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The Actuary The magazine of the Institute & Faculty of Actuaries

How to defuse a time bomb

SOME OF THE DISADVANTAGES of being an actuary
have been widely discussed in this magazine,
but there is one that receives little publicity.
This is the need to shout at the radio, television,
and newspapers when they disclose their ignorance
of statistics. Over the past few years my own
tendency to bark at commentators has been largely a
response to their observations on the so-called ‘demographic
time bomb’. Any fellow sufferers can enjoy
instant relief by reading Phil Mullan’s new book.
Types of ageing
Mullan clinically demolishes all the arguments of
those forecasting that demographic change will cause
economic bankruptcy and social conflict. He starts by
accepting that there are both economic difficulties
and population ageing in the western world. But, he
argues, there is no causal relationship between these
two factors.
A widespread understanding of current economic
problems is that they are caused by excessive government
spending and low economic growth. Both these
factors are ‘blamed’ on a higher proportion of older
people as state spending on pensions and healthcare
increases, and production falls. Mullan picks apart all
of the issues implicit in this reasoning.
The first question Mullan tackles is what is meant by
ageing: he distinguishes between chronological, biological,
and demographic ageing. While chronological
ageing is entirely objective, biological ageing is in part
socially determined. Demographic ageing is, of course,
something entirely different and is determined at the
level of society and not the individual. Mullan points
out that one of the major problems with the discussion
at both the popular and specialist level is that people
confuse and conflate the three issues: everyone
over age 65 is considered old, and society is viewed as
being increasingly dependent and infirm.
Demographic transitions
Mullan rejects the claim made by some influential
bodies, including the World Bank, that the current
ageing of society is a result of western societies working
through stage 3 of the demographic transition. He
argues that the UK reached the final stable population
stage of the transition in the inter-war years. However,
his focusing on the way in which the transition was
made in Britain is helpful in drawing attention clearly
to the fact than changes in fertility have a much more
significant effect on population structure than changes
in mortality. It is not appropriate here to unmask the
culprit in the style of a whodunit. You will be aware
that the real cause of the projected ageing of society is
the ageing of the large cohort born in the baby boom
and their adjunct the small cohort of ‘baby busters’.
Mullan points out that, although the ageing of the
baby boom cohort will have an effect,
it is telling that the familiar steadily ascending
lines on the charts used by alarmist commentators
do not extend much beyond 2040. Tables and
charts of ageing projections ending at this time necessarily
ignore subsequent declines. (p63)
A more important point is that:
whatever happens to births over the next 50
years will almost certainly be a more dominant
influence on the age structure in the middle of the
21st century than the factors currently featured in
the projections. (p65)
Dependency ratios
Mullan’s next lamb to the slaughter is the concept of
dependency ratios. Here he has three main criticisms.
First old-age dependency ratios are misleading an
ageing society by definition has a much smaller proportion
of children to support. Savings in the cost of
supporting young families can easily be redirected to
supporting the older population. Projected total
dependency ratios remain at about the same level
from 1992 to 2042. Second, the dependency ratio
assumes that all 16- to 65-year-olds are in work. It
ignores unemployment, early retirement, extended
periods of study, the extent to which women participate
in work, and the mix between part- and full-time
work. A study of the shifts in these aspects over the
period from 1979 to 1994 leads Mullan to conclude
that labour market changes had three times the effect
of demographic changes (p125). The third issue is that
the changes in old-age dependency which have
already occurred over the last century have been
much greater than those projected for the future.
False preoccupations?
Up to this point, much of Mullan’s material will be
familiar to actuaries. Where he goes further is in trying
to explain why society is preoccupied with ageing
when there is no material basis for the fears. He suggests
that there are two trends driving the preoccupation
with ageing. First,
in response to the worldwide economic slowdown in
the 1970s, state spending began to be perceived as
the problem across most industrialized economies.
Ageing is used as a neutral, non ideological, apolitical
pretext for legitimizing reductions in public and
especially welfare spending. (p93) This driver clearly comes from politicians and social
commentators. But it is also important to explain why
these ideas have a popular appeal. As Mullan points
out, ‘what began as mainly a pragmatic pretext for
government cost-cutting has become transformed
into a more pervasive worry about the future’ (p103).
He explains this by pointing to the prevailing sense of
economic and political uncertainty brought about by
the end of the post-war political arrangements. Both
popular and elite institutions have lost their power
and there is a feeling of social fragmentation. Ideologies
have also been abandoned not just those of
socialism or of the mixed economy ideas of Keynesianism
and welfarism but also the neo-liberal doctrine
of free market capitalism. This has produced a society
where concerns about our own ageing and the ageing
of those we may need to care for, are felt particularly
As a result of the frequent conflation of different
types of ageing these intensified apprehensions
about the individual ageing process easily transpose
onto the phenomenon of demographic ageing.
Within this framework, there is a further point
which must be addressed. Worrying about demographic
ageing is only sensible if it is accepted that the
elderly are a burden. Is this the case? Mullan argues
that even if the most extreme forecasts of the future
elderly population are accepted, and if society chose to
double real welfare spending on them, the projected
costs in 2042 as a proportion of GDP would remain
around the same as in 1992, even if relatively low
growth rates of 2.25% per annum were assumed. He
also dismisses some of the more specialist arguments
for example that the real problem is the older old.
Production capacity
There is one area where the book does leave some
stones unturned. Many older ‘retired’ people do contribute
to economic wealth by providing free childcare,
or by doing low-paid or unpaid community
work. Without older people undertaking these duties,
the productive capacity of the nation would fall as, for
example, parents would find it harder to work. This
point is ignored when the old are viewed as a burden,
and it would be interesting to know the magnitude of
their economic contribution.
Mullan devotes specific chapters to the particular
impact of the discussion in the pensions and healthcare
fields. The chapter on pensions tackles the contentious
issue of the difference between PAYGO and
funded pensions, and concludes that the only difference
is the ideological basis one based on social, collective
provision and one on personal responsibility.
Mullan also comments that New Labour has been
questioning the idea of a demographic time bomb.
This he argues is not because it is considering the position
rationally, but because the fear of a demographic
time bomb has allowed governments to slash state
pension provision to such a low level already.
The chapter on health is particularly good at exploding
the misconceptions we all have about the health
needs of the elderly. Mullan contends that, although
the evidence is mixed, the most likely development
will be one where morbidity is compressed into a
shorter timescale before death.
Common sense
In his grand finale, Mullan tackles this question: ‘Can
ageing stunt economic growth?’ His biggest problem
here is finding any explicit proof of an idea which is
usually accepted as common sense. There is certainly
no empirical proof: ‘A reasonable steady rate of ageing
coexists with a variety of economic experiences:
booms, recessions and depressions.’ (p197) After a
thorough review of all the literature, Mullan concludes
that there is no evidence to suggest that ageing
does reduce economic growth.
Overall, this is a must-read book. Despite our backgrounds,
we actuaries are as prone as anyone else to
accepting the consensus opinions about demographic
problems. If, as a profession, we really do have a duty
to the public, then should we not be delivering on it
by dispelling the superstitions aroused by demographic