Monday 12 July 2021

Points experts

Population ageing: three impacts of the Covid crisis on this secular trend

By Bastien Drut, Chief Thematic Macro Strategist, and Simon Cardoen, Strategist - CPR AM

Population ageing is one of the five megatrends highlighted by the United Nations. At first glance, one might think that the Covid crisis has had less impact on population ageing than on climate change or the digitalization of the economy, but several developments related to this topic should be pointed out. Three of them are detailed in this text. 

Population ageing, a megatrend already started long before the Covid crisis

Population ageing is a demographic phenomenon that is not new but whose manifestation has become striking with the retirement of the baby-boomers (from 2010 approximately). Population in Western countries has tended to age over the last few decades. In Europe, the median age has risen from 30 years in 1960 to just over 42 years in 2020 (from 30 to 38 years in the case of the United States). This type of shift is visible on all continents, with the notable exception of Africa, and is the result of two phenomena: the decline in fertility rates and the increase in life expectancy.

One of the most striking developments of the 2010 decade was that the share of working-age people (15-64) in the total population peaked in OECD countries and then began to decline, thus weakening potential growth. Depending on the country, the peak was reached earlier or later and the decline in this share is more or less fast. Now it is a very clear trend in the developed countries, as well as in China. In the case of G7 countries, the population under 60 is either declining or about to decline. On the other hand, the population over 60 is increasing relatively dynamically, which is a support for the silver economy.

In the rest of this note, we will explore the possible effects of the Covid crisis.

1. A (temporary?) lower participation in the post-Covid labor market

In their 2020 book The Great Demographic Reversal, Charles Goodhart and Manoj Pradhan hypothesize that population ageing will lead to a "resurgence of inflation", particularly because "the shortage of workers in developed countries will put employees in a better bargaining position, after decades of stagnation, which they will use to obtain higher wages". This idea is also seen in the book The new long life by the two experts of population ageing Andrew Scott and Lynda Gratton, who cite the example of Germany, where about 4 million people aged 15 to 19 will enter the workforce over the next decade while more than 6 million people aged 55 to 59 will exit: "Companies are facing a larger generational cohort leaving the workforce than entering it". In 2020, these statistics were 20.9 million and 21.7 million in the United States, respectively, reflecting a less advanced stage of the population ageing phenomenon than in Germany.

Before the crisis, this scenario was counterbalanced by a rise in the participation rate of people over 65. In the United States, more than 1,000 employers had signed an AARP (American Association of Retired Persons) charter in which they committed to recruiting seniors. McDonald's, for example, had launched in 2019 an operation to recruit seniors for 250,000 short-term positions across the country. While the participation rate of the over-65s has increased overall over the past 20 years, the increase has been much more spectacular in Anglo-Saxon countries than in continental European countries, where the public pension system is generally of higher standing. This shows how difficult it is to draw general conclusions about the macroeconomic consequences of ageing.

However, Covid particularly affects older populations so the participation rate for those over 65 fell sharply in the United States in 2020, back toward the levels observed a decade ago. As of mid-2021, it had still not rebounded, in contrast to the same variable for people under 55. In Japan, the participation rate for the over-65s has stabilized since the start of the crisis, whereas it had been rising constantly over the 2010 decade. It is obviously too early to draw definitive conclusions, but one of the consequences of the Covid crisis could be lower labor force participation among older people, which would accelerate the "prediction" of aging experts mentioned above that ageing will cause labor shortages. This will depend both on the evolution of the epidemic, on the pension system of each country and the situation in the demographic cycle.

2. The purchasing power of seniors in the United States is stronger than ever

By the end of 2019, AARP had calculated that the "economic contribution" of Americans over 50 was $8300 bn in 2018, which would have made it the 3rd largest country in the world. This means that they have significant purchasing power. On this subject, two points should be noted:

  • Even if their incomes are lower on average than those of other age groups (notably due to changes in career paths), the category of people over 65 is the one for which median or average incomes have increased the most over the 2009-2019 period. 
  • The fact that seniors are growing in number implies that the aggregate incomes of senior citizens are growing much faster than others. For example, in 2019, the incomes of those over 64 represented 19% of American incomes ($2,428 billion), compared to 11% in the early 2000s.

For example, aggregate incomes for the over-64 age group increased by 119% over the 2009-2019 period (69% for the 55-64 age group), compared to 52% and 45% for the 25-34 and 34-44 age groups respectively.

In the post-Covid years, senior citizens' consumption should be boosted by the strong increase in their wealth.  Of the $18,418bn increase in the net wealth of Americans between Q4 2019 and Q1 2021, 29.1% corresponds to households aged over 70 and 35.6% to households aged 55-69 (while they represent only 15% and 24% of the population aged over 20). This is mainly because these age groups own much more stocks than the others do. The share of the over-70s in the total net wealth even reached a historical peak in Q1 2021, at 26.8%. This should of course be tempered by the fact that wealth inequality is extremely high in the US. Finally, it is likely that the phenomenon may have been similar in other countries, for which data is less frequently available, as the financial wealth of the over-55s is generally greater than that of other age groups and the rise in equity markets must have benefited them more than others.

3. Accelerated adoption of digital technologies during the crisis will reshape ageing

The adoption of new technologies by seniors had already been visible for several years, but the crisis has accelerated the phenomenon. Indeed, the use of new communication technologies, already very high in other age groups, has increased in 2020. According to the AARP, it is for the over 70s that the rate of smartphone ownership has increased the most during the pandemic, rising from 62% in 2019 to 77% in 2020. AARP also mentions that the rate of ownership of tablets or "home assistants" also increased significantly in 2020 compared to 2019. AARP says, "The pandemic is likely driving the exponential increase in tech spending. Compared to 2019, tech spending among older adults is up 194%, from $394 to $1144." This type of spending has, for example, increased sharply among those over 70, from $270 to $972.

The AARP survey shows that seniors are more comfortable with digital technologies today than they were before the pandemic. This is expected to be even more the case in the future as tomorrow's seniors will already be familiar with new technologies. An Ericsson ConsumerLab study published in 2021 points out that people turning 65 today have likely already been using a smartphone for 10 to 12 years, while people in the 75-84 age group have likely never used a smartphone before they retired. However, it should be mentioned that the level of education plays a significant role: the higher the level of education, the higher the rate of smartphone ownership among the over-65s. 

This progression in the adoption of new technologies by senior citizens represents an opportunity for the diffusion of these technologies, which help to preserve the independence of senior citizens, for example by detecting falls, allowing remote medical monitoring or reducing social isolation. Teleassistance, telemedicine, databased analysis services and artificial intelligence such as robotics provide products and services to respond to these situations. As an example, in 2020, the top 10 most common reasons for smartphone use among the over-70s included health services and searching for health and fitness information. A study by think tank KFF estimates that more than 1 in 4 Medicare beneficiaries used telemedicine sessions between summer and fall 2020.

In 2019, a report by the House of Lords of the UK Parliament noted that there were 1.7 million telecare users in the country, out of a potential user pool of over 4 million. Several barriers to the adoption of new technologies were cited: lack of knowledge of the technologies, trust and the cost of these devices. While Covid-19 seems to have improved the knowledge and adoption of technologies among seniors, cost may still be a barrier, and it appears that the rate of smartphone ownership by seniors depends on income level. Hence, the issue of inequality is also central to the adoption of new technologies among seniors.

While the megatrend of population ageing does not change radically with the Covid crisis, there are several key developments. First, there is less participation in the labor market in the United States and Japan, probably because of concerns about the epidemic. Second, it is striking that the sharp increase in wealth during the crisis, particularly in the United States, has benefited seniors much more than other age groups, giving them comfortable purchasing power. Finally, the crisis has precipitated an acceleration in the use of digital technologies by seniors, which opens the way to the diffusion of new services that allow them to experience ageing differently.