Hoover Daily Report

The Gray Wave

Wednesday, February 9, 2005

Another big wave is hitting areas of Asia, thankfully not a tsunami. This wave won't be making headlines with shocking visuals. Yet declining fertility rates and prolonged life expectancies could be a crisis in the making.

The share of elderly people as a percentage of the working population in Japan is already one of the highest in the world, whereas its fertility rate is among the lowest, implying that the age distribution of the population will shift dramatically in the coming decades. According to the Japanese government, the population of the elderly (65 years and over) constitutes 19 percent of the total population and is expected to continue expanding in the years ahead. At the same time, Japan's fertility rate (the number of children born on average to a woman) fell to 1.39—its lowest level ever.

Even China, whose population recently hit 1.3 billion, might need to reconsider its one-child policy. China's populace is also aging quickly due to low fertility rates and prolonged life expectancy. The State Family Planning and Population Commission (the nation's leading population think tank) predicts that, from 2000 to 2007, the number of people 65 or older will grow from just under 100 million to more than 200 million. This equates to an increase of more than four million a year—making up 14 percent of the population by 2007. The commission also predicts that the proportion of the population 65 and older will surge to 24 percent by 2050.

As this demographic shock unfolds it is likely to have profound social and economic implications. There is a broad consensus among economists that demographic changes will reduce growth and limit increases in economic well-being. For example, based on long-term simulations produced by the IMF's world macroeconomic model (MULTIMOD), Japan's level of real GDP will fall by a cumulative 20 percent over the next century compared to a baseline simulation with a stationary population.

The effects of this demographic shift resonate well beyond Asia. Worldwide, the status of those sixty and over is growing at 1.9 percent per year—60 percent faster than the overall population. There is no longer a single country in Europe where people are having enough children to replace themselves. In Italy, for example, there are more people over the age of 60 than there are under the age of 20. And in the United States the fertility rate is just below 2.1—the number needed to keep the population from shrinking.

Just over 25 years have passed since the Club of Rome released a famous set of computer studies indicating that population pressures would devastate the world. Yet nothing of the kind has prevailed. Rather, low birthrates, at least in the industrial world, have become a potential cause for alarm. Moreover, despite decades of warnings about high fertility rates and overpopulation, the United Nations recently released a report warning of the evolving situation of population aging and decline.

To address decreasing fertility rates and prolonged life expectancies, policymakers must tackle issues such as the suggested retirement age, medical benefits, levels of immigration needed to offset declines in the working-age population, and financial support paid by workers for retired persons. Such policy adjustments should be made before the gray wave breaks with full force.