Ageing societies require holistic approach to fiscal policy making

Several Asia Pacific countries are ageing fast due to falling birth rates and people living longer because of access to better healthcare. This is not unique to the region and is part of a global megatrend.

What is unique, however, is the speed at which these Asia Pacific countries are becoming aged societies.  

As a comparison, while France and Sweden took 115 and 85 years, respectively, to progress from being an ageing society (with 7-14 per cent of the population aged 60 or older) to an aged society (14-21 per cent aged 60 or older), the same transition in China, Singapore, Thailand and Vietnam is expected to take only 19-25 years.

Compared to other global megatrends that are shaping global economies, such as digitalisation or climate change, demographic shifts remain relatively foreseeable. This provides some soothing yet misleading comfort to policymakers.

The impact these shifts have on economies is far from simple, and analysts struggle to fully understand and/or quantify them. This is because the status of the economy is linked to the people. As a result, demographic shifts stand out as one of the most influential factors shaping any aspect of an economic policy.

Changing demographics means altering the essence and purpose of all economic activities.

As the purpose changes, so do the needs. Changes in productivity, the share of population in job markets, fiscal policy conduct and effectiveness, and how monetary policy affects economies – all these processes introduce high uncertainty into long-term economic and fiscal policy planning.

How much does ageing cost?

Why do the analysts struggle with quantifying the economic impact of ageing?

The net change due to a demographic shift is a sum of multiple factors, often working in opposing directions. As people age, their productivity tends to fall. On the other hand, this trend is offset by technological progress, though to a largely unknown extent, making the net impact difficult to predict.

Ageing societies also exhibit a shift in the consumption pattern from durables (for example cars) to essential services (like healthcare). This affects a country’s composition and demand for goods which in turn affects services and tax revenues.

Ageing also affects the labour force with the number of citizens available and willing to work going down. It has been observed that the more developed a society is, the greater the temptation to withdraw from the workforce as older people have the option to  enjoy the comfort of retirement.

In contrast, in developing societies older people must work till an  old age to avoid poverty. No stone remains unturned.

Policymakers caught in a bind

Why is all that troublesome from the perspective of fiscal policymaking?

First, policymakers would like to know how much of goods and services are available and will be produced so that they can plan how to redistribute them through taxes and fiscal expenditures. In other words, policymakers need to know how to cut and redistribute the “economic pie” (GDP) – and it is not easy to predict its size in the future.

Second, some fiscal expenditures increase and some fall as societies age.  Fiscal expenditures on pensions rise along with healthcare and other forms of social protection. In contrast, education expenditures fall, given less demand for children education.

Third, the exact scale and time of these shifts is not easy to determine.

Addressing the fiscal burden of ageing

Governments do not have to remain passive observers of these demographic shifts, as they have multiple tools to soften the negative impact and boost positive processes.

For example, premature retirement results in excessive burden on the fiscal system. However, reskilling and upskilling of older people can help to retain them in the work force, increase economic output and reduce poverty among older people.

At the same time, governments may implement society-wide policies that support healthy and active ageing. With the help of modern technologies and experience from other aged countries, such as Japan, much can be done to keep people active into old age.

All such actions not only improve quality of life and economic performance among older people, but also directly alleviate the fiscal burden of pension systems as retirement is postponed.

A holistic approach to policy

All the challenges and policies needed to address them are closely linked. Therefore, policymakers should seek to address few problems at a time looking for synergies.

For example, greater investments in healthcare, education, social protection, and environment protection not only improve the quality of life but also allow people to stay employed for a longer time period.

A better environment improves people’s health, which in turn supports economic activity and decreases public spending required for social protection and healthcare. In turn, the money saved from reduced requirment of social protection and healthcare expenditures can be used to support other development priorities.

This holistic approach must become the norm of government policy planning. Socio-economic policies must embrace the idea of synergies between their goals, so that spending on one policy target also supports other goals.

For more insights into how demographic shifts are reshaping Asia Pacific economies, fiscal policy, and the overall development agenda please delve into the Economic and Social Survey of Asia and the Pacific 2024, prepared by the United Nations Economic and Social Commission for Asia and the Pacific.

The author is the Associate Economic Affairs Officer with the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP). His expertise is in macroeconomic modelling and forecasting (GDP, inflation, other macro variables).