95, far higher than any values in the above table. This reminds us that the ability to support non-working segments of the population is a social decision, not a matter of economics.

Notice that China, with its much-derided birth-limitation policy, has a child dependency ratio similar to that of the developed countries. India seems to be continuing to follow its traditional path. Russia is the one country that manages to be short both young people and old people..

Economists shudder when they see the Japanese figures; they point to the declining number of working-age taxpayers and predict disaster. One day the economists may get something right, but it is probably not today. Japan is continuing to increase the per-capita wealth of its people with its current policy. If there is one economic trend to take heed of, it is the long-term unemployment endemic in most developed economies—8-10% for most. Fingleton gleefully points out that Japan, with its declining population, is at about half that value. The country that most nearly resembles Japan in terms of demographics is Germany, a country that is normally touted as an economic powerhouse. One should note that Germany has the lowest birth rate and the healthiest economy of the European countries listed.

There is no economic law that claims a capitalist economy is capable of providing work for every citizen. In fact, the intention of modern capitalism is to eliminate as many workers as possible in order to maximize profit. There is no limit to what automation and smart software can accomplish. There is no evil intent here—that is just the direction in which evolution is taking us. Combining this trend with a declining population—properly educated—could lead to a scenario in which per-capita wealth continues to grow. Combining this trend with a growing population—improperly educated— is a recipe for disaster.

The table below provides the UN’s fertility numbers for the same countries. The numbers relate the numbers of daughters per female who reach a fertile age. Consequently, a value of 1.0 indicates a population that just replaces itself.

Only India continues to expand its population. The USA continues to grow, but mainly from immigration. Again, Japan and Germany look most alike. For all its efforts, China still has a higher birth rate than Japan and Germany.

Societies need to put some thought into whether a declining population can be beneficial and economically feasible. Given the burdens on the climate, overuse of resources, and economic trends, fewer people might be good hedge against the future.

Let us view Japan—and Germany—as examples we might want to follow.

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