When a pyramid becomes a square

29.8.2017 Press Releases

The number of pensioners in Iceland will double in the next 50 years

In the near future, we will see a dramatic change in technology and society. An important aspect of this will be the change in Iceland's age structure. That means that there is a reason to contemplate this change in demographics in regards to the so-called dependency ratio. This ratio explains the aggregate number of pensioners and younger people, divided by the number of people of working age. The increase in people at the working age has the effect to decrease the ratio, and vice versa.  In brief, the increase of pensioners along with the decrease in the birth rate in the coming decades will mean that the dependency ratio will increase.

Statistics Iceland (Hagstofa íslands), according to their population projections, expects that the number of people aged from 64 and older will increase from roughly 50.000 in the year 2017 to a number of 120.000 in the year 2065. The dependency ratio achieved a historical low in the year 2009, at 48%, but during the period 2017-2065 go from 51% to 72%. In other words, we're getting older.

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A decrease in the birth rate

Iceland has during the last decades been among the youngest nations in Europe. To shed some light on this statement Iceland had the third highest birth rate among all European countries in the year 1995, and in the year 1970 two of every three individuals were under the age of 34. Between 1980 and 2010 the number of children per every woman averaged between 2,05-2,2. Since 2012 the birth rate has gone down and in the year 2015 more children were born per every woman in Sweden and in the U.K. than in Iceland for the first time since measurements began. Predictions now assume that in the year 2060 40% of the Icelandic population will be under the age of 34, compared to 50% in the year 2017.

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What are the effects on economic growth?

Regarding what has been said before, you could expect that the change in age composition should affect economic growth in a negative way. The labour participation rate in Iceland is among the highest known meaning that the age composition has been favourable in regard to economic growth. It can be concluded that the change in the age composition, by itself, could lead to a decline in economic growth, around 0,25% per year for the next fifty years (Gylfi Magnússon, 2013). This means that the Icelandic age composition will not be one of the driving forces of economic growth like it has been.

 

Financing healthcare and services to the elderly

Inevitably the increased burden of the above mentioned development will fall especially on services relating to healthcare, pension and long term care. It can be expected that the cost of health care will double from 7% of the GDP to 15,2% between the years 2015 and 2050 when compared to a 3% increase in health care expenses per year (Institute of Economic Studies, 2003). OECD has a similar story to tell, but according to the Organization member state health care expenses will amount to 14% of GDP on average in the year 2060. The Organization predicts that in the middle of this century the increased costs will reach an unsustainable level (OECD, 2015) compared to current benchmarks in fiscal policy.

Longer working life and more immigrants

It's a significant challenge to tackle the change in age demographics of the Icelandic nation. Research implies that an individual over the age of 65 will achieve four times the amount of an individual under the age of 65 in medical expenses (OECD, 1994). The challenge will be involved in securing funding and the availability of health care, and at the same time stimulating economic growth for the future. More people can provide the service, public sector, private sector, individuals, non-profit organizations, insurance companies and so on. In this regard, the funding of the service and providing the service will not essentially have to go hand in hand.

Two growth stimulating actions that should be noted is the increase of the retirement age on one hand, and cutting red tape when it comes to migrating to Iceland on the other hand. Undoubtedly a longer life expectancy calls for a revision of the retirement age and many things suggest that Iceland would in the long-term benefit from the increase in number of migrants to Iceland. That is what the experience of other nations can tell us. 

Sölvi Blöndal
Head of Economic research