The conventional old-age dependency ratio makes the economic impact of ageing societies seem worse than they will be. There are now some better measures that do not exaggerate the effects of ageing.
The dependency ratio method of measuring impact of ageing on economies has remained unchanged for over a hundred years so it’s time for an overhaul. Hopefully the new, more accurate techniques will also help to offset some of the ‘doom and gloom’ predictions we read so often.
Fundamentally, the old-age dependency ratio measures the number of older dependents relative to working-age people. It has assumed that the characteristics of the elderly do not change, yet ‘ageing’ is indeed changing. In general, we will be live longer, have better cognitive functioning, and be more educated than when the old-age dependency ratio was conceived.
Furthermore, this ratio is now regularly used in conversations about things it was not designed to address such as health care costs and the pension burden.
This article from the World Economic Forum explains that, in addition to the simple fact that people are living longer now, there are other assumptions about what happens when people reach 65 that render the old-age dependency ratio obsolete, namely;
Because people remain in the workforce longer a more accurate “economic dependency ratio” takes into account observations and forecasts of labor force participation rates.
Health care costs
A new indicator takes into account the fact that most of the health care costs of the elderly are incurred in their last few years of life. Increasing life expectancy means those final few years happen at ever later ages.
A more realistic ratio, called ‘the pension cost dependency ratio‘, has been computed to incorporate a general relationship between increases in life expectancy and the pension age. The pension cost dependency ratio shows how fast the burden of paying public pensions is likely to grow.
Turning 65 in 2016 is not what it was 1916
People do not suddenly become old-age dependents on their 65th birthdays. From a population perspective, it makes more sense to classify people as being old when they are getting near the end of their lives.
As the WEF article explains, failing to adjust who is categorized as old based on the changing characteristics of people and their longevity can make the impact seem worse than it will be.
In the U.K., for instance, the conventional old-age dependency ratio is forecast to increase by 33 percent by 2030. But allowing the old-age threshold to change with increasing life expectancy, the resulting ratio increases by just 13 percent.
Sounds like good news to me.