Ireland’s social contract is beginning to unravel. Currently there are more than four potential workers for every one retiree in the State.
The old-age dependency ratio – the number of people aged 15-64 (potential workers) relative to the number of people aged 65 and over – was 4.3 at the end of 2022.
Of course not all people in the first category work (many are students) and not all people retire after 65 but having a multiple of workers for every one retiree is a financial necessity.
The State’s pension system relies on contributions from workers to support retired ones. Similarly the income tax generated from workers (it amounted €33 billion last year) pays for the healthcare costs associated with those who are no longer economically active.
But our demographics are shifting and our dependency ratio is now rapidly sliding the wrong way.
Last week the Central Statistics Office (CSO) mapped out several projections for how the State’s population might grow between now and 2057 based on various assumptions about inward migration and fertility rates.
What’s driving this shrinking ratio? In short, fewer babies.
In each of them, the ratio of workers to retirees shrinks dramatically.
Under a high net migration scenario, which assumes net inward migration of about 45,000 a year from 2027 on, the population grows by 1.8 million (or 35 per cent) to 7.01 million by 2057.
This would see the worker/retiree ratio fall to 2.2, meaning there would be 2.2 potential workers for every person aged 65 and over.
Under a low migration scenario, which assumes net inward migration of just 10,000 a year after 2032 and the population increasing to 5.73 million, the ratio falls to 1.8, meaning there would be just 1.8 potential workers for every retiree.
What’s driving this shrinking ratio? In short, fewer babies.
Fewer births means fewer workers in the future and therefore less resources. This will ultimately hurt economic growth by reducing output per capita and make it difficult to support a large old-age population.
Over the past 50 years, global fertility rates have plummeted.
The decline is most pronounced in high-income countries, which have proportionally less women of a child-bearing age. Women are also tending to have children later in life for career and other reasons. The average age of first-time mothers in the Republic has risen from 26 in 1985 to 31.7 in 2021.
The State’s birth rate has varied over the past 50 years, peaking at 75,550 in 2009 and declining every year since.
Births are projected to fall below deaths in the 2040s at which point Ireland’s natural population increase (excess births over deaths) will flip to a natural decrease.
On the other side of this diminishing fertility rate is increased longevity. People are living longer because of advances in medicine.
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The number of people aged 65 years and over living the Republic will, according to the CSO, hit one million by 2030. The Department of Finance estimates this shifting age profile will require an additional €8 billion in spending by end of the decade.
That bill will be dwarfed by the ones coming in subsequent decades.
In many advanced economies – the US, EU, Japan – a demographic turning point has been reached: the number of people of working age has peaked and is on a clear downward trajectory
— The Department of Finance
Ironically, given the current political noise about immigration and the spate of attacks on migrants and migrant accommodation, immigration is the only thing pushing against this trend.
A bigger migrant population boosts fertility and output and ultimately tax revenue. According to Revenue, half a million people who were not born in the Republic paid income tax in January this year.
We were warned back in 2019 that the Irish economy was dangerously close to overheating because of labour shortages but we’ve added 400,000 jobs since, the fastest acceleration in employment seen anywhere in Europe. This was facilitated principally by an influx of migrants but also by greater female participation in the labour force.
The world is ageing but some countries are ageing much more rapidly than others. Japan has the world’s oldest population, a product of having had low birth rates and strict immigration policies for decades. It has already surpassed the two workers to one retiree ratio.
Former German chancellor Angela Merkel’s open-door immigration policy saw about 1.7 million people apply for asylum in Germany between 2015 and 2019.
While the merits of this policy are hotly contested and are fast being dismantled (the current Berlin administration is busy bolstering border controls and promising to speed up deportations), the move might have been at least partly motivated by Germany’s “greying” population profile.
“In many advanced economies – the US, EU, Japan – a demographic turning point has been reached: the number of people of working age has peaked and is on a clear downward trajectory,” the Department of Finance said in a report in 2018.
“As a direct result, economic growth rates are slowing and demographically-sensitive public expenditure is rising in many of these countries,” it said. The Government is planning to amass €100 billion of excess corporation tax receipts in a new sovereign wealth fund to prepare for this financial drag. It may not be enough.
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