Economic support ratios and the demographic dividend in Europe

Abstract

AbstractBACKGROUNDSupport ratios and dependency ratios are widely used as indicators for measuring the effects of ageing on economic development. Both of these indicators use fixed age limits to distinguish between the working and the dependent populations.OBJECTIVEWe apply age-specific profiles of consumption and labour income instead of using arbitrary age limits. Based on these age-specific characteristics, we study the impact of changes in the age structure on the economy. In addition to looking at the compositional effect of age structure changes, we also consider savings/wealth effects.METHODSThe National Transfer Accounts (NTA) offer researchers a new method for comprehensively analysing economic flows across age groups. Because they combine micro (survey) data and macro controls, the provide detailed profiles of consumption and labour income by age, as well as age profiles of transfers and assets, through which the differences between consumption and labour income are covered.RESULTSThe development of the NTA support for 2010-2050 indicates that the compositional effect of the changing structure on economic development will range from -11% for the UK to -25% for Slovenia, which exceed the values of the conventional support ratio. The positive saving/wealth effect is almost negligible for the countries studied, except for the UK, Germany, and Spain.CONCLUSIONSGiven the current profiles of consumption and labour income in the European countries, the rates of growth in the support ratio induced by the changing demographic structure will be negative in these countries. A positive effect of increased saving/wealth can counteract this decline in the support ratio, but depends on the institutional settings in which the elderly finance their consumption.COMMENTSWe offer for the first time a European comparative study on the effect of changes in the age structure in the economy based on data.(ProQuest: ... denotes formulae omitted.)1. IntroductionPersistently low fertility levels and increasing rates of survival to older ages, in conjunction with the ageing of the baby boom generation, are the key determinants of the changing age structures in many European countries. As a consequence, natural growth is negative, and the stability or growth in in many of the European countries can only be sustained through positive net migration. Meanwhile, increasing shares of elderly people have to be supported by an ageing and shrinking In light of the ageing of the population, welfare state systems (including the pension, health, and elderly care systems) have to be reformed. If economic productivity is to be sustained in the future, there is an urgent need to increase labour market participation at the intensive and the extensive margins.To assess the consequences of the current and future demographic structure on the reallocation of resources across generations, demographic dependency ratios-or, alternatively, (economic) support ratios-are calculated. The former indicator relates the dependent age groups (young people and the elderly) to the population, whereas the later relates working age to the total Fixed age limits for the various age groups are imposed. The term young dependent population generally refers to people under age 20, while the term old age dependent population refers to people aged 65 or older. The remaining people, who are aged 20 to 65, are referred to as the working-age population. Unfortunately, the use of such inflexible age categories does not allow us to take into account the differing and changing age profiles of consumption and income across time and across countries, as they are shaped by the prevailing institutional settings. The concept of the support ratio, as introduced by Cutler et al. …