Increasing longevity worldwide is one of the biggest
success stories of the modern era but has also brought with it the
major and growing challenge of coping with ageing populations. For
life insurers, pressure being brought to bear on governments to
find solutions appears to hold significant potential.
Hammering home the reality of the
economic and social challenges facing countries worldwide, the US
Census Bureau has published a wide-reaching study which highlights
the average age of the world’s population increasing at an
unprecedented rate. The study was commissioned by the National
Institute on Aging (NIA), part of the US National Institutes of
Health, and produced by the Census Bureau.
Putting the scale of the demographic change
into perspective, the Census Bureau estimates the number of people
worldwide aged 65 and over in mid-2008 stood at 506 million and
will increase to 1.3 billion by 2040. The Census Bureau stressed
that this means in just over 30 years, the proportion of older
people will double from 7 percent of the total world population to
“Aging is affecting every country in every
part of the world,” stressed the director of the NIA’s division of
behavioural and social research, Richard Suzman.
“While there are important differences between
developed and developing countries, global aging is changing the
social and economic nature of the planet and presenting difficult
challenges. The fact that, within 10 years, for the first time in
human history there will be more people aged 65 and older than
children under five in the world underlines the extent of this
In the study, the Census Bureau
noted population aging is driven by two factors: declines in
fertility and improvements in health care.
In more developed countries, declines in
fertility that began in the early 1900s have resulted in current
fertility levels below the population replacement rate of 2.08
births per woman. Illustrative of declining fertility, in the US in
2006, 20 percent of women aged 40 to 44 had no biological children,
while in 2005 in Italy and Austria, 15 percent of women aged 65
The Census Bureau anticipates that more than
20 countries will experience population declines in the coming
decades. Russia’s population, for example, is expected to fall by
18 million between 2006 and 2030, a decrease of about 13
Nine other countries are projected to
experience a decline of at least 1 million people during the same
period. They are Japan, Ukraine, South Africa, Germany, Italy,
Poland, Romania, Bulgaria and Spain.
Japan is of particular note for having one of
the world’s lowest fertility rates – 1.4 births per woman – and an
average life expectancy of 82, the highest in the world. Between
2006 and 2030, Japan’s total population is projected by the Census
Bureau to decrease by 11 million and the population aged 65 to
increase by 8 million, thereby increasing the proportion of older
people from 20 percent to about 30 percent in 2030.
Also of note is South Africa, a life insurance
market worth almost $9 billion in annual new individual premium
income. Primarily as a result of the increase in mortality
precipitated by HIV/AIDS, the Census Bureau predicts that the
country’s population will decline by nearly 6 million people (12
percent) between 2006 and 2030.
South Africa has the highest HIV/AIDS
prevalence in the world, the impact of which has been seen in the
average life expectancy of its population falling from 60 years in
1996 to 43 years in 2006.
Dependency ratio rising
Rising numbers of older people and
falling fertility rates have a particularly significant
consequence: an increasing dependency ratio.
Among the most informative studies on the
dependency ratio are those undertaken by Eurostat, the EU’s
economic data unit which defines the dependency ratio as the number
of people aged 0 to 19 and 65 and over divided by the number of
people aged 20 to 64. In other countries the ratio is based on
other definitions, of which the most accepted is the number of
people aged 0 to14 and over 65 divided by the number of people aged
15 to 64.
In the EU15 (the 15 member countries prior to
2004), Eurostat data shows the dependency ratio rising steadily,
and in 2008 stood at an average of 50.3, up from 48.4 in 1999.
Within the EU15, the dependency ratio varies from a low of 38.4 in
Slovakia to a high of 53.4 in France.
However, more pertinent is the old age
dependency ratio (OADR), which is based on the number of people
aged over 65 divided by the number of people aged 15 to 64.
According to Eurostat, across the full 27 EU member countries, the
average old age dependency ratio stood at 25.4 percent in 2008
(using the working age group definition of 15 to 64 years) and is
rising steadily under the combined impact of a decline in the
working age population and a rise in the older population
Eurostat predicts the OADR will rise to 31.1
percent by 2020, 50.4 percent by 2050 and 53.5 percent by 2060. By
2050, Eurostat predicts there will be 294.4 million people in the
working age group in the European Union (EU) and 148.4 million aged
over 65, while net migration is assumed to have fallen to zero.
The impact of this was the subject of a recent
report by the European Commission and the Economic Policy
Committee, submitted to EU finance ministers. The report
highlighted that, while the EU now has four people of working age
for every older citizen, it will have only two workers per older
citizen by 2050.
Given current policies, stressed the report,
the pension, health, and long-term care costs associated with an
aging population will lead to significant increases in public
spending in most EU member states over the next half century. In
the absence of policy changes, the report warns that GDP growth
rates will fall across the EU and the potential EU economic growth
rate will be cut in half by 2030.
The impact of ageing populations will not be
spread evenly through the EU, however. Significant pressure is
expected to be experienced by Central and Eastern European (CEE)
member states. For example, the OADR in Poland is forecast by
Eurostat to rise from 18.9 percent in 2008 to 55.7 percent in 2050
and 69 percent in 2060, the highest level predicted for any EU
Also, among the highest OADRs predicted in the
EU by 2060 are CEE member states Latvia at 64.5 percent (25 percent
2008), Czech Republic at 61.4 percent (20.6 percent) and Hungary at
57.6 percent (23.5 percent).
Among the EU15 member states, Spain is set to
show the steepest rise in OADR, from 24.1 percent in 2008 to 59.1
percent in 2060. Germany also faces a particularly steep rise, from
30.3 percent in 2008 to 59.1 percent in 2060; as does Italy, from
30.5 percent in 2008 to 59.3 percent in 2060.
Faring comparatively well in Eurostat’s
analysis is the UK, which is predicted to see its OADR rise from
24.3 percent in 2008 to 42.1 percent in 2060. Only Luxembourg is
predicted to have a lower OADR in 2060, 39.1 percent.
European Union not alone
Rising OADRs are not, of course,
unique to the EU. In the US, for example, a study by the
Congressional Research Service (CRS) estimates that primarily as a
result of a surge ‘Baby-Boomer’ retirements, the country’s OADR
will rise from about 20 percent in 2010 to 25 percent by 2020, 39
percent by 2050 and 40 percent by 2060. For its estimates, the CRS
defined the working age group as being persons aged 20 to 64.
Other developed economies face a situation
similar to that of the US. Canada, for example, can expect its OADR
to rise from 19 percent that pertained in 2005 to 38 percent in
2030, and 45 percent in 2050, according to data published by the
United Nations’ Population Division (UNPD).
Similarly, the UNPD forecasts that Australia
and New Zealand’s combined OADR will have risen from 19 percent in
2005 to 34 percent in 2030, and 44 percent in 2050.
However, of the world’s major economic powers
none face a challenge of the magnitude presented by Japan’s ageing
population. Presenting an ominous picture, Japan’s National
Institute of Population and Social Security Research forecasts the
country’s OADR will rise from an already high 34.4 percent in 2006,
to 52.8 percent by 2020 and an incredible 81.9 percent by 2050. By
2050, the institute predicts, Japan’s population will have declined
to 95.2 million, down from 127.7 million in 2006.
Also of significance, the US Census Bureau
highlighted that the most striking increase in the proportion of
very old people will occur in Japan where, by 2030, almost a
quarter of all older Japanese are expected to be at least 85 years
Developing economies take the
Though proportions of older people
typically are highest in more developed countries the Census Bureau
stresses this situation is changing fast stresses with the most
rapid increases in older populations occurring in less developed
According to the Census Bureau, in 2008 62
percent (313 million) of the world’s population aged 65 and older
lived in developing countries. By 2040, today’s developing
countries are likely to be home to more than 1 billion people aged
65 and over, 76 percent of the projected world total.
In terms of sheer numbers, the two most
populous nations, India and China, are the most impacted by this
trend, with their combined 65-and-older population predicted to
increase from 166 million in 2008 to 551 million in 2040. Of the
latter total, China is estimated to account for 329 million and
India 222 million.
The Census Bureau emphasised that one of the
most significant characteristics of the developing world’s ageing
population is its rapidity compared with that in developed
For example, the Census Bureau estimates that
in China it will have taken only 26 years (2000 to 2026) for the
number of people over 65 years old to increase from 7 percent to 14
percent of the population. In Brazil this process is anticipated to
take an even lower 21 years (2011 to 2032).
This rapid ageing of populations contrasts
with, for instance, France, where it took 115 years (1865 to 1980)
for the number of people over 65 years old to increase from 7
percent to 14 percent of the population. In Sweden it took 85 years
(1890 to 1975) and in the UK 45 years (1930 to 1975). In the US,
the Census Bureau anticipates it will take 69 years (1944 to
The result for many developing countries will
be a rapid increase in OADRs. Indicatively, the UNPD estimates the
OADR in China will rise from 11 percent in 2005 to 24 percent in
2030 and 43 percent in 2050. In Brazil, the UNPD estimates the OADR
will increase from 9 percent in 2005 to 20 percent in 2030 and 41
percent in 2050.
Commenting on what it termed the “compression
of aging,” the Census Bureau noted: “Some less developed nations
will be forced to confront issues, such as social support and the
allocation of resources across generations, without the
accompanying economic growth that characterised the experience of
aging societies in the West. In other words, some countries may
grow old before they grow rich.”
From an economic growth perspective, India
stands out in terms of a having a more gradual ageing of its
population. Based on the UNPD’s estimates, India’s OADR will have
risen from 7 percent in 2005 to 12 percent in 2030 and 23 percent
in 2050. In addition, the 14 percent OADR level is anticipated to
be reached in India in about 2035, giving India a more manageable
30 years for the increase from 7 percent.
Time for action
In its overall assessment of the
global ageing phenomenon, the US Census Bureau emphasised that, in
addition to the obvious strain rising aged populations will place
on state-funded pension schemes and the working population
supporting them, there are other significant implications. For
example, lower fertility rates suggest that in many countries
traditional familial support of ageing parents by their children is
likely to wane.
Health care funding also requires close
scrutiny, advised the Census Bureau, which cited a study conducted
by the World Health Organisation and the World Bank, Burden of
In the study, the two organisations warn of a
very large increase in disability caused by increases in
age-related chronic disease in all regions of the world within a
few decades. Specifically, the loss of health and life worldwide is
predicted to be greater from noncommunicable or chronic diseases
such as cardiovascular disease, dementia and Alzheimer’s disease,
cancer, arthritis, and diabetes than from infectious diseases,
childhood diseases and accidents.
In concluding, the Census Bureau stressed:
“Some governments have begun to plan for the long term, but most
have not. The window of opportunity for reform is closing fast as
the pace of population aging accelerates.”
Fortunately determination to tackle challenges
of global ageing is mounting as evidenced by a study released in
October 2009 by the Commonwealth of Nations (CoN) ahead of the
annual meeting of CoN finance ministers Meeting.
CoN is an intergovernmental organisation
comprising 53 countries including the UK, Australia, Bangladesh,
Canada, India, New Zealand, Nigeria, Pakistan and South Africa.
Formerly the British Commonwealth, CoN member states have a total
population of almost 2 billion people.
As could be expected, the CoN study undertaken
by its Commonwealth Business Council (CBC) tackled the key issues
of ageing – increasing OADRs and related health issues –
Highlighting that the OADR in CoN developing
member countries is expected to at least double over the next 40
years, the CBC stressed income security in old age, already low, is
at risk of diminishing further in four-fifths of the CoN because of
low pension coverage, inadequate funding, lack of annuity insurance
or negative real investment returns.
The CBC’s study’s authors stressed: “The
pressure on policy makers to marshal sufficient public and private
resources to meet age- and health-related challenges is already
To address the situation, the study’s authors
made three key recommendations:
• Encourage the development of a
competitive market for life insurance and pension annuities;
• Review the governance and
investment strategies of pension funds; and
• Consider hybrid solutions to
Life insurers’ key role
Of particular significance, the
authors of the CBC study highlighted the vital role the life
insurance industry can play in finding solutions in the provision
of pensions and health insurance in developing economies.
However, the CBC study noted that, while life
insurers are positioned to provide a wide range of annuity products
with a variety of options, the market for annuities remains fairly
small or nonexistent in many parts of the developing world.
On a positive note the authors stressed: “This
is set to change as defined contribution schemes proliferate and
To enable insurers to fulfil their role, the
CBC urged governments in developing countries to promote flexible
annuities markets. This, advised the CBC, can be facilitated by
liberalising and strengthening the life insurance industry.
“Pension system reforms should ideally include
measures to liberalise the life insurance industry and develop the
domestic government bond market,” wrote the study’s authors.
“This three-pronged approach is mutually
re-enforcing and offers broader welfare benefits, which include the
development of a deeper annuities market.”
The CBC noted that the potential for expansion
of regional capital markets and insurance and contractual savings
markets is particularly positive in smaller CoN member countries in
the Pacific and Caribbean regions.
Smaller CoN member countries in the Pacific
region include Papua New Guinea, Samoa and Solomon Islands. Smaller
CoN member countries in the Caribbean region include Barbados,
Bahamas, Jamaica and Trinidad and Tobago.
However, the outlook for development in other
smaller CoN member countries is not as positive. According to the
CBC study authors, in these countries low incomes, limited
financial sectors, high inflation, a lack of familiarity with
insurance products and a lack of reliable actuarial data could
hinder the development of the life insurance industry.
The authors concluded pension reforms in such
countries may therefore have to remain focused on providing an
annuity in the form of a state-funded universal flat-rate old-age
Their view echoes the US Census Bureau’s
warning that some countries may grow old before they grow rich.
Over 1 million: 2006-2030
Population decline (m)
Source: US Census Bureau; LII