Analysis - New baby booms won't avert dependency dilemma

LONDON Wed Nov 14, 2012 7:33am GMT

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LONDON (Reuters) - With so many fretting about the rapid ageing of European societies and the rising burden of old-age dependency, it's easy to overlook the mini baby booms in many countries.

Often apocalyptic headlines on the greying of major economies and the "pensions timebomb" sit oddly with a growing body of data and reports of rising births and recovering fertility rates in many European economies, notably Britain.

Only this week, the inside pages of many UK newspapers dropped the little nugget that England this year is set to record the highest number of births in 40 years.

According to data released by the Royal College of Midwives, more than 700,000 babies are likely to be born in 2012 if first-quarter trends persist - more than in any year since 1971.

And these numbers are no isolated blip. There's been a welter of statistical and anecdotal evidence from Britain and elsewhere in Europe in recent years that shows a significant upturn in birth rates since the turn of the millennium.

A study released late last year by the RAND Europe think-tank showed that after two decades of year-on-year declines the total fertility rate for the European Union as a whole has stabilised in the 21st century, with all but four EU countries recording increases between 2000 and 2008.

National pictures vary of course and there's only a modest increase in Germany and the Netherlands. But Britain has more than reversed declines of the prior 20 years and pushed back close to "replacement rates" of 2.1 births on average per woman - the threshold where population stands still.

If trends of the past decade were to persist, RAND reckons replacement rates - which EU countries slid below as long ago as the 1970s - would be hit again in France and Sweden by 2015.

And even though many people assume rising number of babies have been driven by immigration, the report reckons migrants have had negligible effects on fertility rates per se, regardless of total births. More varied factors, including working family tax credits in the UK, were see as more powerful.

But, at the very least, the report reckons "Doomsday" scenarios of downward spiralling fertility have not materialised and the outlook is better than it was a decade ago.

HOLD THE CHAMPAGNE

So, is there room for any optimism on the economic and financial impact of ageing given that fertility rates and life expectancy - alongside net migration - are two critical variables affecting the worrying old-age dependency projections?

Well, not if you believe last week's long-term economic outlook from the Organisation for Economic Cooperation and Development. The OECD reckons ageing of global economies over the next 50 years - both in Europe and emerging economies such as China - would act as a significant drag for decades.

Old-age dependency ratios, or the number of persons over 65 as a share of 15-65 age group - were expected to keep rising everywhere out to 2060, with the ratio in the likes of Germany and Italy expected to be in excess of 40 percent by 2030.

And this year's Ageing Report from the European Commission forecast that the EU's old-age dependency ratio would more than double to 52.5 percent in 2060 - meaning the EU as a whole will have just two workers for every person over 65 from four now.

Driving that powerfully is the move into retirement of the post-World War Two "baby boomers" and their lengthening lifespans. Total numbers of over 65s in the EU will almost double from 87.5 to 152.6 million by 2060, with life expectancy at birth seen rising by between 6 and 8 years for men and women.

To return to the eye-catching UK birth rate example, a report published by UK insurer Scottish Widows this week said one in three children born in 2012 will live to be 100.

And while it will take at least 15 years for newborns to enter to enter the workforce, current workers continue to move toward peak retirement.

This means overall dependency - those under 15 plus those over 65 as a share of the workforce - is increasing even more rapidly in the short run with commensurate pressure on government welfare and household budgets.

So, the sheer momentum of falling fertility and mortality over many decades seems impossible to deflect even with a decade or so of mini-baby booms.

"Population dynamics works like a freight train," RAND Europe research director Stijn Hoorens told Reuters. "If the population change has been happening for a while, it is very difficult to stop it. It would require decades of 'above-replacement fertility' for this process to be reversed."

Even though it's stabilised, for example, the German fertility rate remains less than 1.5. And, all else equal, a fertility rate of 1.5 means a population will half in less than 70 years.

What's more, the fact that fertility rates have been below replacement rates in many European countries for decades means not only that smaller cohorts of young workers are entering the labour market, but there are also fewer potential mothers.

Worryingly, Hoorens said that - UK aside for now - other recent data indicated fertility has dropped back again in many European countries since the financial crisis started in 2008.

But even if the looming ageing picture is set in stone, there is still some fillip from a fertility recovery. A permanent fertility increase of around 0.05 children per women is estimated to lead over time to a decrease in the dependency ratio of up to 0.5 percent.

"At the scale of an economy of several hundreds of billion euros, it's not insignificant," Hoorens said.

(Editing by Ruth Pitchford)

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