Population Pyramid
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Is India Aging Like Japan? Visualizing Population Pyramids There has been a lot of discussion on how Japan is dealing with an aging population crisis.
By Vasavi Ayalasomayajula There has been a lot of discussion on how Japan is dealing with an aging population crisis. The theory of demographic transition says that populations in a country undergo a transition from a period of high birth and death rates to one of lower birth and death rates, as the country progresses economically and culturally. To know more about how this transition actually happens, check out our blog post on aging population. Since Japan is one of the few countries that has currently reached the far end of this transition, it is interesting to see what India can learn from the Japan story. We looked at age-wise population data from the United Nations Department of Economic and Social Affairs (UN DESA) for India and Japan. We first visualized the 2015 data for both countries in the form of population pyramids. A population pyramid (also called an age pyramid or age picture diagram) shows the distribution of males and females of different age groups in the population. The population pyramid is named so because it resembles a pyramid when the population is growing. A bottom-heavy population pyramid for India suggests a young and growing population. Japan, on the other hand, has a narrow base and wider top, as is typical of an aging population. UN DESA has published population data for 1950-2015 and medium variant population estimates for 2016-2100. When we analyzed the data for India and Japan, we found an intriguing trend — India is mimicking Japan’s population growth trend, but with a 50 year lag. What Can India Do? Japan is facing many consequences of an aging population — low GDP growth, a focus on markets (healthcare, insurance, pensions, and leisure) targeted to older citizens,high cost of child care, and high real estate costs, all amidst the backdrop of low immigration. In addition, there are significant cultural and psychological effects. Japan has seen many people living alone, especially working women and the elderly, and the rise of a “lonely children” dynamic where children do not have siblings. People are postponing marriage to pursue career growth and self actualization, and there is deep unease and fear about Japan’s potential economic collapse and loss of vitality. Japan is boosting its birth rate by offering incentives in the form of cash, state-supported day care, tuition waivers and so on. Given that India’s population is already bursting at its seams, measures to increase birth rate are out of the question. As per UN DESA data, India’s population in 2015 is 1.3 billion, more than 10 times bigger than Japan’s population of 126.6 million. What India can do is to ensure that it takes care of its soon-to-be-aging population at retirement. Countries such as Sweden and Poland have now instituted demographically indexed pension schemes to tackle their aging population crisis, which is a huge contributor to the countries’ economic deflation. India has always been a savings-oriented economy, but this is changing with the shift towards a more consumption-based lifestyle. Effective data collection and analysis on individual-level income, savings, and medical expenditure can add great value in urging policymaking in the right direction. Provident Fund accounts and state-provided medical insurance, for instance, can go a long way in ensuring that India’s economy is, at least, better financially prepared for an aging population crisis like the one in Japan.
A Solution to the Pension Ticking Time Bomb
By Daniel Mitchell America’s main long-run retirement challenge is our pay-as-you-go Social Security system, which was created back when everyone assumed we would always have a “population pyramid,” meaning relatively few retirees and lots of workers. But as longevity has increased and fertility has decreased, the population pyramid increasingly looks like a cylinder. This helps to explain why the inflation-adjusted shortfall for Social Security is now about $37 trillion (and if you include the long-run shortfalls for Medicare and Medicaid, the outlook is even worse). But Social Security is not the only government-created retirement problem. State and local governments have “defined benefit” pension systems for their bureaucrats, which means that their bureaucrats, when they retire (often at an early age), are entitled to receive monthly checks for the rest of their lives based on formulas devised by each state (based on factors such as years employed in the bureaucracy, pay levels, contributions, etc). Unlike Social Security (which has a make-believe Trust Fund), these pension systems are supposed to be “funded” in the proper sense, which means that money supposedly is set aside and invested every year so that there will be a big nest egg that can be used to pay benefits to future retirees. At least that’s how it’s supposed to work in theory. In reality, politicians like promising big retirement benefits to government bureaucrats, but they oftentimes aren’t willing to actually set aside the money needed to fund the nest egg. After all, it’s more fun to spend the money appeasing other interest groups (state and local bureaucrats don’t approve of underfunding, but their retirement benefits generally are seen as a contractual obligation, so they don’t have much incentive to lobby for honest accounting). The net result is that every retirement system for state government workers is underfunded. How far in the red? That’s a hard question to answer because you have to make long-run assumptions about the investment earnings of the various pension funds. But the answer is going to be a big number regardless of methodology. According to a new report from the American Legislative Exchange Council, the shortfall is enormous. “When state pension funds are examined through the lens of a more realistic valuation, pension funding gaps are revealed to be much larger than reported in official state financial documents. This report totals state-administered plans’ assets and liabilities and finds nationwide total unfunded liabilities to be $5.59 trillion. The nationwide funding level is a mere 35 percent, which is one percentage point lower than two years ago. Combined across all states, the price tag for unfunded pension liabilities is now $17,427 for every man, woman and child in the United States. … Taxpayers are on the hook for the legal obligation to cover the promised benefits of traditional, defined-benefit pension plans. … When unfunded pension liabilities are viewed as shared debt placed on each individual, Alaska, where each resident is on the hook for a staggering $42,950, tops the list. Ohio and Illinois follow for the highest per person unfunded pension liabilities.” Here’s a map from the report. It’s bad news if your sate is dark blue. And if your state is gray, your burden is relatively low. Though keep in mind that these numbers are not adjusted for state income. Louisiana, Mississippi, and Kentucky get bad scores, but they probably are in even deeper trouble than lower-ranked states like California and New Jersey where per-capita income is higher (yes, the cost of living is lower in those southern states, but that doesn’t matter since the relevant comparison is per-capita income vs per-capita pension liabilities. The ALEC report is more pessimistic than other estimates, but that’s because they use more cautious assumptions about the potential investment earnings of the various pension funds that manage money for state and local bureaucrats. “State Budget Solutions uses a more reasonable valuation to determine the unfunded liabilities of public pension plans. Given that many plans’ assumed rates of return are too high and invite risk, State Budget Solutions uses a more prudent rate of return, rather than the loftiest goals of money managers. This study uses a rate of return based on the equivalent of a hypothetical 15-year U.S. Treasury bond yield. … State Budget Solutions is not alone in calling attention to the flawed accounting practices of state agencies. A recent study released by the Stanford Institute for Economic Policy Research, Pension Debt: United States Public Employee Pension Systems, also suggests that states use unrealistically high rates of return to discount their pension liabilities. The study found that pension debt totals $4.8 trillion, a finding similar to this report.” A new study from Pew isn’t nearly as pessimistic, but it still shows a huge gap. “The nation’s state-run retirement systems had a $934 billion gap in fiscal year 2014 between the pension benefits that governments have promised their workers and the funding available to meet those obligations. … This brief focuses on the most recent comprehensive data from all 50 states and does not reflect the impact of weaker investment performance in fiscal 2015, which averaged 3 percent. Performance has been even weaker in the first three quarters of fiscal 2016. … Total pension debt is expected to be over $1 trillion for state plans, an increase of more than 10 percent from fiscal 2014. When combined with the shortfalls in local pension systems, this estimate reaches more than $1.5 trillion for fiscal 2015 and will likely remain close to historically high levels as a percentage of U.S. gross domestic product (GDP).” Here’s a visual from the report showing how the fiscal outlook for state pension systems has deteriorated over the past 15-plus years. Equally troubling, most states are heading in the wrong direction. “… this brief shows that 15 states currently follow policies that meet the positive amortization benchmark—exceeding 100 percent of needed funding—and can be expected to reduce pension debt in the near term. The remaining 35 states fell short; those performing the worst on this measure typically had the largest unfunded pension liabilities.” Here’s the chart from the study. As you can see, Kentucky, New Jersey, and Illinois are falling deeper in the red at the fastest rate. Kudos to New York and West Virginia, by the way, for being the most aggressive in trying to address long-run problems. Moody’s Investor Services also has a new report on pension shortfalls. Here are some of the highlights, or perhaps lowlights would be a more appropriate word. “Total U.S. state aggregate adjusted net pension liabilities (ANPL) totaled $1.25 trillion, or 119% of revenue in fiscal 2015, Moody’s Investors Service says in a new report. The results, based on compliance with new GASB 68 accounting rules, set a new ANPL baseline and are poised to rise for the next two fiscal years as market returns fall below annual targets. ‘The median return for public pension plans in FY 2016 was 0.52% compared to an average assumed investment return of 7.5%,’ Moody’s Vice President — Senior Credit Officer Marcia Van Wagner says. ‘We project that aggregate state ANPL will grow to $1.75 trillion in FY 2017 audits.’ Moody’s new report also introduces a new ‘Tread Water’ benchmark, which measures whether states’ annual contributions to their pensions are enough to keep the unfunded net liability from growing. … there were several states whose pension contributions were notably below the Tread Water mark, including Kentucky (Aa2 stable), New Jersey (A2 negative), Illinois (Baa2 negative), and Texas (Aaa stable). … The states with the highest pension burdens — measured as the largest three-year average ANPL as a percent of state governmental revenue — were consistent with previous years. Illinois topped the list with pension liabilities at 280% of total governmental revenue, followed by Connecticut (Aa3 negative) at 209%, Alaska (Aa2 negative) at 179%, Kentucky at 162%, and New Jersey at 157%.” Wow, it doesn’t matter what report you look at, or what methodology is being used, Illinois, New Jersey, and Kentucky are a big mess (Alaska’s numbers also are awful, but the state – within certain limits – can use energy tax revenues to cover much of its shortfall). So what’s the solution to all this mess? As I noted a couple of months ago when sharing other grim numbers about state pension systems, the answer is to, 1) stop promising excessive benefits to bureaucrats (and stop giving them excessive pay as well), and 2) switch to “defined contribution” plans so that workers have their own piles of money and the underfunding problem automatically disappears.
A Poisonous Demographic Outlook Could Be America’s Doom
By Daniel Mitchell The most depressing data about America’s economy is not the top tax rate, the regulatory burden, or the level of wasteful government spending. Those numbers certainly are grim, but I think they’re not nearly as depressing as America’s demographic outlook. As you can see from this sobering image, America’s population pyramid is turning into a population cylinder. There’s nothing a priori wrong with an aging population and a falling birthrate, of course, but those factors create a poisonous outlook when mixed with poorly designed entitlement programs. The lesson is that a modest-sized welfare state is sustainable (even if not advisable) when a nation has a population pyramid. But even a small welfare state becomes a problem when a nation has a population cylinder. Simply stated, there aren’t enough people to pull the wagon and there are too many people riding in the wagon. But if America’s numbers are depressing, the data from Europe should lead to mass suicide. The Wall Street Journal has a new story on the utterly dismal fiscal and demographic data from the other side of the Atlantic Ocean. “State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared. … Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. … Though its situation is unusually dire, Greece isn’t the only European government being forced to acknowledge it has made pension promises it can ill afford. …Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69. … Only a few countries estimate the total debt burden of the pension promises they have made.” The various nations in Europe may not produce the data, but one of the few good aspects of international bureaucracies is that they generate such numbers. I’ve previously shared projections from the IMF, BIS, and OECD, all of which show the vast majority of developed nations will face serious fiscal crises in the absence of reforms to restrain the burden of government spending. Now we can add some data from the European Commission, which has an Ageing Report that is filled with some horrifying demographic and fiscal information. First, here are the numbers showing that most parts of the world (and especially Europe) will have many more old people but a lot fewer working-age people. Looking specifically at the European Union, here’s what will happen to the population pyramid between 2013 and 2060. As you can see, the pyramid no longer exists today and will become an upside-down pyramid in the future. Now let’s look at data on the ratio between old people and working-age people in various EU nations. Dark blue shows the recent data, medium blue is the dependency ratio in 2030, and the light blue shows the dependency ration in 2060. The bottom line is that it won’t be long before any two working-age people in the EU will be expected to support themselves plus one old person. That necessarily implies a very onerous tax burden. But the numbers actually are even more depressing than what is shown in the above chart. In the European Commission’s Ageing Report, there’s an estimate of the “economic dependency ratio,” which compares the number of workers with the number of people supported by those workers. “The total economic dependency ratio is a more comprehensive indicator, which is calculated as the ratio between the total inactive population and employment (either 20-64 or 20-74). It gives a measure of the average number of individuals that each employed ‘supports.’” And here are the jaw-dropping numbers. These numbers are basically a death knell for an economy. The tax burden necessary for this kind of society would be ruinous to an economy. A huge share of productive people in these nations would decide not to work or to migrate where they would have a chance to keep a decent share of their earnings. So now you understand why I wrote a column identifying safe havens that might remain stable while other nations are suffering Greek-style fiscal collapse. Having shared all this depressing data, allow me to close with some semi-optimistic data. I recently wrote that Hong Kong’s demographic outlook is far worse than what you find in Europe, but I explained that this won’t cause a crisis because Hong Kong wisely has chosen not to adopt a welfare state. People basically save for their own retirement. Well, a handful of European nations have taken some steps to restrain spending. Here’s a table from the EC report on countries which have rules designed to adjust outlays as the population gets older. These reforms are better than nothing, but the far better approach is a shift to a system of private retirement savings. As you can see from this chart, Denmark, Sweden, and the Netherlands already have a large degree of mandatory private retirement savings, and a handful of other countries have recently adopted private Social Security systems that will help the long-run outlook. I’ve already written about the sensible “pre-funded” system in The Netherlands, and there are many other nations (ranging from Australia to Chile to the Faroe Islands) that have implemented this type of reform. Given all the other types of government spending across the Atlantic, Social Security reform surely won’t be a sufficient condition to save Europe, but it surely is a necessary condition. Here’s my video explaining why such reform is a good idea, both in America and every other place in the world.
Knowledge Graph
Examples
1 A population pyramid, also called an age pyramid or age picture is a graphical illustration that shows the distribution of various age groups in a population (typically that of a country or region of the world), which forms the shape of a pyramid when the population is growing.
2 The population pyramid is also used in ecology to determine the overall age distribution of a population; an indication of the reproductive capabilities and likelihood of the continuation of a species.
3 Population pyramids are often viewed as the most effective way to graphically depict the age and sex distribution of a population, partly because of the very clear image these pyramids represent.