Policy Brief: Examining the Lifecycle Deficit in Jamaica and Argentina Maurice Harris, Planning Institute of Jamaica Pablo Comelatto, CENEP-Centro de Estudios de Población, Buenos Aires, Argentina Studying the economic lifecycle can provide valuable information for any country s policy-makers and technocrats as they engage in planning for development. This information is particularly useful as it can be fed into plans spanning the short term to the long term and can have great impact on several areas related to the provision of key social services to the population. The National Transfer Accounts (NTA) approach to the study of the lifecycle deficit provides exactly this kind of information identifying the periods of age-related economic dependency (where consumption exceeds income) as well as surplus (where income exceeds consumption) over the lifespan in a population, using a cross sectional approach. This paper uses NTA estimates from 1997 in the case of Argentina and 2002 in the case Jamaica, to analyze and compare the lifecycle deficit in both countries to gain useful insights into the nature of the generational economy. Demographic Situation: Jamaica Jamaica has the largest population of all English-speaking countries in the Caribbean and in 2002, its population was estimated to be approximately 2.61 million 1. The 2010 population was estimated at 2.73 million with the country projected to enter a phase of rapid ageing within the next two decades. The population is projected to increase to 2.87 million by 2029 (UN Population Unit projections). Currently, changes in the age and sex structure and rural/urban distribution of the population are the major shifts underway. The total fertility rate (TFR) was estimated at 2.5 children per woman according to the Jamaica Reproductive Health Survey, 2002. The crude birth rate was 18.6 per thousand and the crude death rate was 6.5 per thousand. The child population (0-14 years) is expected to decline both as a proportion of the total population and in absolute numbers until 2050. The change in absolute numbers is projected to be from 790 000 (2010) to 500 701 (2050). In 2009, the child dependency ratio was 48.9 per 100 persons of working age, while the old age dependency ratio was 15.2. The proportion of persons in the working age population (15-64 years) is projected to increase up to 65.2 per cent in 2019 and then decline to 63.7 per cent in 2050. Jamaica is therefore currently experiencing a demographic dividend and this period is regarded as a window of opportunity. The size of the elderly population (65 years and over is projected to rise steadily from 212 000 in 2010 to 472 500 in 2050, accounting for approximately 17.6 per cent of the population in 2050. The annual average size of the labour force in 2010 was approximately 1.25 million, with an annual average unemployment rate of 12.4 per cent. Unemployment among youth (14 24 years) was 30.8 per cent compared with the unemployment rate for adults (25 years 1 Estimate provided by the UN Population Unit. This population profile was used in the computation of the NTA estimates for 2002 for Jamaica. 1
and older), which stood at 9.7 per cent. Males accounted for approximately 54.9 per cent of the labour force. The total labour force participation rate was 62.4 per cent in 2010, with males recording a participation rate of 70.4 per cent and females, a rate of 54.8 per cent. Labour force participation was concentrated primarily in the 25 44 age range, which constituted 56.8 per cent of the labour force. Normal retirement age is 60 for females and 65 for males. Approximately 40.9 per cent of the employed labour force was self-employed in 2010. Traditionally, public sector schools have been the major providers of education to the school-age population (ages 3 24). In 2009, the public sector schools accounted for 86.0 per cent of all enrolment. Demographic Situation: Argentina Argentina (population 40.117.096 in 2010), traditionally the second largest country by population in South America, has experienced over the course of the twentieth century low and declining growth rates, resulting in the country recently falling to third place, surpassed by faster-growing Colombia. These low and declining growth rates are the result of a relatively early process of demographic transition, with declining mortality and fertility since the early twentieth century. In the latest intercensal interval (2001-2010) the country has averaged a growth rate of a slightly more than 11 per thousand and this growth rate is expected to decline over the following 20 years to less than 9 per thousand (UN Population Prospects 2008). As a result of the decline in mortality (and the different pace for men and women), the country has experienced a double process of aging and feminization. The sex ratio fell under 100 men per 100 women during the early 1970s and kept declining until the early 1990s, when it stabilized around 96 men per 100 women. Concurrently, the proportion of population 65 and over has grown from around 4 percent in 1950 to 10 percent in 2010 and is expected to reach 17.8 percent in 2050 (CELADE). As a result, the old age dependency ratio has more than doubled in the last 60 years and is expected to further double in the next 40 years (28.5 individuals over 65 per 100 individuals in working ages, defined as the ages 15 to 64). Conversely, the youth dependency ratio, after reaching a maximum of 51.3 in 1986 is expected to steadily decline, reflecting declining fertility and reaching a minimum of 31.6 in 2050. As a result of both trends, the total dependency ratio peaked at 65.8 in 1988, declining to 52.8 in 2026 and then rising again to 60.1 in 2050. The demographic dividend then, of having declining numbers of people in economically dependent ages relative to the working age population, will end in the first quarter of the 21 st century. In addition to the evolution of age dependency ratios, changing patterns of labour force participation are also relevant for the assessment of the relative burden of supporting young- and old-age consumption. Among the various determinants of labour force participation at different ages, the institution of social security provisions for retirement during the 1940s and the evolution of the retirement age seem to have been an important factor influencing the labour force participation of men at older ages. Effectively, the gap in labour force participation rates for men 50-54 and 60-64 more than doubled during the years of expansion of the program (from 15 percentage points in 1950 to 33 percentage 2
points in 1975). The subsequent crisis of the system and raising of the age of retirement (from 55 years before 1970 to 60 years and then to 65 years in 1994) closed this gap to less than 8 percentage points in 2000. Consequently, labour force participation rates for men under 60 in 2000 are at approximately at the same or slightly higher levels than those in 1950, while men above 65 years have consistently lower participation rates. For women, on the other hand, the secular trend towards increasing labour force participation at all ages conceals the impact of the expansion of the old age social security and increasing of the retirement age (always five years younger than that of men) and, consequently, women in the year 2000 present labour force participation rates that are, at all ages, higher than those of the year 1950. Figure 1-Age and sex structure, 2010 Comparison of the Lifecycle Deficit for both Countries Both Argentina and Jamaica are moderately ageing countries, albeit at slightly different stages in the ageing process. The respective age structures of both countries (Figure 1) reflect past trends in fertility and mortality, with both countries experiencing declining fertility rates and increasing longevity, and resulting in a relatively large proportion of population in ages 65 and above (7.7 percent and 10.7 percent in 2010 for Jamaica and Argentina, respectively). For Jamaica, the per capita consumption (Figure 2) peaked at 48 years and private per capita consumption exceeded public per capita consumption at all ages. Argentina s consumption profile, on the other hand, peaked at the relatively early age of 32, but remaining relatively constant for the remaining ages 2. 2 Consumption and labour income profiles for each country are standardized making the average of the income between ages 30 and 49, for the respective country, equal to one. 3
Public financing in Jamaica tends to be higher in the economic inactive ages (children and elderly). This is as a result of the fact that the majority of the in-kind social security programmes are geared at providing assistance to the young and the elderly. Private education peaks at age 17, while public education peaks at age 14. Per capita public health consumption tends to be predominantly public in the economic inactive ages. In Argentina, public financing of consumption declines from a maximum of approximately 48 percent at age 5, reaching a minimum of around 18 percent between ages 30 and 60 and raising again to a level of around 25 percent for the older ages. As in Jamaica, the U-shaped pattern reflects the weight of public financing of education (averaging around 75 percent in primary and secondary school) and health (averaging around 70 percent at older ages). Figure 2-Consumption by age, Jamaica 2002, Argentina 1997 Source: Authors calculations using data from the Jamaica Survey of Living Conditions 2002 and the Labour Force Survey 2002 (for Jamaica); and Encuesta Nacional de Gastos de los Hogares 1996/97 and Encuesta Permanente de Hogares (Mayo-Octubre 1997) (for Argentina). Jamaica s per capita labour income (Figure 3) peaked at 49 years, declining rapidly and reaching at age 63 approximately the same levels that had reached at age 20. Argentina, on the other hand, peaked at age 46, sustaining higher levels of labour income until later in the lifecycle, with labour income reaching at age 73 similar levels than those of workers of age 20. 4
Figure 3-Labour income by age, Jamaica 2002, Argentina 1997 Source: Authors calculations using data from the Jamaica Survey of Living Conditions 2002 and the Labour Force Survey 2002 (for Jamaica); and Encuesta Nacional de Gastos de los Hogares 1996/97 and Encuesta Permanente de Hogares (Mayo-Octubre 1997) (for Argentina). Combining consumption and labour income profiles, we can identify the stages in the life cycle where consumption exceeds labour income, giving rise to a deficit that has to be financed either by transfers, credit transactions or dis-saving (Figure 4). The lifecycle deficit for Jamaica shows that in the age ranges 0-22 and 57 and over, consumption exceeds labour income, or the deficit is positive. This means that Jamaica had a productive/surplus period of 34 years. The brevity of this surplus period might be explained by the relatively high rate of youth (aged 14-24) unemployment, which was 30.8 per cent, more than double the national rate; and the relatively high numbers of persons in the 55 and over age group who are outside the labour force. The age profile for net public transfers shows negative per capita totals between the ages of 21 and 68. Youth aged 0 to 20 and persons 69 and over recorded positive net public transfers. This is expected as these age groups consist overwhelmingly of persons outside the labour force, and who benefit more from in-cash public transfers relative to other age groups. With regard to net private transfers, the per capita totals were negative between ages 21 and 57, while ages 0 to 20 and 58 and over experienced positive net transfers. In the case of Argentina, deficits are observed in the age ranges 0-32 and 66 and above, with a surplus range of 33 years. While the consumption profile in Argentina remains at higher relative levels at almost all ages than in Jamaica, and hence the deficit in the early stages of the lifecycle lasts in Argentina ten years longer than Jamaica (until age 32, instead of 22), the fact that older workers in Argentina seem to sustain higher labour force participation rates delays the beginning of the deficit in the older ages nine years (age 66 instead of 57). 5
Figure 4-Life Cycle Deficit, Jamaica 2002, Argentina 1997 Source: Authors calculations using data from the Jamaica Survey of Living Conditions 2002 and the Labour Force Survey 2002 (for Jamaica); and Encuesta Nacional de Gastos de los Hogares 1996/97 and Encuesta Permanente de Hogares (Mayo-Octubre 1997) (for Argentina). Policy Implications Jamaica Jamaica s situation, characterized by the relative brevity of the surplus period, and the reality of an ageing population, raises policy implications for several areas such as the provision of social security, health care, education and the creation of sufficient jobs to meet the supply of labour as the working age population expands. Certainly, Jamaica has performed well in recent years with respect to raising the enrolment rates in school, achieving universal enrolment in primary education by 2002. However more effort needs to go into achieving higher levels of enrolment at the higher levels of the education system. This will ensure further development of human capital that will assist in raising the ability of the working age population to increase their earnings. This is going to be critical, as the 65 years and older population continues to grow steadily and will therefore require more resources from the working age population for sustenance, both in their contributions to pension schemes as well as private transfers. The building of human capital will be critical to this, because the number of additional jobs created annually that will be required to maintain the employment rate at 2002 levels, is projected to continue to rise as the working age population continues to expand up to 2024. Given the projected deterioration in the dependency ratio, what would actually be required to maintain adequate social protection for the economically inactive population is an increase in the employment rate and in per capita earnings. The 6
prospects of achieving both of these outcomes would be bolstered by further development of human capital. Public expenditure, in considering the current need for higher levels of investment in education in the short term, will also have to take into account the need for increased investment in healthcare and specialized services for the elderly in the medium to long term. One of the possible approaches to the increased investment required in both education and health is an increased reliance of public-private partnerships. This would relieve the government of some of the burden of the required expenditure. The need to increase expenditure/investment in education in particular, brings into focus the issue of quality of education delivered. It is one thing to increase expenditure/investment in education, but that in and of itself may not provide the required outcome i.e. the expected increase in human capital. Therefore the increased investment in human capital needs to intentionally target, not just increasing access to education, but increasing the quality of the education delivered by our schools. Work is on-going in this regard, and these efforts need to be continued. Argentina The age pattern of public consumption (high in the younger ages, relatively lower on the older ages, and very low for younger adults) stresses the relevance of demographic change over the sustainability of this given pattern of public expenditures. Effectively, the aforementioned period of demographic dividend will lighten the burden on workers of sustaining public programs targeted at the very young and very old age groups. Similarly, family composition will shift towards a decreased average number of dependents within the household, but with significant differences as for the relative number of dependent children as opposed to the number of the elderly. Additionally, the public sector in Argentina has embarked recently on the implementation of a new design of age-specific transfer programs that underline the relevance of age-, or intergenerational-, related analysis of the interaction of demography and fiscal sustainability. These two new policies are the Asignación Universal por Hijo, a noncontributory transfer program aimed at children in households with at least one unemployed, or working in the informal sector, parent; and an expansion of the number of old age Social Security beneficiaries, mostly based on age requirements and without consideration for past contributions. These two new policies have increased the role of public transfers as a means of financing the lifecycle deficit. The fact that both policies are aimed at the opposite extremes of the lifecycle implies that the impact of the aforementioned aging process on the sustainability of one of the programs will compensate the effect on the other. That is, while a reduced youth dependency ratio might make in the future the burden of the Asignación Universal por Hijo lighter, a higher old age dependency ratio will increase the cost of transfer programs targeting the elderly. The development of the National Transfer Accounts for both countries intends to make a contribution to better understanding the impact of the demographic change and highlight 7
the necessity of a comprehensive analysis of the fiscal sustainability of age-specific public transfer programs and changing patterns of household formation and age-specific private transfers. 8