The burdens of population aging and possible solutions

An elderly lady once said “we were promised a long life, but all we got is old age”. Progressing loss of independence and a sense of uselessness are a source of anguish for seniors and generate problems and costs for societies.
The burdens of population aging and possible solutions

(eberhard grossgasteiger, Pixabay, Public domain)

The United Nations Population Division estimates that in 1950 there were nearly 130 million people aged 65 and more around the world, and that they accounted for 5 per cent of the overall population at the time. As a result of profound demographic changes, in 2015 the number of post-working age people was 607 million and they already accounted for more than 8 per cent of the Earth’s inhabitants. In the period 1950-2015, the world population nearly tripled, while the share of those aged 65 years+ increased more than five-fold. Torsten Slok of Deutsche Bank has noted that for the first time in the history the number of people aged 65 years+ outnumbers the population of children under the age of 5.

Demographers believe that at this point approximately 40 per cent of all countries are in the phase of demographic aging, which is determined on the basis of the so-called Rosset scale. The Polish demographer Edward Rosset concluded that an “old population” is where the proportion of people aged 65+ is higher than 7 per cent. In thirty years, in the year 2050, this phase could be reached by 80 per cent of all countries, out of which 65 per cent will be coping with advanced population aging.

Let’s now segue from all these facts and figures to an old age-related anecdote. The notary Andre-Francois Raffray, who lived in the town of Arles in Provence, commonly known as “Little Rome”, knew a 90 years old lady named Jeanne Louise Calment. In 1965, he agreed to buy her apartment through the French “en viager” system. They made a sort of a life annuity agreement, pursuant to which the buyer pays a monthly fee to the seller, who also gets to remain in the property for the rest of their natural life. Raffray, who was 47 at the time, agreed to pay Mrs. Calment a monthly fee of 2,500 French francs (the equivalent of around USD500 at the time). In return he was supposed to acquire the ownership of her large apartment after her death. However, in 1995 the notary died at the age of 77, exactly 30 years after the contract was concluded. Meanwhile, Jeanne Louise Calment was still alive and kicking. She eventually died two years later, at the age of 122, and the Guinness Book of Records named her the oldest person ever. Raffray was truly out of luck, as he ultimately ended up paying the equivalent of USD184,000 for the apartment (according to the prices prevailing in the 1990s), that is, twice more than it was worth (at the time). On top of that, he was never able to move into the apartment he had purchased.

Although the share of the oldest age groups in the overall global population is still quite moderate, it is growing every year. Of course, the situation is not the same everywhere. The group of aging countries primarily includes the most affluent, as well as the relatively affluent nations. Poland is among the latter. A detailed examination of reasons for this transformation would produce volumes of academic papers, but the most important factors include the secularisation of societies, as well as the elimination of the economic and military-related need for procreation. Civilizational progress brings a change in attitudes: life can be so enjoyable, and children are seen as a responsibility and a problem.

The growing demographic burden

In macroeconomic terms, the aging of populations, together with a simultaneous, slow but systematic decline in the population share of working-age people (15-64 years), results in a slowdown in economic growth and generates tensions in public finance, provided that all the other conditions remain unchanged. The main cause of economic slowdown is that the rate of productivity growth is slower than the rate at which labour resources are decreasing. Meanwhile, budget problems stem from the social and political need to cover the ever-increasing costs of medical care and to provide decent incomes to post-working age people. The shortcomings in the living conditions of seniors are being compounded, because the pension systems known in the Western world are not a universal solution. However, even in the places where they do exist, they are becoming increasingly insolvent, as they are based on a financial pyramid scheme that is currently crumbling under its own weight.

The retired people have less money to spend freely, and more importantly — they have virtually no ability to improve their financial situation. In the pessimistic scenario the companies would start noticing a decline in consumption, resulting from the increase in the share and the number of pensioners, and would limit their investments. This, in turn, could translate into high unemployment and perhaps even so-called secular stagnation. A concurrent effect are budgetary tensions associated with a drop-in revenues (stagnation) and increasing commitments on the side of expenditures, because old age is associated with costs, and providing better conditions for the elderly as a result of societal efforts would mean even higher costs.

In places characterized by great wealth, these tensions are less painful, because a large percentage of people reaching retirement age have accumulated significant assets as a result of inheritance and in the course of their professional careers. For quite a large group of people, these resources constitute a nice safety cushion for old age. Unfortunately, this doesn’t apply to Poland — in its case the cushion is rather thin.

Older people account for over one-fourth of Poland’s population

According to the official data, since 1989 the share of people aged 60 and above (such persons are defined as elderly by the law) in Poland has increased by almost 10 percentage points, up to 24.2 per cent. In reality, however, this share is higher and already exceeds one-fourth of the population, because Statistics Poland (GUS) refuses to take into account the huge number of Polish people who have emigrated abroad, likely reaching several million, and still claims that there are 38.4 million people living in Poland. Meanwhile, the people who have left and who are leaving Poland are mostly young or middle-aged, so this has to have an effect on the country’s actual demographic structure. The problem of population aging in Poland is therefore more serious than the assessments based on data provided by GUS. We should keep this in mind, while analysing the subsequent data sets.

GUS reports that in 2017 the population of people who have reached the newly restored retirement age (65 years for men and 60 years for women) was almost 8 million. Most of these people were women (almost 70 per cent). Retirement and disability pensions are collected by several hundred thousand fewer people, as they are either still working or have not acquired the rights to a pension. In 2016, 7.3 million of Poles were receiving retirement pensions and disability pensions. Two years later it was 7.6 million. This means that the average annual increase in the number of Poles who have reached the retirement age is now over 150,000.

In accordance with the expectations, the noticeable growth in the prosperity of Polish people has led to increased life expectancy. In 2016, a newly born baby boy could expect to live 8 years longer than his peer who was born in 1991. Among girls, this increase reached nearly 7 years.

That is something to celebrate, but we should also be prepared to roll up our sleeves. The Polish Social Insurance Institution (ZUS) has hundreds of billions of the PLN in current liabilities and trillions of the PLN in future liabilities. In a forecast prepared by ZUS three years ago it was estimated that by 2060, that is, when the millennials reach their retirement age, the Polish population will be just above 33 million people. A population decline does not have to be a bad thing, because we are more than making up for it with the increasing productivity, and from an environmental point of view it would even be quite beneficial. Unfortunately, it is also associated with a catastrophic deterioration in the age structure of the Polish population. In 2015, the share of working-age people in the Polish population was 63.4 per cent. By 2060, this share is expected to fall to 48.4 per cent. In the central scenario, the number of people above the retirement age is projected to reach more than 11.8 million, that is, more than three out of every ten Poles.

Assuming that no currently unknown factors affect the projection, the forecast shows a negative annual balance throughout all the 40 years that it covers, with the maximum annual deficits occurring in 2060 and ranging from PLN93bn to PLN250bn (EUR21.8-58.4bn in today’s exchange rate).

After discounting the values to the conditions of the year 2014, that is, after taking into account the declining value of money and after making the data comparable, we are able to determine that in 2020 the per capita value of the contributions made by people from the working-age population to the ZUS’ pension fund will amount to approximately PLN550 per month. In 2060, these contributions would have to amount to nearly PLN1,100 per month in the best-case scenario, and up to approximately PLN2,000 per month in the worst-case scenario. The contributions are therefore expected to increase at least two-fold. This is due to the fact that in 40 years the number of working-age people in Poland is expected to decrease by almost 7 million, and higher contributions will be necessary in order to maintain safe proportions between the revenues and pension expenditures.

Unless an economic miracle occurs, or there is some unexpected change in conditions as a result of a “white swan” event (as opposed to Nassim Taleb’s “black swan event”), or, preferably, unless we start preparing right now, the consequences of a radical change in the demographic structure will be felt not only by the working people, but also by the people who are financially dependent on the Social Insurance Institution, their own children, and on social welfare programs, i.e. the elderly whose needs will not be properly financed.

Challenges of population aging policy

One problem faced by large corporations is the so-called short-termism, that is, focusing on the coming months or quarters instead of the coming years. The same can be said about countries, and this is not limited to the issue of population aging. And there is certainly a lot to be done in this regard.

Marzena Rudnicka, the president of the National Institute of Silver Economy, believes that our main priority should be to encourage retirees to maintain their previous lifestyles. There are many possibilities and chances when it comes to prolonging professional activity. We can look at the figures from at least several perspectives. Although there are currently approximately 2 million Poles aged 60+ who require assistance, there are also 7.4 million persons in that age bracket who are fully self-reliant. Most of them enjoy good or pretty good health and psychophysical condition.

Ms. Rudnicka points out that people exhibit different characteristics depending on the era in which they were born, and not on their actual age. Today’s 65-year-old, who was born in the 1950s, is in a better condition than the erstwhile (average) 45-year-old, who came into the world at the beginning of the 20th century. Our lifespans are currently about two decades longer than right after the Second World War, and for most of us the quality of life during these additional decades is fairly decent. With some exceptions, we are now able to work longer than before, and this statement is becoming even more true along with a decrease in the share of hard physical labor.

Efforts to extend the duration of working life has a dimension universally associated with the retirement age, and constitutes a political challenge, but the issue is much broader. Along with the expected exacerbation of the labor shortages, we will probably see the end of the phenomenon in which people are being pressured to retire. Instead, the opposite trend will emerge — people will be encouraged to stay at work after reaching the retirement age. This is a challenge for entrepreneurs and the management boards of large companies, which should have started thinking a long time ago about the possible further career paths of their employees, extending beyond the point at which they reach the retirement age. It might be worth listening to the 70-year-old protagonist played by Robert de Niro in the movie “The Intern”, who points out that “musicians don’t retire, they stop playing when there’s no more music in them”.

The issue of medical care for senior citizens is unfortunately linked with the generally poor condition of the public health care system. The repeatedly announced plans for the introduction of universal health check-ups of 60-year-olds and 65-year-olds have not materialized thus far. The idea is simple — comprehensive and thorough examinations enable the detection of diseases and health threats, while counteracting such problems at the early stages significantly reduces costs compared with the treatment of advanced diseases and combating old ailments. To make matters even worse, geriatric wards were closed down in county hospitals, and there are only approximately 200 trained geriatricians in Poland. The elderly suffer as a result of polypharmacy (concurrent use of multiple medications), as each professional only treats the disease within their own area of expertise, and many medications should never be taken together.

The president of the National Institute of Silver Economy mentions the “assistant living” model, which is becoming increasingly popular in the West. In this model elderly people live in suitably adapted housing, where they are assisted by trained personnel, and provided with access to spa and physical rehabilitation facilities, as well as various activities enjoyed by the senior tenants. In the Polish conditions and financial reality, it is not reasonable to expect that such a model becomes widespread, but the construction and organization of day-care homes and community centers is already within the reach. Such objects should be designed as multi-generational facilities, so the elderly are not condemned to live in “old-age ghettos”. Such facilities should preferably be located in places that offer contact with nature, e.g. in the vicinity of parks. Multi-generational settings would enable seniors to provide mentoring services, i.e. sharing of knowledge and experience, as young people typically lack the latter.

Demographic processes are characterized by significant inertia, and therefore it is not possible to change their direction within a short period of time. The results of any activities in this area become visible decades later. Poland can’t escape the effects of population aging, and the hasty implementation of ill-prepared plans that haven’t been well thought out won’t help. Meanwhile, in Israel the Ministry for Social Equality has been operating for more than 10 years. Until 2015, it was called the Ministry for Senior Citizens. It’s time to start treating the issues of senior citizens with the highest priority in Poland as well.

(eberhard grossgasteiger, Pixabay, Public domain)