The pandemic year has seen a baby bust in developed nations, exacerbating a long-term population decline. What does this mean for the growth prospects and pension systems of these economies? 

 

One of the key drivers of economic growth is one that is often overlooked, contentious and now also played down – population growth. How many there are in one country impacts how influential it is, even if headline growth may not be reflected in per capita growth and thus quality of life – China being the most well-known example for that. 

 

Pandemics, like wars, impact how populations grow by affecting mortality, fertility and migration. Covid-19 led to excess deaths, but also to a decline in births last year. The US recorded the lowest number of newborns since 1979, and in the EU, the number of newborns has reduced by 3%, with some countries like Romania seeing a decline as steep as 10.6%, according to insurer Allianz SE.  How will this impact on the long-term outlook of our economies? 

 

   

While it is still unclear if people have merely postponed or completely abandoned their plans for children – some countries have seen a slight recovery in births in the first three months of this year - the overall trend of a population decline in developed countries remains unchanged, Allianz said, not least because in Europe, there are currently fewer women of childbearing age than there were in 1950; and they tend to have children later in life, meaning they also have fewer. 

 

  

As the demographic pyramid thins out at the bottom, pressure on social security and pension systems increases, but there is a deadline. 

 

"The window of opportunity for adapting the social security systems to demographic change is getting smaller, the baby boomers are at the brink of retirement,” warned senior economist Michaela Grimm, one of the report authors. Increasing the retirement age in line with life expectancy or reducing the benefit level of the public pension system are ways to mitigate the impact of demographic change, she noted, arguing that it is also necessary to strengthen the second and third pillars. 

 

The UK government has already taken this advice to heart by gradually lifting the state pension age to 68 and introducing auto-enrolment – although increased saving can have its own impact on the national economy since it reduces discretionary spending at home, while pension fund investment is spread across the globe. 

 

The demographic decline puts into question the entire logic of intergenerational systems reliant on a steady supply of new taxpayers – like the UK’s pay as you go funded state pension, introduced after the war and just before the invention of hormonal contraceptives. Immigration has largely kept the system on its feet since. 

  

PAYG systems will remain the backbone of our pension systems, says Grimm, but they need to be complemented by capital-funded systems. 

 

“The burden-sharing between the generations and within generations between families and people without children is a permanent societal negotiation process,” she observed, with the conditions of the social contract decided by politics. "There is no final solution, as societies and values change, so will the principles of burden-sharing,” she adds. 

 

 

One country that has seen some of the most extreme changes in demographics is China, where the one-child policy has created a demographic cliff edge. The Chinese government has relaxed its policy, allowing two and, more recently, three children per family and even sayingthat having children is a ‘national duty’; however, it appears the Chinese may not follow the call given the high cost of living in many of China’s cities. 

 

The slowdown in population growth in China will also slow its economic growth, says Grimm, but it will at the same time lead to huge investments into upgrading the economy, ultimately creating more consumers. The rest of the world will need to reconfigure supply chains to adapt, something made more difficult by the cold tech war between the US and China, but she predicts that dependence on the Chinese market will increase further. “In the past, Chinese workers ruled the world, in future Chinese consumers will do,” she says. 

 

At the other extreme lies Japan, which has been dealing with an ageing population even without any government policy on family size. Its slow economic growth, deflationary environment and ballooning government debt are frequently associated with the age characteristics of its population.  

 

However, Frank Eich, director of specialist consultancy Economicsense, emphasises that although headline growth rates and overall population size determine a country’s standing on the world stage, they do not say much about the living standards of individuals. 

 

“When you see the numbers you say it’s a lost decade. But if you look at per capita growth, Japan has done like anybody else,” says Eich. At this point, one needs to look at population dynamics, he notes, such as how many people actively participate in the labour market and even whether older workers are equally productive or innovative as younger ones. Japan’s GDP per capita was similar to France’s according to the World Bank, while the OECD puts France’s GDP per capita higher. 

  

The Japanese model of an ageing population and long-term high government debt supported by the central bank could be the UK’s long-term future, particularly if immigration reduces, as well as that of many other European countries, says Eich. 

 

 

Whether growth can be achieved despite declining populations is a question economists have been grappling with for some time, with many arguing that technology can break the link between number of people and GDP. Grimm too believes population growth will be less important for economies than it has been thanks to technological innovation. 

 

“Demographic growth has been and will remain a powerful driver for economic growth in the future, albeit to a lesser extent,” as automation and digitalisation are changing the working environment, she says.  

 

“Both developments have the potential to boost productivity, thus mitigating the impact of the future decline in the workforce population,” she argues, allowing remote working across borders to ease the shortages of skilled labour without migration, for example.  

 

However, technology is not a panacea, she admits. “Given the increasing role of services in the economy, the availability of skilled workers on the ground remains a limiting factor – currently the shortage of skilled labour is already holding back the recovery post Covid-19,” she notes. 

 

Eich is more sceptical about the impact technology will have on productivity. “People have talked about that for decades,” he says. While a move away from an economy based on physical labour towards services has meant that people can – in theory – stay in work for longer, he notes that wealthy nations have suffered from a lack of productivity in recent years. 

 

“The UK is really bad in terms of productivity, and they haven’t found a mechanism to kickstart it,” he observes, saying that merely doing things online rather than in person, for example, does not increase productivity. “The revolution must be that we do things really differently, but we’re not doing that yet,” he says. 

 

Frank Eich