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A nursing home in Japan: Social security outlays have ballooned over the past two decades, forcing the government to borrow to sustain the system. (Photo by Akira Kodaka)
Asia Insight

Asia's worst aging fears begin to come true

Policymakers in South Korea, China and Japan stare into demographic abyss

TOKYO -- The Asian century is going to be gray.

From Japan and South Korea to China and some parts of Southeast Asia, aging populations are about to fundamentally change societies, business strategies and government policies. Moreover, the trend could tilt the regional and global power balance, as some economies are stunted while others continue to grow on the back of still-plentiful labor.

The aging threat has been discussed for years, but the latest signs suggest the region's worst fears are beginning to become a reality.

"I want a child," said one South Korean wife in her 30s. "But we still don't have a house, and when we think about the money, we're unable to take the plunge."

Many South Koreans express similar sentiments and refrain from having children. The working-age population, ranging in age from 15 to 64, declined for the first time in 2017. Now, the total population is also projected to go into decline as early as next year, the country's statistics agency warned at the end of March.

A newborn at a hospital in Japan: As births decline, Asia is rapidly getting older. (Photo by Ken Kobayashi)

By 2065, South Korea is forecast to become the grayest developed nation.

In China, the government abolished its one-child policy in 2016, but this appears to be a case of too little, too late. Births continued to decrease in 2017 and 2018.

The number of Chinese aged 16-59 began falling in 2014, according to the United Nations. Last year, for the first time, the age group dropped below 900 million people.

Adding to the headwinds, China's marriage rate declined for the fourth straight year in 2017. Businesses are increasingly catering to a nation of singles: Last year, Alibaba Group Holding's Tmall e-commerce site found its best-sellers were geared to one person, including a 100-gram pack of rice and a 200-milliliter bottle of red wine.

Japan is farther along on this fast track to nowhere. Its population of 15- to 64-year-olds started shrinking in 1995, about the time the country descended into "lost decades" of economic stagnation and deflation. The total population has been falling since 2008.

The outlook for all three countries is grimmer still: From 2020 to 2060, working-age populations are projected to plunge 30% in Japan, 26% in South Korea and 19% in China, according to the Organization for Economic Cooperation and Development. These estimates are based on an especially broad age group of 15 to 74.

Pensioners aged 65 or over are expected to make up more than 30% of these countries' populations by 2060.

Hong Kong, Singapore and Thailand look destined to follow similar trajectories.

There are exceptions. The workforces of India and Indonesia are expected to keep expanding at least through 2060. The same is true of the U.S., giving the country a major theoretical advantage over its chief rival for global dominance -- China.

The poverty rate among South Koreans aged 66 to 75 reached 39% in 2015, compared with 17% in Japan. (Photo by Jean Chung)

For the fast-aging countries, there is a real danger to economic growth.

China's already slowing growth rate, forecast to average 7.1% from 2010 to 2020, is seen falling to just 1.5% in the decade from 2040 to 2050. That would be a slower clip than India, at 3.7%, and the U.S., at 2.0%.

These are still just predictions. But gloomy forecasts can be self-fulfilling, as consumers and companies brace for the worsening demographic crisis. It's simple logic: Fewer consumers will constrain economies, prompting companies to cut back on investment, creating a downward spiral.

Young Japanese are already in saving mode, household spending data shows. Over the last 30 years, the saving rate has risen to 38% from 33% among those aged 25 to 29, and to 44% from 38% for the 30 to 34 set, according to Ikuko Samikawa, an associate professor at Hitotsubashi University in Tokyo.

"Young people tend to save more because they are more worried about their future," said Hiroshi Nakaso, chairman of the Daiwa Institute of Research and a former deputy governor of the Bank of Japan. "Businesses are also reining in investment amid uncertainty about future growth."

Governments and central banks, meanwhile, face vexing questions with little maneuvering room to find the answers. The demographic changes "will have various implications for policy," predicted Willem Adema, an economist at the OECD.

The social security burden grows ever heavier, with fewer workers to carry the load. Japan has managed by accumulating debt, while South Korea has resorted to painful austerity. But a reckoning is coming in both countries, while China's challenge looks even more complicated.

In Japan, social security outlays have ballooned over two decades, forcing the government to borrow more to keep the system going. The public debt is now more than twice the gross domestic product, making Japan the most indebted developed economy.

Over time, these circumstances will constrain policymakers. As the population shrinks, growth slows, investment wanes and frugality reigns, the result is likely to be a savings glut and a plunge in interest rates. With growth stuck around 1% and long-term interest rates held down, it will be difficult for the central bank to cut rates to stimulate the economy.

Bank of Japan Gov. Haruhiko Kuroda touched on this in January.

Bank of Japan Gov. Haruhiko Kuroda has touched on the risks of aging populations. (Photo by Shihoko Nakaoka)

"In a low interest rate environment, there is a greater risk that central banks will face the zero lower bound problem," he said, noting that policymakers and businesses are increasingly monitoring the "impact of demographic changes on the economy, as advanced and some emerging economies have experienced, or are expected to experience, declining and aging populations."

Still, Japan's elderly are generally taken care of, at least for now.

Seoul's debt is lower, but this has come at a severe cost to retirees. The poverty rate among South Koreans aged 66 to 75 reached 39% in 2015, compared with 17% in Japan and 18% in the U.S. The rate is even higher among those aged 76 and up.

The plight of Korean elderly shows up in household spending data. Japanese and South Korean consumption levels are similar among citizens under 50. Beyond that, the Koreans' spending drops off more sharply.

A 70-year-old retiree, who identified himself as Son, offered a peek at the lives of seniors scraping by in Seoul.

"I check my wife's mood when I ask for pocket money," he said. "She often refuses my requests, saying she already gave me money yesterday. I understand her. There's little money left after paying off bills for electricity and other utilities."

In South Korea, as in many Asian countries, younger generations are traditionally expected to care for their elders. But attitudes are changing, and even South Korea's no-frills pension system is becoming untenable. Last year, the government warned the national pension fund would go bust in 2057 unless action is taken.

South Korea's social security programs accounted for just 7.7% of GDP in 2015, versus 18.7% in Japan, according to S&P Global. By 2050, the share is projected to hit 17.8%, compared with 22.1% in Japan.

In China, where social security outlays ate up only 6.3% of GDP in 2015 but are seen rising to 16.5% by 2050, the country's size and high rates of labor migration add layers of complexity.

About 300 million people have migrated from rural areas to cities, and few can afford to return to care for aging parents thousands of kilometers away. The migrants, too, are getting older: The ratio over 50 was 21.3% in 2017, up from 11.4% in 2008. The retirement age in China is generally 60 for men and 50 for women, but most of the migrants will not be getting the generous pensions available to urbanites.

Including rural residents, around 900 million Chinese are living with little social safety net.

"The responsibility of taking care of parents is like a time bomb for us. You never know when they will get sick and when you may end up paying a fat bill," said Wang Yuefei, a 36-year-old health care consultant in Beijing. Although Wang's parents have government-subsidized medical insurance, she said it's not enough. Fears of exploding expenses, coupled with the cost of raising a 5-year-old daughter, have forced Wang and her husband to give up traveling abroad. "We don't have the luxury to enjoy the lifestyle we want," she said.

Guo Yongqi, who works for an environmental NGO in the northern Chinese city of Jinan, said his father is 60 years old "yet he still has to work part-time at a factory. That's enough to tell you how much pressure we face."

Despite the Communist Party's all-encompassing control, old-age poverty will soon affect so many people that Beijing will be forced to address it, the OECD's Adema predicted. "The government won't be able to ignore the issue anymore," he said. "You will have to think about how to get money from rich areas to poorer areas in order to sustain national unity."

The Chinese puzzle is part of a larger issue: 68% of total employment across the Asia-Pacific region is in the informal sector, which generates no tax revenue and provides little welfare coverage.

Governments are reacting slowly so far.

Japan intends to highlight the aging issue when it hosts the Group of 20 summit this year in Osaka.   © Reuters

One common response is to postpone retirement. In Hong Kong, the government recently imposed pension reductions on seniors unless they look for work. In Japan, Prime Minister Shinzo Abe is proposing that individuals who wait to draw their pensions until age 70 should be entitled to higher payouts.

South Korea is offering incentives to have children, with little success. "Young couples put off or avoid having a baby because [parents] are burdened by high education costs," said Gu Bon-chang, a director at World without Worry about Shadow Education, a civic group that opposes excessive private tutoring -- a problem tied to intense pressure to attend top schools and land a prestigious job.

China has introduced a "reverse mortgage" system, which allows older citizens to use their homes as collateral to borrow money for retirement. Very few have taken the loans.

Perhaps, this year's Group of 20 summit will be a turning point. Japan, the host, intends to raise awareness about demographic threats, offering itself up as a cautionary tale.

The hope, the OECD's Adema said, is that less-developed Asian countries will "look at Japan, take lessons and try to avoid" following it into the gray abyss.

Nikkei staff writers Kim Jaewon and Sotaro Suzuki in Seoul and Coco Liu in Hong Kong contributed to this article.

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