Organisation of households: Aging, depopulation and welfare costs

Organisation of households: Aging, depopulation and welfare costs

Phuah Eng Chye (7 April 2018)

In his report on “Future welfare and the ageing population”, Mårten Blix highlights that while much of the attention is focused on challenges from a rise in the dependency ratio, challenges arising from population movement from rural to urban areas and the future costs of welfare support also required substantial attention.

Mårten Blix points out “the urbanisation of the country continues, with a reduced need for labour in agriculture and an increased need for labour in the big-city regions. It is by no means a development that is unique to Sweden, but one found throughout the world…The mirror image of the big cities getting bigger is, of course, that some municipalities get smaller and find it ever harder to maintain schools, health and long-term care of the elderly.”

Rural depopulation is characterised by a generational shift as it “is the young who move to the big cities.” In Sweden, this meant that till 2025 the number of young labour market entrants will be greater than the number of retirements in big towns, big cities and educational centres. In contrast, “in rural municipalities, the number of young who are expected to enter the labour market is only half the number of those who leave to retire.”

Mårten Blix also notes “a large number of retirements are expected in agriculture and forestry. Almost as many retirements will occur in the public sector and within the care sector. In thinly populated areas, this compounds the challenges of financing welfare services associated with an already high old-age dependency ratio…The age departures are significant in manufacturing[1] as well, but at the same time, employment in manufacturing has tended to decrease in step with the improvement in productivity growth and the development of new technology.”

Asit K. Biswas, Cecilia Tortajada and Martin Stavenhagen observes depopulation and deurbanisation occur when the population shrinks, an industry experiences decline, or when there is resource depletion or environmental degradation. In particular, these events raise policy issues in relation to the operations and financial viability of infrastructure.

They cite the example of Leipzig’s water system where “fewer users, increased efficiency and less water demand by industries dramatically reduced water demands from 700,000 m3 to only 165,000 m3/day…created new types of challenges. Lower demand means water stays in the pipes for longer periods increasing the risk for bacterial growth and microbial contamination, and thus health problems. Lower water use means lower waste water generation. This contributes to sedimentation in sewer pipes because low flow velocities. Thus, clean water has to be used to flush the sewer system periodically for proper maintenance. Leipzig’s water utility is facing higher operation and maintenance costs, and also higher long-term investment costs for restructuring the water system, with a declining consumption and revenue. Another problem is that the unexpected but serious financial pressure is forcing the utility to focus on possible technical fixes due to lower domestic and industrial water use. This means lower priority to proper operation and maintenance practices will negatively impact long-term sustainability of the utility.”

Andrés Rodríguez-Pose highlights “persistent poverty, economic decay and lack of opportunities cause discontent in declining regions…the places that don’t matter have often been characterised as rustbelts or flyover states.” But it has been difficult to find the appropriate policy responses to depopulation and declining regions.

Tim Leunig points out that “despite massive spending, the evidence is that regeneration spending towns have slipped back relative to both the national average and Britain’s most successful towns. Regeneration policy has failed to regenerate towns.” He notes “there’s no altering geography, and some of our towns just aren’t in the right place any more”. He argues sustaining the expansion of vibrant towns has historically contributed to economic success and should be supported by expanding the supply of affordable housing to accommodate larger population inflows.

However, Andrés Rodríguez-Pose points out “shifting attention from places in need of support to more prosperous and dynamic ones also causes distress and resentment in the neglected spaces, sowing the seed for revenge through the ballot.” Nonetheless, options such as “decentralising and devolving power to less developed cities and regions has also had disappointing economic outcomes. Sticking to existing social and welfare policies can result in permanently dependent populations and territories, possibly stunting economic growth and leading to a rise in social and political tensions.”

Aging also poses the challenge of rising welfare costs. Mårten Blix notes “most people want the standard of welfare services to continue to increase and will not accept an unchanged standard at today’s level…Demand for welfare services and the requirement that they should follow the general rise in society’s standards is the driving force behind the big cost projection; costs of long term care for the elderly and for healthcare will increase.”

With the costs of welfare services likely to outpace fiscal revenues, “a so-called funding gap may arise” which results in the “risk that it will not be possible to continue financing welfare in the same way as today.” Mårten Blix outlines “in the Swedish welfare model, financing is primarily done through taxes and to some extent from fees” but notes there is little room to “finance increased welfare with higher taxes” and “raising fees for welfare services has impacts on equity and would make life more difficult for those worse off.”

Hence, “the alternative that seems best for the economy and that is most equitable between generations is more work, mainly through higher employment, extending working life and an earlier entry into the labour market…all of which increase the tax base and reduce the support burden implied by the rise in the old age dependency ratio.”

Another possibility is to increase the productivity of welfare services. However, Mårten Blix notes while “it should be possible to achieve a higher welfare development for the same money or the same level of welfare as today for a smaller price tag,” yet higher productivity “does not help to reduce the challenge of the financing gap. The reason is that higher productivity leads to higher wages in the private sector, then the salaries in the public sector will increase as well – and the funding gap will not shrink.”

Mårten Blix also points out a future downturn in productivity growth could upset the delicate balance between private and public welfare services as it “could cause those who have private insurance to turn increasingly to the publicly funded welfare services. If this were to happen when only a few have private insurance policies, it would probably have little cost significance. However, when the number of private insurance policy holders is no longer negligible, it might have a greater impact on public expenditures.”

Overall, aging is accompanied by a slowdown in productivity growth in tandem with the shift to a services economy[2]. In this regard, the current development and welfare models are being placed under tremendous strain as economies make a transition to the information society.  There is the lack of robust theories and paradigms on managing these challenges.

Mårten Blix advises “it is not a given that public welfare must look exactly the same in the future as it does day.” Hence, there are opportunities to pursue non-expansionist models. Aging is a natural antidote to over-population and over-production and provides opportunities to improve environmental sustainability. Hence, there is a need to strive for greater policy coherence by reshaping the clusters of economic activities and remodelling the welfare systems to match the changing household sizes and population distribution.

References

Andrés Rodríguez-Pose (6 February 2018) “The revenge of the places that don’t matter”. Voxeu.org. https://voxeu.org/article/revenge-places-dont-matter

Asit K. Biswas, Cecilia Tortajada, Martin Stavenhagen (8 Mar 2018) “In an urbanizing world, shrinking cities are a forgotten problem.” World Economic Forum. https://www.weforum.org/agenda/2018/03/managing-shrinking-cities-in-an-expanding-world

Mårten Blix (February 2013) “Future welfare and the ageing population”. Interim report from the Commission on the Future of Sweden. http://www.martenblix.com/uploads/6/2/7/2/62723607/blix_future_welfare_and_the_ageing_population_report_from_the_commission_on_the_future_of_sweden_2013.pdf

Phuah Eng Chye (26 August 2017) “The services economy: Revisiting Baumol’s cost disease.” Economicsofinformationsociety.com. http://economicsofinformationsociety.com/the-services-economy-revisiting-baumols-cost-disease/

Phuah Eng Chye (7 April 2018) “Organisation of households: Aging, secular stagnation and population policies”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/organisation-of-households-aging-secular-stagnation-and-population-policies/

Tim Leunig (13 Aug 2008) “The regeneration game is up”. The Guardian. https://www.theguardian.com/commentisfree/2008/aug/13/regeneration.conservatives

[1] Including the relocation of companies with a strong local association or their outsourcing of production. Mårten Blix

[2] Phuah Eng Chye “The services economy: Revisiting Baumol’s cost disease

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