The Ageing of the Population (part I): Scope and Future Outlook in Spain

The Ageing of the Population (part I): Scope and Future Outlook in Spain

Theme: The following analysis looks at Spain’s ageing population and its socioeconomic consequences. The analysis is assessing the scope of the ageing process and address which sectors of Spain’s welfare state that are likely to be influenced by the ongoing changes.

Summary: Spain is in the middle of a demographic transition that is characterized by a rapid ageing of its population. Contrary to what many people may believe the ageing of the population is not a phenomenon influencing only the older age groups of society. Ageing occurs across all age groups, and will influence how Spanish welfare and state financed services are provided across all age groups. The analysis has focused on how ageing is affecting the educational institutions, the pension system, the health care system, and the labour market. It assesses current state of the ageing of Spain’s population, and provides glimpses into the future. The findings show that so far the ageing process has principally affected parts of the education system. In the immediate future, however, the effects of the ageing population will start to exert significant influence on some of the more costly sectors of Spain’s welfare state, such as the pension system, and health care sector. The analysis concludes by raising a set of questions that are necessary to address with some urgency to avoid a deteriorating welfare system. These questions should be seen as a point of departure for political debate aimed at reassessing the objectives of the Spanish welfare state, and harmonizing it with a new demographical reality that is fundamentally different from the one the current welfare state is designed for.

Analysis: Most people are aware of the demographic changes occurring in Spain and other European countries. We know that there are much less children born today than twenty years ago, and we know that people tend to live much longer today than before. What is less obvious, but nevertheless present in peoples mind, is that these two long-term population trends give rise to population ageing. However, the ageing of the population is an abstract description of a complex process that takes time to materialize, and it often has socio economic consequences that are difficult to comprehend. To enable an analysis of the phenomenon I will first assess in which way increased life expectancy and decreasing fertility are contributing to Spain’s ageing population. Thereafter I address some of the consequences resulting from Spain’s ageing population.

Increased life expectancy simply means that people live longer. In Spain, as in all the other countries of the European Union, life expectancy has increased more or less linearly since the end of World War II. Between 1975 and 1998 the Spaniards life expectancy at birth increased by 2.8 months per year, from 73.34 years to 78.71 years (numbers refer to both sexes). What is less intuitive is that large improvements in life expectancy entail large structural changes in the population. That life expectancy has gone up from just over 73 years to close to 79 between 1975 and 1998 means that many more people reach age 79 today than in 1975. When many more people in the population reach age 79, the population’s average age is also increasing, or put differently, the population is ageing.

If the problem of the ageing of the population were a result by increased life expectancy alone, politicians and demographers alike, would be less concerned by it. What makes the problem so difficult in Europe and in Spain is that the increase in life expectancy coincides in time with a unique decline in fertility. That is, at the same time as the population live longer and longer, young people are conceiving less and less children. To give a colourful example of the extraordinary developments of Spain’s fertility: In 1976 Spanish mothers gave birth to 707.498 children. In 2001, the number of births was 409.857.

The result is a fundamental change in the country’s population structure, whereby the average age of the population is increasing faster than it would if only one of these trends were present. It gives rise to a process known as “rapid” ageing of the population with far-reaching consequences for state finances and planning.

Just how big change in the population structure are we talking about? The perhaps best way to assess a country’s population development is through the decennial censuses. Spain had its last census round in 2001. The preceding census was conducted in 1991. By analysing the population structure at these two points in time we achieve a visual effect, or snapshot, of changes in Spain’s population structure over the last decade.  Figure 1 contrast the number of people aged between 0 and 100 years in 1991 and 2001.

Figure 1 show that Spain’s declining birth numbers were present already in 1991. We can see that they since then have stabilised at around 400 thousand children – down 300 thousand from 1975. The collapse of Spain’s fertility is perhaps the most dramatic change visible in the figure. However, and focusing instead on the ageing of the population that took place between 1991 and 2001, there are two other processes worth noticing in the figure. On the left hand side of the figure we see a sharp decrease in young people under age 26 across all ages when comparing the 1991 figures with those from 2001. On the right hand side we see clearly how the number of person’s aged over 26 has increased between the two censuses. The largest differences are visible between age 26 and 40 (due in part to immigration) and among those aged over 70. These two processes are solid evidence of an ageing population, which is reflected in the rise in the population’s average age from 36.5 years to 39.5 over the period.

If we look into the future there are reasons for being concerned. In 2001, Spain’s fertility was approximately 1.25 children per mother. If levels this low prevail over a substantial period of time the decrease in the total number of births would accelerate in the future. The reason for this is simply that when smaller and smaller age cohorts reach reproduction age there are less and less potential mothers around. If we consider that the mean age of Spanish mothers at birth is just over thirty years of age, and that most births in Spain are conceived by mothers aged between 20 and 40, figure 1 tell us that historically there has never been as many potential mothers in Spain as in this very moment. However, from now on the number of potential mothers will decline with a tremendous speed. Just ten years from now they will be 750 thousand less than today, and in 2050 the number would be down by 2.5 million (according to INE’s projections). Considering that life expectancy is still rising, the implication of such a development is that the ageing of Spain’s population could continue for a considerable part of this century.

The socio economic consequences of Spain’s ageing population

From an economic and state planning perspective, the consequences of an ageing population are, if not unattainable, difficult to fully comprehend. Contrary to what many people might believe, the ageing of the population does not only occur in older age groups. Since ageing is fundamentally caused by a combination of declining fertility and increased life expectancy, the effects of ageing have implications on the composition of all age groups, young and old alike. This means that the consequences of ageing affect all institutions of a society.  Hence, in addressing the consequences of ageing, Spanish politician’s are confronted with the largest enterprise of socio economic engineering in the history its welfare state. This work will include possible reforms of, the educational system, pension system, the labour market, as well as public health care.

The educational system is already experiencing a population implosion resulting from the sharp decline in fertility shown in figure 1. The demographic change affecting pre-university education (age groups 0-17) is in its late phase. Between 1991 and 2001 those aged 0 to 17 have decreased by 2.2 million. For the next ten years the size of this group would be relatively stable but with substantial differences within the group – the number of teenagers will continue declining, meanwhile the younger age groups will grow slightly.

While the decline in potential university students started in 1996, Spanish universities have so far been relatively spared from the effects of the ageing process. Assuming that most university students are aged between 18 and 25, the potential number of university students has declined by a modest 250 thousand persons since the last census. However, the outlook for the next decade is grim. Between 2001 and 2011 the potential number of university students will decline by 1.5 million, excluding the effect of immigration from the projection.  The numbers are rather spectacular. Between 2001 and 2005, those who turn 18 (the age at which many enter university) recedes those who are turning 26 (the age at which many leave university) by 200 thousand every year. If we consider that the average number of students in Spain’s 64 Universities is 25.000 and that the total number of matriculated students is approximately 1.5 million students, it is safe to say that there are hard times ahead for some of these universities. One comfort, albeit a small one, is the increasing share of young people attending University.

The consequences of the sharp decrease in students across all ages are difficult to evaluate. On the one hand it suggest that the Spanish educational system is, or will be, over-dimensioned in terms of staff versus students, as well as the number of students versus educational capacity. On the other hand Spain’s spending on education is among the lowest in the European Union.  Thus, instead of cutting cost as a consequence of the declining number of students, the challenge awaiting policy makers is to distribute economic resources more effectively, prevent a drop in quality, and preserve the variety and diversity of Spanish education in a context in which student cohorts are declining and competition for the most popular education tracks and universities is declining.

Assessing the impact of the increasing share of old people warrants some reflection over intra group differences. The increase in the number of old is not only an effect of the Spanish population growth, although important. Since the census in 1991, the continuously increasing life expectancy in Spain has caused a relative increase in the number of the oldest old, or the people over 85, that is stronger than for the group aged between 65 and 85 (see figure 2).

As figure 2 show, the group aged 85 and over is increasing with tremendous speed between 1991 and 2001. The increase is particularly strong, over 100%, for those aged 90 and over. The absolute increase is however more modest and the oldest old in Spain are still a small group when compared to the total population. In 1991 those aged over 85 comprised only 450 thousand, and in 2001 they were 710 thousand. Since the increase in the oldest old is due to increased life expectancy, and because there are no consistent signs that the increase in life expectancy will level off, we can expect this group to increase persistently in the coming years. Looking at elderly in general, that is, persons over 65, the trend is clear. In 1991, 5 million Spaniards were aged over 65. In 2001 they were 6.5 million. Towards the middle of this century the group will comprise some 12 million. Is there a price for the increasing number of elderly in Spanish society? Most experts believe there is, and that this price could be uncomfortably high. 

An increase by 1.5 million people aged over 65 implies in itself increased expenditures on pensions. Spain as many other European countries has a pay-as-you-go system, which means that it is those who are active on the labour market that pay for the pensions received by those who are retired. Those active in the labour market in turn, will enjoy the same benefit once they reach retirement age. Such a system of redistribution requires a certain amount of equilibrium in the proportion of the active vis-à-vis the retired population to enable sound financing of the pensions. If the share of retired people increases relative to the active population, new capital has to be injected into the system to save it from collapsing.  So far Spain has been saved from a situation whereby this balance is upset. The reason for this is that just as the number of retired people has increased over the last decade, so has the active population.

The question is whether this development will continue. The answer is simple: it will not. Spain’s demographic transition, with decreasing fertility and increasing share of elderly, suggest that the active population will start to decline as the younger and smaller age cohorts starts to enter into the active population. Demographic change is a very slow process that takes several years to materialize. In the case of Spain, fertility started to decline after 1976, but it is first now, 26 years later, that the smaller birth cohorts are starting to enter into the active population. Between 2003 and 2014, the yearly transfer of people from the young to the active population will drop from its current level of 700 thousand to 370 thousand. With a slight delay, from 2009, and onwards, the people turning 66, and thus leave the active population, will start to increase rapidly. Between now and 2009 about 400 thousand Spaniards turn 66 each year. By 2020 they will be close to 500 thousand a year, and by 2030 it will reach 650 thousands. From 2014 and onwards more people will leave the active population than enter it. Figure 3 effectively show the structural changes that the Spanish labour market has to assimilate.

Figure 3 show that the Spanish labour market is on the verge of the perhaps largest structural change in history. Leaving aside the implications this may have on market economy, the effect of these changes will have large implication on the cost for sustaining an effective pension system. For example, Herce (2001, has estimated that between now and 2015 the relationship between affiliated/contributors and pensioners/receivers would be stable around 2:1. From then on the number of contributors per receiver is set for steady decline and around 2040 the relationship would be approximately 1:1.  From 2015 and onwards the costs of pensions would exceed the incomes. What is more worrisome is that the cost of pensions under the present system will increase from 9% of Spain’s GDP in 2015 to a handsome 17% of GDP in 2050 due to the increasing number of retirements. Given the simultaneous decline of the Spanish labour force shown in figure 3, the question is: Who will chip in the difference?

All things equal, the pay-as-you-go system is a fine system. It provides a “collective good” that no beneficiary question. In the absence of a demographic transition it is probably an optimal solution. But herein lies the problem – the part of the demographic transition affecting the sustainability of Spain’s pension system is irrevocably underway – in fact it started in 2003 (see figure 3). In the meanwhile people continue contributing income for pensions in the belief that they will enjoy pensions in the same extensive way as now. No doubt, they will be disappointed when the time comes to start collect their pensions, unless measures are introduced to make up for the deficit. At the very minimum, it should be clarified how and to what extent the government intends to solve the problem of the deficit that is likely to emerge around 2015. Currently there is no information about how the government intends to solve this difficult equation, and consequently, a majority of the active population is actually contributing to a future benefit which size and importance is completely unknown or reduced to mere speculation.

Another socio economic effect of an increased share of elderly in the population is related to the sustainability of the public health sector. As mentioned above the group aged over 85 has increased tremendously over the last ten-year period, and it is unlikely that this increase will weaken in the future. Even modest increases of people above 85 has far reaching consequences on particularly healthcare expenditures since this group is more frequently in need of healthcare, and is much more care intensive, with significant longer convalescence periods than younger age groups. For example, the average patient time (time between arrival and departure in care facilities) in Spanish hospitals is 9 days. If we break down the figures by age group, however, we find that people who seek care between 66 and 75 stay on average 11 days, people between 76 and 85 stay 12 days, and finally those over 85 are hospitalized 14 days on average. Hence, a shift in the population structure whereby the share of elderly are increasing at the expense of younger age groups imply an increase in care resources per capita under a scenario of constant population size. If the increase in the share of the elderly is significant and persistent it will inevitably mean higher cost for the health care sector to maintain the current level of quality. Another issue is the increasing demand for institutional care as a result of an increasing load of elderly. This sector is relatively undeveloped in Spain and is known to be cost intensive.

Is there no good news? In the short term the answer would probably be: yes some. The declining labour force could mean that Spain finally will come to terms with its high unemployment levels. Moreover, it could also come to affect the low participation level, by drawing more people into the labour force, especially women. Decreasing unemployment and higher participation rates would counteract some of the structural deficits caused by ageing. The problem, however, is that the ageing process in Spain would be so rapid and significant that in the long term their economical effects would be marginal. Another problem arising from the inclusion of groups that traditionally has been outside the labour market is that it requires adaptation by the society to a new type of family life. For example, a higher female participation rate weakens the capacity of Spanish families to care for their elderly and children, which in turn may increase the demand for state subsidised childcare and institutional care of elderly to compensate for this deficit. Thus, it is not clear to what extent society would benefit from these developments.

But how about immigration, is it not a solution to our problems? There are two answers to this question: Yes and no. In the short term, and assuming that retirement ages remain at their present level, immigration is the only solution to offset the decline of the labour force relative to the retired population. However, offsetting the effects of population ageing in the long term would entail unsustainable immigration levels. Thus, although immigration is important, it is currently not a solution to the structural changes that most European societies including Spain are going through. Most studies analysing the effects of ageing conclude that despite the positive impact of migration, the only feasible way to come to terms with the problem is through a reassessment of the welfare state, which in the case of the pension system, involves either a different way of financing it or a substantial rise in the retirement age.

Conclusions: Spain would from the middle of this century, when the demographic transition is in its later phase, be a fundamentally different country than today. This analysis has raised the issue whether the current welfare state is able to accommodate this change effectively. I have argued that the ageing of Spain’s population creates new dependencies and needs. Assessing them is a political responsibility. Addressing them without seriously changing the ways in which resources are being distributed is most likely an impossible task. The problem of changing how resources are redistributed is that it often comes at a high political price, opposed by many groups in society. However, the welfare state is a construction built on solidarity, and if abused it could lead to a much more difficult situation and collapse of the whole system. The only viable alternative in preserving Spain’s welfare state in the face of its ongoing ageing process, is by reforming it in such a way that it is in harmony with the new demographic conditions that the country is starting to experience.

The analysis has pointed out that the ageing of Spain’s population now has reached a stage where it is time to rethink how some of the more costly sectors in Spain should function in the future. This includes sectors such as education, pensions, labour market, and health care. Important questions ahead for Spanish policy makers are; which measures are necessary for preserving the quality, variety, and diversity of Spanish education in a society with significantly less students? How should pensions be financed in the future? Should the pay-as-you-go system be abandoned? Should the retirement age be postponed in an attempt to harmonizing a future pension system with modern conditions of life resulting from increased life expectancy, and to lower cost for the increasing number of pensioners?  How could the costs for the health care system be contained in responding to the more care intensive needs posed by an increased share of elderly in the population? And finally, how would an increased demand of labour affect Spanish families and their lives, and which role should the state play in accommodating the cultural changes accompanying increased participation of, for example, women in the labour market. 

Rickard Sandell

Senior analyst, Demography and Population

Real Instituto Elcano

Rickard Sandell

Written by Rickard Sandell