The economics of healthy and active ageing series

WILL POPULATIONAGEING SPELL THE ENDOF THEWELFARE STATEA review of evidence and policy options

Jonathan CylusJosep FiguerasCharles Normand

World Health OrganizationRegional Office for EuropeUN City, Marmorvej 51,DK-2100 Copenhagen Ø,DenmarkTel.: +45 39 17 17 17Fax: +45 39 17 18 18E-mail: postmaster@euro.who.intweb site: www.euro.who.int

Print ISSN 1997-8065

Web ISSN 1997-8073

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Keywords:

Aged

Aged, 80 and over

Aging

Healthy Aging

Health Care Costs - trends

Health Services for the Aged - economics

Health Policy - economics

Long-Term Care - economics

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EditorsAnna SaganErica Richardson

Series EditorsJonathan CylusCharles NormandJosep Figueras

Managing EditorsJonathan NorthCaroline White

Contents

Key Messages 7

Executive Summary 9

Introduction 13

1. What are the implications of population ageingfor health and long-term care needs and costs? 14

2. What are the implications of population ageingfor paid and unpaid work? 19

3. What are the implications of populationageing for the acceptability, equity andeffectiveness of financing care and consumption? 22

4. The policy options: How candecision-makers respond to population ageing? 27

5. Building on what we know and improvingthe evidence base for policy-making 34

References 35

Authors

Jonathan Cylus, London Hubs Coordinator andEconomist at the European Observatory on HealthSystems and Policies, London School of Economics& Political Science and London School of Hygiene& Tropical Medicine

Josep Figueras, Director of the European Observatory on Health Systems and Policies

Charles Normand, Emeritus Professor at TrinityCollege Dublin and Professor at King’s CollegeLondon

page

The Economics of Healthy and Active Ageing

Will Population Ageing Spell the End of the Welfare State: A review of evidence and policy options

Print ISSN 1997-8065

Web ISSN 1997-8073

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3The Economics of Healthy and Active Ageing

About this brief

This brief serves as an overview and introduction to theEconomics of Healthy and Active Ageing series. It reviewsthe main evidence on the health and long-term care costsassociated with ageing populations to better understand theexpected cost pressures associated with changing age-demographics. At the same time, the brief explores howolder populations can and do contribute meaningfully bothin economic and societal terms, particularly if they are ableto remain healthy and active into later life, fostering the so-called “Silver Economy”. The brief concludes by reviewingselected policy areas that have been shown to either supportthe health and activity of older people or which otherwisereinforce sustainable care systems more broadly in thecontext of population ageing.

This brief has been prepared as a background document forthe High-Level Forum on the Silver Economy held on July 9-10, 2019 in Helsinki, Finland, which is part of the officialprogram of the Finnish Presidency of the Council of theEuropean Union.

It constitutes an update of an earlier version prepared withthe support of the Centre for Ageing Better and the WHODepartment of Ageing and Life Course. A draft version ofthis brief was also presented at a meeting of the Economicsof Healthy Ageing expert panel convened by the WHODepartment of Ageing and Life Course; the content of thebrief reflects the input of various panellists. Special thanksalso to John Beard, Martin McKee, Erica Richardson, Claire Turner and Gemma Williams for their comments and suggestions.

About the series

Population ageing is often perceived negatively from aneconomic standpoint. Yet taking a more balanced view,it becomes evident that a growing older population isnot necessarily very costly to care for, and that olderpeople provide significant economic and societalbenefits – particularly if they are healthy and active. Thisis the broad perspective of the Economics of Healthyand Active Ageing series: to inspire a ‘re-think’ of theeconomic consequences of population ageing.

In this series we investigate key policy questionsassociated with population ageing, bringing togetherfindings from research and country experiences. Wereview what is known about the health and long-termcare costs of older people, and consider many of theeconomic and societal benefits of healthy ageing. Wealso explore policy options within the health and long-term care sectors, as well as other areas beyond the caresector, which either minimize avoidable health andlong-term care costs, support older people so that theycan continue to contribute meaningfully to society, orotherwise contribute to the sustainability of caresystems in the context of changing demographics.

The outputs of this study series take a variety of briefformats that are accessible, policy-relevant and can berapidly disseminated.

4 Overview brief

Acronyms

DADDR adult disability dependency ratio

ADL activities of daily living

AWG Working Group on Ageing Populations and Sustainability

ESS European Social Survey

EU European Union

FTE full time equivalent

GDP gross domestic product

HTA health technology assessment

IADL instrumental activities of daily living

ICT information and communication technology

IDI interactive digital intervention

NCD non-communicable disease

NTA National Transfer Accounts

OECD Organisation for Economic Co-operation and Development

POADR prospective old-age dependency ratio

RCT randomized controlled trial

SHARE Survey of Health, Ageing and Retirement in Europe

WHO World Health Organization

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5The Economics of Healthy and Active Ageing

Boxes, table and figures

Boxes

Box 1: Forecasting future health care expenditure 15trends by age

Box 2: Estimating total costs of formal 18and informal long-term care

Box 3: Accounting for the value of informal care 21

Box 4: Accounting for health and disability 23in the old-age support ratio

Box 5: Accounting for the number of consumers 23and producers in the old-age support ratio

Box 6: The Silver Economy 26

Box 7: Health implications of remaining in paid and 32unpaid work for longer

Table

Table 1: Fiscal support ratios, by region 26

Figures

Figure 1: Conceptual framework 14

Figure 2: Health care expenditures by age and gender 15 relative to GDP, EU + Norway

Figure 3: Contribution of changing age-mix to growth 16rates of health care expenditures per person, selected EU countries

Figure 4: Long-term care expenditure as a share of GDP, 19OECD countries, most recent year available

Figure 5: Age structure of the workforce, including 20informal carers, adjusted for full time equivalence (FTE)

Figure 6: Participation in paid employment and full 21time equivalent (FTE) informal caregiving among the 55+, selected European countries

Figure 7: Average retirement ages among men 22in OECD-34 countries, 1970 to 2016

Figure 8: Per person consumption by age, selected 24countries

Figure 9: How consumption is financed for people 25over age 65 in selected European countries

Figure 10: Share of tax revenues by source, 27OECD countries, 2015

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7The Economics of Healthy and Active Ageing

Key messages

• Population ageing is raising concerns about how to copewith the expected greater cost of health and long-termcare, and over the economic implications of having acomparatively smaller share of younger people attraditional working age.

• This rhetoric is often inspired by misleading metrics, suchas the traditional old-age dependency ratio, whichassume that people become dependent on society afterreaching some pre-defined age.

• Yet, upon closer inspection, available evidence suggeststhat care and consumption of a growing older populationmay not be so costly to finance and that older peopleprovide significant economic and societal benefits,especially when healthy and active:

- Population ageing has a modest and very gradualeffect on health expenditure forecasts, compared totraditional cost drivers such as price growth andtechnological innovation.

- Demand for long-term care is expected to increasesubstantially due to population ageing but it is comingfrom a low base currently and is not expected to havea large impact on spending forecasts. However, thisdoes not account for the economic cost of informallong-term care, which is not captured in theinternational statistics (nor fully understood).

- Many older people continue to provide paid or unpaidwork beyond official retirement age and continue tomake a positive economic and societal contribution.The value of unpaid work provided by older people isconsiderable but difficult to monetize.

- While in Europe consumption of older people is mainlyfinanced by public transfers, many older people pay for(part of) their consumption from private sources,including from incomes from their own continuedwork or accumulated assets.

- Accumulation of asset wealth also benefits theeconomy indirectly through its contribution toproductivity growth and health is a key predictor ofasset accumulation.

- Further, older people, even if not in paid employment,continue to pay consumption and other non-labourtaxes, and thus contribute to public-sector revenues.

• Carefully crafted policies can reduce the costs of healthand long-term care of older people, enhance theireconomic contribution through paid and unpaid work,and support acceptability of funding and incometransfers:

- Policies to promote cost-effective health and long-termcare interventions include the use of technology,integration of health and long-term care, as well asother models of care delivery and supporting bettertreatment and care choices near the end of life.

- Keeping older people active in paid work is dependenton a number of factors, not least their health, andimportantly the roles and incentives regardingemployment and pensions. On the unpaid work side,policies may include support of informal carers throughtraining or cash transfers and interventions that enablecarers to combine unpaid care with paid employment.

- Health and long-term care financing systems may needto diversify their sources of revenue in order tocontinue to generate sufficient resources. Policies thatare being explored include increasing reliance ongeneral taxes or private sources in welfare systems thatrely heavily on payroll contributions; the use ofhypothecation and the introduction of mandatorylong-term care insurance. Overall, acceptability ofhigher taxes and transfers will depend on thetransparency of the process and perceived fairness ofthe rules.

- Policies to promote healthy and active ageing, whichhas an intrinsic value in itself, such as those thatprevent or delay care dependency, will also indirectly(through enhanced health and functional ability) helpachieve all the other policy goals outlined above.

• The forthcoming briefs in this series will look at the issuesoutlined above in more detail in an attempt to gaugehow big a challenge population ageing actually is for thewelfare states as we know them today.

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9The Economics of Healthy and Active Ageing

Executive summary

Population ageing presents both challenges andopportunities for societies around the world. As the share ofthe population at older age increases, there are concernsover how to cope with the possible economic implications ofhaving a smaller share of people at traditional working age(with potentially more people obtaining income securitythrough both public and private pensions) and how torespond to greater health and long-term care needs.Without appropriate policy responses, demographic changeswill have inevitable consequences for households, publicfinances and possibly for economic growth anddevelopment. To manage the challenges and to takeadvantage of the opportunities policy makers must actacross a range of domains, on work and employment, onincome security, on promoting healthier lifestyles and ondeveloping new and more efficient models of care.

Evidence suggests that older people can provide significanteconomic and societal benefits – particularly if they arehealthy and active. Their patterns of consumption canprovide economic benefits, their paid and unpaid work cancontribute to economic activity, and in particular olderpeople can provide important inputs into caring for otherolder people. While ageing will bring higher needs for andcosts of care, in part this can be moderated with betterchoices and configurations in health and social care. Thisbackground paper aims to provide a balanced summary ofthe challenges and opportunities, drawing on the bestavailable evidence to describe likely trends and to reviewoptions for policy. Gaps in the evidence and methodologicalchallenges are discussed and priorities for researchconsidered. The background paper draws heavily on thepolicy briefs and papers from the European Observatoryprogramme on the Economics of Healthy and Active Ageing.

An overview of challenges and opportunities inpopulation ageing

Concerns about the implications of the ageing population inEurope mainly focus on effects on economic activity(especially shortages of people of working age and possiblylower labour productivity) and on the burden and cost ofsupporting and caring for larger numbers of older people,some of whom have complex medical needs and frailty. Aspecific issue that is often raised is the likely shortage of staffto provide this care given the demographic trends. There isa related concern about the cost of providing financialsecurity to older people who are outside the formalworkforce.

Ageing also provides many opportunities. People overconventional ages for retirement continue to carry out bothpaid and unpaid work, in many cases providing childcarethat allows younger people to go to work. Older peoplemay help support economic activity through theirconsumption patterns and a general tendency to spenddown savings. Much of the care for older people is providedby other older people, as is some care for younger people),

so ageing brings both more needs and more caregivers. Thepension ‘problem’ is in part caused by the design of pensionsystems, restricted access to work for older people, and poordesign of jobs that might suit older people. In someinstances, it is difficult for older people to work in ways thatsuit them and in jobs that suit them. Additionally in somesystems they lose pension income if they continue to work.

What are the implications of population ageingfor health and long-term care needs and costs?

In general, health and long-term care needs andexpenditures increase with age. However, there areimportant differences across countries. For example, in2015, health care costs of the average 80-year-old inHungary were almost 16 times higher than costs of theaverage 20-year-old, but this difference was only 2.7-fold inCyprus. Yet, despite this typical pattern of higher health carespending on older people, available data show thatpopulation ageing has in fact a relatively modest effect onhealth care expenditure forecasts compared to otherimportant historical drivers of health expenditure growth,such as prices or technological innovation. Changes inpopulation age structure alone are expected to add no morethan one additional percentage point to the average annualper person health care expenditure growth rates between2010 and 2060 in the countries reviewed in this report.Population ageing is simply too gradual a process to rapidlyaccelerate health care expenditure growth.

Additionally, much of the evidence suggests that calendarage itself is not the primary reason for higher health carespending associated with older ages. Rather, related factorssuch as proximity to death and poor health are moreimportant determinants of health spending. Poor health anddisability at all ages are major drivers of health careexpenditure trends, which means that whether people areliving longer in better or worse health will affect care costs.Likewise, although health care spending increases rapidly inthe final months of life, there is research showing that froma certain point, the older people are when they die, thelower their health spending is near to the end of their life.This is likely due to lower use of resource-intensiveinterventions in older ages (although it may also reflectdiscriminatory practices and ageism). Therefore, as longevityincreases, it is possible that the health care costs of olderpeople relative to younger people will actually fall, especiallyif older people live in better health, thereby reducing theotherwise expected effects of population ageing on totalhealth care expenditure growth in the future.

The presence of a formal or informal long-term care systemmay be another reason behind declining health care costsamong the oldest old, as costs are shifted outside of thetraditional health care sector into other settings.Alternatively, in countries where there are no suitablealternatives, chronically ill patients may need to occupyacute care facilities inappropriately at far greater cost, againdistorting the measured costs of providing health care toolder people. Overall, wider health system characteristics areanother important driver of variations in spending at olderages across countries.

10 Overview brief

Where formal long-term care is available, its costs areexpected to increase rapidly as a result of population ageing.However, this growth in spending on long-term care iscoming from a low baseline in most countries. The majorityof Organisation for Economic Co-operation andDevelopment (OECD) countries with data available currentlyspend less than 2% of gross domestic product (GDP) onlong-term care, which means that even large increases inspending are unlikely to consume a large share of resources.

A major methodological challenge is estimating total currentand projected health and long-term costs attributable toolder people. In particular, challenges with definitions,measurement and disaggregation continue to make it verydifficult to compare formal long-term care costs acrosscountries. It is even more difficult to understand fully theeconomic cost of informal long-term care, including themissed employment opportunities of informal carers.Projections of health care costs are also problematic. Forexample, most projections of future health care expendituresassume that current patterns of care by age will remainunchanged in the future and that all remaining factors thatdrive health expenditure patterns, including prices andtechnology, will grow at the same rate as GDP growth in thefuture. While these provide a practical simplification, theycan be misleading.

What are the implications of population ageingfor paid and unpaid work?

There is great scope for older people to contributemeaningfully to society and the economy through both paidand unpaid work, particularly if they are healthy and able toremain active.

While many people leave paid employment in their 60s,others remain in paid work. While comparatively olderworkers have historically produced less economic outputthan younger workers, this may reflect labour marketrealities that are no longer valid, such as a the requiring thecapacity to carry out physically demanding work. There areimportant differences in how productivity changes over thelife course by type of occupation; for example, jobs requiringless physical exertion may benefit from additional years ofexperience where skills continuously improve with age, andin some types of jobs long experience improves the qualityof the work. Even if older workers are slightly less productive(which may be due to discriminatory practices and ageism,such as poorer access to training at older ages), they are stillable to make a positive economic contribution compared toif they are not working at all.

Many older people produce economic and societal valuethrough unpaid work. One of the most relevant forms ofunpaid work is informal caregiving. If national statisticsaccounted for informal carers (adjusted for full-timeequivalency (FTE)) would have a substantial effect onmeasured employment rates of older people. For example,among the population aged 55+ in Portugal, includinginformal carers would have increased the employment rateby nearly 13 percentage points in 2014. Methods tomonetize the value of unpaid informal caregiving alsodemonstrate its considerable economic value. However,

informal care, especially if it is very demanding on thoseproviding it is not without cost, and the availability ofinformal caregiving depends in part on the supports givenand the availability of complementary formal care.

Provision of informal care by older people also has knock-oneffects on formal employment rates, for example, of adultchildren. If older people are able to provide informal care todependent older people or care for grandchildren, adultchildren who would otherwise be providing care may beable to work in paid employment. This is important channelthrough which older people contribute to the economyremains invisible in national statistics.

More evidence is needed on how work and retirement affecthealth and vice versa. In simple terms, for people who wantto continue working and who have work that is fulfilling theeffects seem to be positive on health. For some others itseems to be negative. A complication is that ill health isoften a reason to stop doing paid work, so health affectscapacity to work as well as work affecting health. Policies toincrease the normal duration of paid work may be necessarygiven increased life expectancy. However, it is important torecognise the complexity of the relationship between workand health and between health and work. It is important todo more than raise official retirement or pensions ages.

What are the implications of population ageingfor the acceptability, equity and effectiveness offinancing consumption?

There is a common belief that older people are ‘dependent’on the financial support of society, particularly youngerpeople in paid employment. However, traditional old-agesupport ratios (also known as dependency ratios) – themetrics that often inform this perception – are misleading.This is because they assume that all people over a certainage threshold (usually age 65) depend on the support of alladults below it. However, not all people over 65 retire and/orare dependent and many people stop paid work below theage of 65. Alternative approaches to measuring supportratios attempt either to more properly account for changesin population health and disability (though few studiesmeasure care or functional dependency states), or forchanges in the number of consumers and producers in thepopulation. These refined indicators suggest that populationageing will create significantly fewer challenges thananticipated. For example, estimates from the UnitedKingdom suggest that while the traditional old-age supportratio will increase from 27% (2005–10) to 41% (2045–50),the share of the adult population with disability will stayunchanged at 10% during the same period. Additionally,while public transfers fund the majority of consumptionamong those over age 65 in Europe, many older peoplefinance some of their own consumption from privatesources, for example, from assets such as savings andinvestments. The accumulation of this asset wealth can itselfalso contribute to economic growth if these assets translateinto increased capital investment.

Additionally, while older people on average contribute lessto public-sector revenues than working-age people, they stillcontribute significant amounts through taxation. Older

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11The Economics of Healthy and Active Ageing

people who are not in paid work continue to payconsumption taxes (e.g. VAT or sales tax) as well as taxes onnon-labour income and assets (e.g. property). Tax revenuesgenerated from purely non-income sources (i.e. non-labour,but also capital gains which may be earned by older people)comprise around 30% to upwards of 50% of tax revenuesin OECD countries.

The policy options: how can decision-makersrespond to population ageing?

The health care and long-term care costs of older people, aswell as the ability of older people to contribute meaningfullyto society and the economy are dependent on a number offactors, many of which are amenable to policy intervention.Undoubtedly, health and functional ability are of utmostimportance. This is because of their intrinsic value as well astheir indirect effects on the economy via their impacts onreducing care costs and promoting the ability of olderpeople to contribute. Healthy older people require lessintensive and expensive care; they are able to engage in paidor unpaid work if they choose so to do; and theyaccumulate greater asset wealth compared to unhealthypeople. Policy-makers can employ a range of policies andstrategies in order to control costs of care and enhanceeconomic and societal contributions of older people,ensuring that population ageing does not lead to undueeconomic pressures. Examples of such interventions, bothindirect (via improvements in health and functional ability)and direct, are summarized below.

Policies to promote healthy and active ageing

The types of interventions that support health and activity atolder ages include those that delay the onset andprogression of disease, as well as those that prevent or delaycare dependency. Importantly, policies which encouragebehavioural changes can have significant health effects evenif those changes do not occur until older ages. For example,there is good evidence that those who quit smoking at age65 live longer than those who continue to smoke. Toprevent dependency, a key focus should be on preventingcognitive decline, where there is some evidence that takinga multidomain approach can improve or maintainfunctionality. Other interventions to prevent or reduce frailty,such as resistance training or promoting physical activity atolder ages, can also be effective.

Policies to support paid and unpaid work

While there is widespread interest in keeping people in paidwork for longer, raising pension ages alone may simplydivert some older people into other state support forunemployed people or people with disabilities if they are nothealthy enough to work productively. Health systems canusefully help to keep older people healthy and able toremain in the workforce. There is also growing recognitionthat workplace health promotion interventions, such asscreening activities to identify potential health risks andlifestyle management activities to improve health and healthbehaviours, can keep older workers healthy and productive.Adapting work practices to accommodate older workers’

needs and circumstances can also help older people toremain in work. Good evidence shows that flexible workingpractices, such as flexitime, part-time working, job-sharingand working from home, can help older people, particularlythose with health issues or caring responsibilities, to remainin employment for longer and can result in healthier livesoverall. Changes to the physical work environment can alsosupport older workers to remain in employment, whilecontributing to improvements in productivity.

On the unpaid work side, strategies that support informalcarers through training or by providing cash for care havebeen shown to reduce carers’ stress and may also improvethe quality of care. However, it is important to acknowledgethat cash-for-care benefits can act as a disincentive toparticipating in formal employment. Much emphasis hasbeen placed on implementing reforms to enable carers tocombine unpaid care with paid employment, including theintroduction of paid or unpaid leave and flexible workingarrangements.

Policies to support acceptable, equitable and efficientfunding and income transfers

Given likely reductions in the share of the population in paidwork as a result of population ageing, health and long-termcare financing systems may need to diversify their sources ofrevenue if they are to continue to generate sufficient, stableresources. For example, health and long-term care financingsystems that are heavily reliant on payroll contributions mayneed to be redesigned to fill the financing gap from generalrevenues or private sources.

Increasing the reliance on locally raised taxes or, conversely,centrally raised taxes is one focus of ongoing debate andreforms, with countries moving in different directions. Theuse of hypothecation (or earmarking) of payroll or ‘sin’ taxeshas been seen by some as a potential source of funding.However, many argue that this introduces unwelcomebudgetary controls and that spending is ultimatelydetermined by revenue generated rather than based onchanging needs and demand. Earmarked funding sourcesare also likely to be susceptible to economic fluctuations,resulting in unstable revenue streams. Similar argumentshave been made against the introduction of mandatorylong-term care insurance arrangements, such as those seenin Germany, Japan and Korea.

Overall, acceptability of higher taxes and transfers variesbetween countries and can depend in part on thetransparency of the process and the perceived fairness of therules.

Policies to promote cost-effective health and long-term care interventions

Technological advancements, such as telemedicine, as wellas assistive technologies, such as digital memory aids orautomated medication dispensers, can be effective ways toprovide care using relatively low resource levels. There hasalso been widespread interest in integration of health andlong-term care and other models of care delivery to helpcontrol care costs, particularly given the complex care needs

12 Overview brief

of older populations. There are many varied examples ofdelivering coordinated or integrated health and long-termcare. There is also good evidence that supporting bettertreatment and care choices near the end of life can reducethe use of unnecessary treatments and tests, lower costs,improve the experiences of patients and carers and even, insome cases, contribute to longer survival.

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13The Economics of Healthy and Active Ageing

Introduction

It is often suggested that population ageing will haveadverse consequences for economic growth, public financesand households [1]. As the share of the population at olderage increases, there are concerns over how societies willmeet older people’s expected health and long-term careneeds, while at the same time coping with slower growth ineconomic output due to a relatively smaller share of thepopulation being at traditional working ages. Given theperceived scale of future challenges, some commentatorspredict slower growth in economic output and question thesustainability of welfare states, and suggest that the scaleand scope of coverage should be reduced.

However, the bulk of empirical evidence does not indicatethat population ageing will bring unmanageable economicproblems. The extent to which ageing will bring economic,fiscal and social difficulties is not easily gauged withcommonly used metrics, such as the share of the populationover a certain age. Differences in the health and capabilitiesof older people have more important effects on health andlong-term care costs than chronological age, as does thecapacity of and possibility of older people to contributemeaningfully to society and the economy.

People over a certain pre-defined age are often categorizedas ‘dependent’, but older people may in fact opt to remainin paid labour for longer if they are healthy enough to do so.This also depends on other factors, such as national policiesthat are accommodating to continued work, the existence ordesign of pension systems, employer attitudes and beliefsabout ageing and productivity, and older people’s ownpreferences. It also depends on there being some flexibilityin working conditions and hours. Older people who arehealthy and active can provide other, often unrecognized,benefits, such as informal caregiving and participating involuntary work. Accounting properly for such outputs paintsa more complete picture of the economic implications ofpopulation ageing. There is growing recognition of thecontributions that older people make to both the formal andinformal economy, and the term ‘grey economy’ has beencoined by those who identify this expanding demographicgroup as an opportunity.

Population ageing presents a complex mix of challenges andopportunities for societies around the world. A morenuanced comprehension of these, as well as a betterunderstanding of how policy can influence the effects ofpopulation ageing on the economy and society morebroadly, is needed. With conflicting rhetoric on the topic,this paper seeks to provide clarity about the expectedeconomic and societal effects of population ageing, and tooffer some policy options. Healthy, active older people areless costly to care for and can contribute to the economy inways that can be (but are often not) properly measured.

To guide our approach we use the conceptual framework inFigure 1. This highlights the relationships between thehealth and activity of older people, economic growth, publicfinances and overall societal well-being. The pathwaysunderlying these linkages are complex, but the basic premiseis simple: healthier, active older people have lower health

and l ong-term care costs (Figure 1, Outcome A) – and canparticipate in paid and unpaid work (Outcome B), both ofwhich have positive economic and societal effects, includingthrough opportunities for new products and services aimedat the so-called ‘Silver’ consumer (Outcome D). Policyinterventions (Interventions 1–4) play a key role, not onlyin promoting good health throughout the lifecourse(Intervention 1) and starting this chain reaction, but also inensuring that services are provided in efficient ways(Intervention 2) and that resources (including labour) canbe fully mobilized to maximize economic and societalbenefits (Intervention 3). To promote social solidarity,effective and equitable mechanisms are also needed(Intervention 4) in order to collect, pool and transfer stableand sufficient resources in ways that must be politicallyacceptable to those who pay and those who receive incometransfers and care (Outcome C).

Making use of this framework, we highlight where: existingevidence is at odds with common beliefs; important factorsare ignored; and overly simplistic conclusions are drawn. Wealso highlight areas where: current evidence is inadequate;there are particular challenges in measurement andevaluation; and research is most needed. We explore policylevers that have implications for the health and activity ofolder people, their health and long-term care costs and theircapacity to contribute to society, and which supportpolitically acceptable modes of redistribution.

We consider some of the analyses and projections of theeffects of population ageing. We first focus on expectationsabout how population ageing has affected health and long-term care costs in the past, and how it is likely to do so inthe future (Outcome A). We consider future trends, lookingalso at the roles of other significant cost drivers, such asproximity to death, compression (or expansion) of morbidity,and health system characteristics. This provides a morerobust basis for judging the probable levels of future needsand costs, the opportunities for effective policy interventionsto influence both health needs and costs (Intervention 2),and the scale of the challenge to ensure health and long-term care systems remain sustainable.

The second section discusses the societal and economicbenefits provided by older people; it looks at thecontribution of older people to the economy through bothpaid work resulting from later and partial retirement, andunpaid work such as child care and other informal care(Outcome B). The third section considers how their care andconsumption are paid for, asset income of older people andfairness in financing (Outcome C). This provides a betterbasis for understanding potential future contributions fromolder people and how this might help generate economicgrowth through opportunities for innovation in products andservices in the ‘Silver Economy’ (Outcome D) and supportsustainable financing needed to meet future needs. It alsoprovides a basis for consideration in the final section ofpolicies that might increase the contribution through workof older people (Intervention 3). We demonstrate that,when measured appropriately, many people above pre-defined retirement ages are not dependent on youngerworkers, and that much can be done to avoid a largeincrease in the numbers of those who are dependent.

14 Overview brief

In the final section, we look at the options for policy-makersto minimize avoidable costs and maximize the benefits ofolder people, facilitating sustainable economic growth,services provision and income security. We provide anoverview of the four areas of policy interventions in theconceptual framework: promoting healthy and active ageing(Intervention 1); promoting cost-effective health and long-term care interventions (Intervention 2); supporting paidand unpaid work at older age (Intervention 3); andsupporting acceptable, equitable and efficient funding andincome transfers (Intervention 4). In this contextsustainability will be enhanced if policy focuses onminimizing health needs, increasing efficiency of serviceprovision, maximizing the contributions of older people, andensuring that the mechanisms for funding care and incomesecurity are fair.

1. What are the implications of population ageing for health and long-term care needsand costs?

The idea that it is costly to provide health and long-termcare to older people is plausible and pervasive. Health andlong-term care spending is higher for older people, and so,because older people will comprise a larger share of thepopulation, health expenditures are expected to will increasecommensurately and, without policy action ‘unsustainably’.In this section we review evidence on expenditure patternsby age to understand better how population ageing is likelyto affect future spending. We focus particularly on theeffects of older populations on costs of health and long-term care. We start by analysing growth in health careexpenditures due solely to population ageing and find thatits effect is modest.

Policies to promote cost-effective health and

long-term care interventions

(Intervention 2)

Policies to support paid and unpaid work (Intervention 3)

Policies to support acceptable, equitable and

efficient funding and income transfers (Intervention 4)

Health and activity of older people

Lower health and long-term care needs and costs

(Outcome A)

Increase paid and unpaid work (Outcome B)

Politically acceptable, equitable and effective financing (Outcome C)

Sustainable economic growth, public finances, services provision, and

income security

Policies to promote healthy and active ageing

(Intervention 1)

New markets and opportunities to innovate and produce new products

and services for ‘Silver’ consumers(Outcome D)

Figure 1: Conceptual framework

Source: Authors.

15

15The Economics of Healthy and Active Ageing

Projected growth in health care expenditures due topopulation ageing depends on two factors: the difference inaverage spending levels between older and younger groups,and the size of the population shifting into older ages ineach country. While governments cannot materiallyinfluence the size of the population shifting into older ages,they can alter the relationship between age and health carespending through policy intervention.

Evidence shows that calendar age itself is not the primaryreason for the observed increases in spending correlatedwith age. Researchers have identified related factors such asproximity to death and poor health as key determinants ofhigher health spending. The incentives around care deliveryand health system characteristics also play an important role.Cost pressures arise both from improved opportunities totreat diseases common in older age and raised expectationsfrom (politically strong) older people who are an increasingproportion of the population.

Health care costs should not be examined withoutconsidering long-term care costs. These are increasingrapidly, but from a very low baseline in most countries, soeven doubling expenditures represents a modest absoluteincrease.

Health care expenditures generally increase withage but age has relatively modest effects onhealth care expenditure forecasts

Data on health care spending by age are collected forcountries in the European Union (EU) by the Working Groupon Ageing Populations and Sustainability (AWG) of theEuropean Commission. These data show that overall in2015, with the exception of those under 1 year and thoseover 90, per capita health care expenditures are higher athigher chronological age in Europe, with a particularlypronounced difference from around the mid-40s to the mid-

80s (Figure 2). These patterns differ across countries. InHungary, for example, the data show that the average 80-year-old man’s health care costs were 15.8 times that of theaverage 20-year-old man in 2015, whereas in Cyprus, theaverage 80-year-old man’s health care costs were only 2.7times as much as that of the average 20-year-old man.

Given the general pattern of higher spending for olderpeople, one might expect that a larger share of thepopulation at older ages would bring a significant increasein spending. To assess long-term sustainability of healthsystems in the EU, the AWG carries out ageing-relatedprojections based on the data they collect on health carespending by age [2]. While this approach has problems (seeBox 1), it is interesting to explore the outcomes of thisapproach. They suggest that as populations age, a graduallyincreasing share of economic resources is likely to beallocated to their care. According to the AWG, publicexpenditure on health care due to demographic changes isexpected to increase between 2013 and 2060, ranging froma low of 0.1 percentage points of GDP in Lithuania to a highof 2.8 percentage points of GDP in Portugal. In the lattercase, this still only amounts to an average increase inspending on health due to population ageing of0.06 percentage points of GDP per year.

Box 1: Forecasting future health care expenditure trends by age

Forecasting the contribution of population ageing to increasinghealth care expenditures can be done by taking population estimatesby age group and weighting each by current expenditure levels forthe respective age group. Such an approach does not produce a fullpicture of total future health care expenditures, but aims to isolatethe specific contribution of population ageing to future expenditurepatterns and assumes current patterns of care by age will remainunchanged. The assumption in these projections is that aside from

Figure 2: Health care expenditures by age and gender relative to GDP per capita, EU + Norway

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Female

Male

Aver

age

heal

th c

are

expe

nditu

re p

er p

erso

n by

age

rela

tive

to G

DP

per c

apita

0 10 20 30 40 50 60 70 80 90 100Age

Source: [2].

Note: France not included.

16 Overview brief

demographic change, all remaining factors that drive healthexpenditure patterns including prices and technology will grow at thesame rate as GDP growth in the future. While this is a practicallyuseful simplification, it is a little odd given that changing adoption oftechnology, as well as changes to entitlements and prices are at leastin part amenable to policy actions.

Forecasts of the contribution of population ageing to healthexpenditure trends can be presented either as a share of future GDPor as a growth rate. Showing these forecasts as a share of GDPidentifies whether population ageing will consume a higher or lowershare of economic resources, whereas showing the forecasts as agrowth rate facilitates comparison with other non-demographicdrivers of health expenditure growth.

Most projections aim to show the effects of ageing assuming that allage groups will be treated in the future with identical intensity ascompared to other age groups currently. So, while expenditures willchange over time for all age groups due to changes in prices,technology, care delivery models and other factors, if a 65-year-oldtoday uses three times as many resources for health as a 25-year-old,it is assumed that in the future this relative intensity of treatment willbe maintained. This is an important assumption because it helps toisolate the effects of the changing age-mix of the population onfuture health spending; but it is only sensible to assume constantrelative intensity of resource use by age if needs at different agesremain in the same proportions. Given the demonstrated importanceof proximity to death in driving costs (see below) and given thechanging patterns of age at death, this relationship is unlikely toremain the same and projections will be misleading. This isparticularly important if end-of-life costs are lower for olderdecedents. As life expectancy has increased fairly consistently in most(although not all [3,4]) parts of the world over the past few decades,it may be that the health care costs of older people have actuallyfallen relative to younger people, and may continue to fall in thefuture; to put it another way, the curves shown in Figure 2 may haveflattened or otherwise shifted towards the right.

Figure 3 shows the expected contribution of changing agedemographics to health care expenditures presented asaverage per person spending growth per year for five EUcountries [5]. In these countries, changing demographics areexpected to cause marginal increases in average annual perperson health care expenditure growth rates from 2010 to2060. In no 5-year period between 2010 and 2060 is ageingexpected to contribute more than one percentage point toaverage annual health expenditure growth for the countriesshown. Among OECD countries, nominal per person annualhealth care expenditure growth (in local currency units)between 2000 and 2015 varied substantially acrosscountries but was 5.5% in the median country (NewZealand). By historical standards, population ageing isexpected to make up only a modest share of average annualgrowth in per person health spending.

In summary, compared with other historical drivers of healthexpenditure growth, such as higher prices and technologicalinnovation, population ageing on its own plays a minor role.Population ageing is simply too gradual a process to be amajor driver of health care spending [6]. In addition, whilethe projections suggest that ageing will result in health careexpenditures consuming an increasing share of economicresources, this may be deemed sustainable in many societies.

An increase in the share of GDP for one sector inevitablymeans a smaller share for other sectors (but not necessarilyan absolute decrease elsewhere). If there is a growingpreference for health spending over other sectors, andresources are used efficiently, it is not clear why this shouldbe considered to be unsustainable.

Figure 3: Contribution of changing age-structure to growth rates of health care expenditures per person, selected EU countries

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.2%

Netherlands

Hungary

Germany

Czech Republic

Slovenia

2060205520502045204020352030202520202010-2015

Perc

enta

ge p

oint

s of

add

ition

al g

row

th in

per

pers

on h

ealth

exp

endi

ture

s at

trib

utab

le to

age

ing

popu

latio

n

Source: [5].

Contribution of changing age-mix to growth rates of health care expenditures per person, selected EU countries

17

17The Economics of Healthy and Active Ageing

Finally, while a better understanding of the pure effect ofageing on costs suggests that any growth will be slow andmodest, cost pressures may arise both from improvedopportunities to treat diseases common in older age andraised expectations from (politically strong) older peoplewho are increasing in numbers and as proportions of thepopulation. One recent study suggested that populationageing could exert much greater pressures on health careexpenditure because of the possibility that future economicgrowth will disproportionately drive expensive technologicaladvances that target older people, since they will comprisean increasingly large share of the health care market [7].1 Aswith other aspects of population ageing, these politicaleconomy issues and the changing influence of older peoplein terms of voting strength are not straightforward.

However, the adoption and funding of technologicalinnovations is a policy choice, and has typically been a largerdriver of increased spending than ageing. If these are ofparticular benefit to older people, ageing may increase theproportion of people who will benefit from such services.

It is wise to be cautious in considering the political economyof priority setting in the context of population ageing.While it is tempting to assume that ageing will bring greatervoting power and political influence for older people leadingto ever greater spending on age-related policy areas, morecareful analysis suggests that it is unwise to divorce ageingissues from other issues of inequalities and disadvantage.There is not a simple single set of interests for older people,and too much focus on solving problems faced by olderpeople can generate demands from other underservedpopulation groups. A fuller analysis will be presented in theObservatory’s forthcoming book and policy brief on thepolitics of healthy ageing.

Costs rise before death, but less so for the older old

A large body of research investigates how proximity to death– measured in terms of the number of months before death,as opposed to age itself, influences health care utilizationand expenditure [8–10]. The literature shows that the costsof dying are substantial, particularly relative to the healthcare costs of survivors. For example, research from the USMedicare programme, which provides health care primarilyto those age 65 and above, finds that nearly seven timesmore per person was spent on Medicare beneficiaries whowere in their last year of life, compared to Medicarebeneficiaries who survived [11]. This amounts to over aquarter of Medicare spending going towards people in theirlast year of life, a share which did not materially changebetween the 1970s and 2000s, despite changes in medicaltechnology and care delivery [10]. While research suggeststhis is driven by increased hospital utilization around thetime of death [8], the pattern has also been found formedicines expenditure, for example, in Ireland [12]. This Irish

study of a longitudinal sample of people aged 70 years andover compared the deceased matched with survivors ofsimilar age, gender and region, and found that differences inmedicines expenditure between the two groups were notexplained by calendar age; however, those who died withinthe 36-month study period had on average 23% highermedicines expenditure.

There is also research showing that, beginning at a certainage, the older people are when they die, the cheaper is theirdeath. For example, evidence from Canada finds that thehealth care costs of dying are lower for those over age 80[9]. Another study from the Netherlands finds that the levelof spending on so-called curative care (e.g. generalpractitioners, hospitals, medicines) among those in their lastyear of life begins to fall notably, and almost linearly, aroundage 70 [13]. Yet, long-term care expenditures (e.g. bothnursing homes and home care) are found to increase steadilywith age for both survivors and decedents, albeit from amuch lower baseline than health care costs. This increase inlong-term care spending with age dampens but does notcancel out the overall downward trend in total spending forpeople who live to older ages.

Researchers have incorporated time-to-death into modelsthat forecast hospital costs. This research finds that sincelonger life expectancy postpones death-related costs, thecontribution of population ageing to health careexpenditures would be lower than estimated when using thesimpler projection methods described above [14]. Otherresearchers have modelled future health care costsseparately for survivors and decedents in a given year so asnot to overstate any effects of demographic change onhealth care spending [15]. A substantial share of health careexpenditure on older people occurs near the time of death,and dying at older ages can mean the health care costs ofdeath are lower. This is mainly due to a lower use ofresource-intensive interventions in older ages. This mayreflect more efficient resource use, but there are alsoconcerns about potential discriminatory practices andageism [16].

Whether people are living longer in better orworse health affects care costs

The costs of caring for older people will vary in the futuredepending on whether they are in good or bad health. Poorhealth or disability at all ages are major drivers of health careexpenditure trends [17]. Estimates from the United Kingdomshow that models that do not account for end-of-life costsor morbidity under- or overestimate future health careexpenditures, suggesting that these factors may beimportant in determining expenditure trends [18]. Proximityto death itself, as described above, may also function tosome extent as a proxy for high levels of morbidity or fordependency.

A key question, therefore, is whether people are livinglonger in better or worse health. Findings from the Survey ofHealth, Ageing and Retirement in Europe (SHARE) showreductions in mild/moderate disability for older people inseveral countries between 2004 and 2013, attributing muchof this to declining rates of chronic conditions [19]. Whetherthere has been a compression of morbidity (i.e. a reduction

1. The relationship between GDP levels and spending by age isdetermined in this study using cross-sectional country data. How-ever, much like the Preston curve (which compares country cross-sectional life expectancy data to GDP per capita), it is unclear thatlongitudinal changes in GDP levels within countries will have thesame effects on age as those observed in cross-sectional panels.

18 Overview brief

in the number of unhealthy years lived as a proportion of lifeexpectancy) or an expansion of morbidity (an expansion ofunhealthy relative to healthy life-years due to increasedsurvival of frail people) among older people presentsmeasurement challenges. There are differences in howhealth and disability are measured across countries andacross time, making it difficult to capture trends accurately.Additionally, some research suggests that declines in theshare of older people reporting disability in terms ofactivities of daily living (ADL) or instrumental activities ofdaily living (IADL) result from changes in the environmentand society overall, rather than health improvements [20]. Aperson with severe arthritis may have reported difficultymoving within the community (an IADL) in decades past, butnow can benefit from assistive technologies such asmotorized scooters to overcome such difficulties. There arealso likely to be varying trends by health condition, making itimpossible to draw definitive conclusions overall for oldercohorts. Given the importance of understanding how healthand disability evolve among older people, prioritizingmeasurement of morbidity and disability at older ages (andtheir implications for health and long-term care costs) isneeded. The World Health Organization (WHO) emphasizedthat health in older age should not be considered in terms ofthe presence or absence of disease, but rather the functionalability to do the things that are important. At present, severelosses of function are identified by deterioration in IADLs orADLs, but it would also be useful to see trends earlier in thelife course and for specific domains such as cognitivecapacity.

To what extent does poor health at older ages influencehealth expenditure trends? A study from the World Bankindicates that using current approaches to modelling healthcare expenditures show only small effects of poor health onspending patterns [21]. The authors project public spendingon health as a share of GDP in Eastern Europe and theformer Soviet Union under four scenarios: (1) pure ageing;(2) constant morbidity; (3) compressed morbidity; (4)adjusted for death-related costs. The differences betweenthe projections are small in most countries. Sensitivityanalyses of similar health spending projections from theUnited Kingdom’s Office for Budget Responsibility also findthat expenditure forecasts are not very sensitive to varyingassumptions of future morbidity [15]. This could, in part,reflect limited access to expensive services by older people insome countries and, therefore, limited effects on treatmentcosts of different levels of morbidity.

Health system characteristics also drive variationsin spending at older ages

Understanding the role of health policy choices, such as onentitlements, coverage levels and access to care, is importantin determining spending patterns by age. Evidence fromlongitudinal ageing studies show that having betterinsurance coverage increases use of services [22] and studiescomparing use of free and full-cost primary care show largedifferences in service use. Some of the observed patterns ofprimary care use in Ireland are driven by free access for olderpeople while those under 70 normally pay the full cost [22].

While many new or improved interventions are likely tobenefit older people disproportionately, since they are thepeople most likely to have (treatable) chronic conditions, thedecisions to fund or reimburse service access are part ofhealth policy and should be subject to rigorous evaluation. Itis not logical to consider services to be both cost-effectiveand unsustainable, since cost-effectiveness means this is agood use of resources in the context of overall resources.There is some variation in patterns of entitlements andservice use by age between countries, but there remaindifficulties in understanding these due to limited availabilityof appropriate data.

It is artificial to examine health care costs without alsoconsidering long-term or social care. The presence of a long-term care system may be one of the reasons that health carecosts decline among the oldest old, as costs are shiftedoutside of the traditional health care sector. In countrieswhere there are no suitable alternatives, chronically frailpatients often occupy acute care facilities that are lesssuitable and more expensive.

Formal long-term care costs are expected to increase but from a low baseline

Concerns have also been raised about increased spendingon long-term care as populations age. Demand for long-term care is closely linked to age, with around half of usersbeing over 80 years of age in most countries [23].

There are challenges in obtaining an accurate assessment ofaggregate long-term care costs (formal and informal) withinand across countries, such as different definitions andmeasurement approaches, and difficulties in defining theboundary between the health and social care components.Moreover, we cannot understand the real costs of providinglong-term care until we account for the economic costs ofinformal caregiving, which are not well known in manycountries (see Box 2).

Box 2: Estimating total costs of formal and informal long-termcare

Expenditure data on formal long-term care is split into health careand social care components according to the System of HealthAccounts [24]. The health care component includes either medical orcore personal care services to assist individuals with ADL, such ashealth services in support of family care. The social care componentprovides assistance with IADL, such as preparing meals, houseworkand household management. However, these definitions are notapplied uniformly across countries, with the social component beingparticularly difficult to measure. There are also differences betweencountries in how care is financed and which Ministry is responsiblefor which services. Challenges with definitions, measurement anddisaggregation continue to make it very difficult to be definitiveabout long-term care costs across countries, despite initiatives likethe Joint Health Accounts Questionnaire and the System of HealthAccounts. To fully understand the total economic costs of providinglong-term care, one must also account for the costs of providing careby family and other unpaid carers (expenditures in Figure 4 representonly formal long-term care). These models of care predominate insome countries and can have important effects in terms of time of

19

19The Economics of Healthy and Active Ageing

work and decision to retire. According to the ANCIEN study, around14% of people in EU countries provide unpaid help to someone forone or more ADLs [25]. Since these contributions are not normallyquantified, it appears as if sustainability questions and cost increaseswill only be of concern in countries with care models using paidemployees. Indeed, households’ costs of informal caregiving in theform of missed employment opportunities (particularly when caringfor those with the most intensive needs [26]), the labour associatedwith caregiving itself, and emotional, physical and social well-beingmay be substantial [27]. Better quantifying the costs borne byhouseholds who provide care would be useful to shed light on thetrue costs of long-term care, and would make data and forecastsmore comparable across countries. It may be that the low-costbaseline described above is not so low when the hidden costs ofinformal care are considered. Moreover, better understanding thecosts of both formal and informal care would then allowconsideration of the broader economic impacts of governmentinvestment in this area. In the same way, we need to take intoaccount that much of the informal care is provided by older peoplethemselves, for example, to their spouses or other relatives. Thisquestion is raised again below in this brief to ensure we properlyaccount for the economic contributions to society by the elderly.

In spite of the methodological complexities in measuringlong-term care costs, most estimates suggest rapid growthin long-term care expenditures over the coming decades. Forexample, although political decisions and funding prioritiesin recent years would suggest the contrary [28], a studyfrom the United Kingdom finds that the need for long-termcare spending will more than double by 2035 [29]. However,it is important to recognize that long-term care spending iscoming from a low baseline in most countries so a doublingof expenditure represents a modest absolute increase. In theaforementioned study, total expenditure needed for long-

term care for those over 65 years of age is expected toincrease by 162% from 2015 to 2035 under the baselinescenario; however, as a share of GDP this represents anincrease from just 1.02% to 1.68%. Recent data suggestthat the health and social components of long-term careconsume less than 2% of GDP in the majority of OECDcountries with available data (Figure 4).

2. What are the implications of population ageing for paid and unpaid work?

In this section we outline some of the economic and societalbenefits of older populations. Older people contribute in anumber of ways, not all of which can be easily quantified.Here we concentrate primarily on their immediatecontributions in terms of paid work and their oftenunrecognized contributions in terms of unpaid work.

While many people leave the paid labour force intheir 60s, others remain in paid work

Population ageing is frequently associated with increases inthe share of the population that is retired from paid work.The European Social Survey (ESS) in 2014, shows a sharpdecline in the percentage of the population in paidemployment between the ages of 55–59 (when 76.2% ofthis age cohort was in paid employment) and 65–69 (whenonly 9.0% was in paid employment) [31] (Figure 5). Whilemany people leave the paid labour force in their 60s (boththose that want to retire and others who are forced toretire), others remain in paid work, either by choice orbecause of increased pension ages or pensions that areinadequate for their needs. Achieving income security

Figure 4: Long-term care (LTC) expenditure as a share of GDP, OECD countries, most recent year available

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 Social LTC

Health LTC

Slov

ak R

epub

lic

Pola

nd

Latv

ia

Hung

ary

Spai

n

Portu

gal

Lith

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a

New

Zea

land

Slov

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Czec

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publ

ic

Luxe

mbo

urg

Fran

ce

Germ

any

Japa

n

Unite

d Ki

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Switz

erla

nd

Finl

and

Denm

ark

Swed

en

Norw

ay

Neth

erla

nds

Perc

ent o

f GD

P

Source: [30].

expenditure as a share of GDP, OECD countries, most recent year available

0.0

0.5

1.0

1.5

2.0

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3.0

3.5

4.0 Social LTC

Health LTC

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Finl

and

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Swed

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Norw

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Neth

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Perc

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P

20 Overview brief

through a combination of work and pensions is oftendifficult and unrewarding. It is difficult in many countries toidentify who wants to be retired and who wants to work inolder age, especially when opportunities to work areunattractive to older workers. Retirement and ‘earlyretirement’ were used extensively during the financial crisisto encourage labour market exit of older workers in anattempt to free up paid employment for younger workers.Not surprisingly, this increases the proportion of older peopleoutside the formal workforce. Labour market exit may alsoaffect health since there are complex relationships betweenwork and health.

Productivity varies over the life course but thereare important differences by type of occupation

There is a perception that older workers are less productivethan younger workers. A recent study of labour productivityby age from the International Monetary Fund finds thatcomparatively older workforces in Europe have historicallyproduced less economic output [32]. Modelling therelationship between the age structure of the labour forceand real output per worker, they find in aggregate thatpopulation ageing will reduce productivity growth by anaverage of 0.2 percentage points each year over the nexttwo decades. One issue in this sort of analysis is that the mixof manual and non-manual jobs has changed over time andcontinues to change. Predicted declines in productivity inthis study may reflect a greater reliance in the past onphysically demanding work where poor health and a declinein physical functionality could prove a hindrance. This maynot reflect labour market realities going forward.

Worker productivity naturally varies over the life course forreasons such as accumulation of experience, changes in skillneeds of the workforce, and changes in mental and physicalcapacity. For some occupations, such as those requiringintensive manual labour, it is unsurprising that older people

would experience declines in output. Researchers havedocumented that the productivity of workers in automobilemanufacturing has been found to decline around age 60,although older workers are also found to make fewermistakes [33]. Multigenerational teams (which include olderpeople) in the automotive industry have been found to bemore productive than single-generation teams.

Jobs requiring less physical exertion may benefit fromadditional experience where skills continuously improve withage [34]. Research from the French manufacturing sectorsuggests that one reason some older workers – particularlyin low-skilled occupations – may be less productive orchoose to exit the workforce is that they may besystematically given less access training on how to use newtechnologies than comparable younger workers, placingthem at a disadvantage that can be linked more to ageismor discrimination than to inability at older ages [35]. Even ifolder workers are slightly less productive, they are still ableto make a positive contribution (compared to if they are notworking) and can help achieve higher overall output.Population ageing will only reduce economic output if thereare fewer people working or if numbers working stay thesame but they are on average less productive.

Many older people participate in unpaid work,producing outputs that have clear (but often unrecognized) economic or social value

There are many unpaid workers (as well as paid workerswho also take part in some additional unpaid work),particularly at older ages, producing outputs that haveeconomic or social value. To understand how productivity (aswell as the sustainability of the welfare state) is affected bydemographic change, it is important to take stock of thesenon-market-based outputs in addition to those that aremonetized and are more directly observed. Accounting forunpaid household labour can reveal that the per person

Figure 5: Age structure of the workforce, including informal carers, adjusted for full time equivalence (FTE)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90% Fulltime carer

Part time carer FTE

Paid work and fulltime carer

Paid work and part-time carer

Paid work only

85+80-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-24

Perc

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f pop

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ion

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5-ye

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roup

ing

Source: Author’s calculation based on [31].

21

21The Economics of Healthy and Active Ageing

costs of caring for children (which are often unmonetizedand borne by households) are actually greater than the costsof caring for older people (which are more often borne bysociety) [36].

An important type of unpaid work is informal caregiving.Using the ESS data, we examine the age structure of theworkforce in Europe, distinguishing between paid workers,full-time informal carers and part-time informal carers, andthose involved in both paid work and informal care, toobtain a more complete picture of the paid and unpaidworkforce (Figure 5). The data are adjusted for full-timeequivalence (FTE) based on self-reported hours providingcare. Here, we see that at younger adult ages there is asubstantial share of the population which is both in paidwork and also providing part-time informal unpaid care (upto 30 hours per week). We also see by 5-year age group thatthe number of people doing full- or part-time informalcaregiving increases sharply at around the same ages wherewe see a large decline in those undertaking paid work. Theincrease in work participation rates if we were to includeinformal carers is most evident over age 65.

Older people who are able to provide informal care to moredependent older people, or who are able to care forgrandchildren, may allow adult children who wouldotherwise be providing care to work in paid employment.Mothers’ employment has been found in some countries tobe positively and significantly associated with grandparentsproviding childcare [37]. It is also interesting to note thatfemale employment may increase more generally due todeclining fertility rates, as there are fewer children to carefor. In addition to knock-on effects of informal caregiving onthe formal employment rates of adult children, there is aneed to account for the value of informal work moregenerally (see Box 3).

Box 3: Accounting for the value of informal care

National income estimates (and associated employment rates)underestimate useful economic activity, and this problem will getworse if the numbers carrying out unpaid work increase withpopulation ageing. We constructed employment rates for the 55+population in European countries that account for both paid andunpaid work. Among the population aged 55+, without includinginformal carers, the ESS 2014 data suggest that 16.6% of people inPortugal were working [31] (Figure 6). However, after includingunpaid work, this number jumps to 29.2%. Data suggest that thereare fewer older people providing informal care in Nordic countries(i.e. primarily to the right of the figure) and more providing informalcare in Southern and Eastern Europe (i.e. to the left of the figure),although there are clear exceptions. This is consistent with evidenceof a North–South gradient within Europe in the response of adultwomen to their parents’ care needs following an adverse healthshock [38].Since paid and unpaid work both represent usefuleconomic activity, and there is likely to be an increase in the numbersavailable and willing to undertake unpaid work, failure to takeaccount of unpaid work is likely to exaggerate the impact of ageingon the need for caring services and financial support for care. Thismay be particularly true in countries where the tradition of caring forolder people is within families. It also distorts the comparisons ofGDP and employment rates between different countries.

Approaches to monetize informal care

There are two common methods to monetize informal care –revealed preference and stated preference [39–45]. Using revealedpreferences, unpaid work is valued at hourly wages for similar paidwork or for work that the carer might otherwise have done. Statedpreference approaches use methods such as choice experiments todetermine the value of the work done [41]. Results vary for eachmethodology, but in all cases suggest that there is substantial valuein unpaid work. A study in Spain found that using a proxy wage, thetotal value of informal caregiving ranges from 2.96–6.23% of GDP;using the opportunity cost method, it ranges from 2.18–2.75 % ofGDP; and using contingent valuation, it ranges from 1.73–3.43% ofGDP [40]. One study looks specifically at valuing care provided byolder people [46]. Using 2006–2007 SHARE data, the authors find

Figure 6: Participation in paid employment and full time equivalent (FTE) informal caregiving among the 55+, selected European countries

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50% Change in employment rate when including informal carers

Formally employed (55+)

HUEESEDKATNOLTSIILCHCZDEIEESFIFRBEPLNLGBPT

Empl

oym

ent r

ate

Source: Author’s calculation based on [31].

Notes: Sorted by size of workforce in informal caregiving.

22 Overview brief

that nearly a third of respondents act as unpaid non-co-residentcarers (9768 out of 29,471). Based on a subjective well-beingvaluation method (where the value of care is estimated based oncarers’ life satisfaction ratings), the authors find that less intensivecaregiving improves life satisfaction (the equivalent essentially of anegative wage rate) but that this is not the case for more intensivecare (i.e. over 30 hours per week), which is more demanding andtherefore should be more highly valued. This reinforces the idea thatinformal caregiving, especially if it is difficult, is not without cost. Thisalso suggests that it is important to provide paid care support to helpmobilize unpaid work and avoid excessive costs on informal carers.

3. What are the implications of population ageing for the acceptability, equity and effec-tiveness of financing care and consumption?

In the sections above we looked at the health and long-termcare costs of older people as well as at how they benefit theeconomy and society through paid and unpaid work. In thissection we begin to examine politically acceptability, equityand effectiveness of financing mechanisms for access toservices and income security. We look at the extent towhich older people are directly ‘dependent’ on the financialsupport of working-age people and on public transfers. Thiscontinues the analysis that forms the basis for theconceptual framework in Figure 1.

Those in paid work are typically young and middle-agedadults, producing labour income above the amount theyconsume, whereas those not in the labour force, includingmany older people, consume more on average than theyproduce contemporaneously through paid labour. In somesocieties there may be reluctance to finance older people’s

care or to pay for their consumption, and the mechanismsused to achieve social transfers may affect acceptability. Insome there are direct transfers through taxation, and inothers incomes and care costs are paid from returns toassets. In the case of public transfers it appears that thecurrent working population directly supports those receivingpensions and benefits (although the pensioner may havepaid over long periods for the right to a pension, and havein effect supported previous generations of pensioners).People living off savings or private pensions can beconsidered to be living off postponed spending. While thereremains debate about who really pays for the incomes ofthose who are not in paid employment, there is a differencebetween those who fund their own incomes and thosefunded on state pensions in the effect on public financesand the need for public transfers.

The size of the ‘dependent’ population dependson how it is measured

The old-age dependency ratio (also referred to as a ‘supportratio’) is a common indicator used to reflect the extent ofnecessary support of older people by others in thepopulation. These indicators often aim to compare the ratioof the ‘non-working’ population to the ‘working’ populationby relating the size of the population above a pre-determined chronological age (considered not to be workingand to require ‘support’) to the adult population below thepre-determined age (who are considered to be working andthus ‘supporting’ them). For example, one could calculatethe ratio of the population size over 65 years to thepopulation size 15–64 years and express the ratio per 100working-age people (e.g. 30 older people for every 100 ofworking age). The age threshold is often 65, till recently theofficial pension age in many countries.

Figure 7: Average retirement ages among men in OECD-34 countries, 1970 to 2016

60

62

64

66

68

70

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

Age

Source: Author calculations based on [47].

23

23The Economics of Healthy and Active Ageing

A limitation of this measure is the assumption that olderpeople above a certain age are out of work, requiring and inreceipt of external financial support, while younger-ageadults are assumed to be economically active andcontributing into support systems (either formally orinformally). In fact, there is considerable variability in termsof normal retirement ages (i.e. the official age at which anindividual can retire with a full pension) and averageeffective retirement ages (i.e. the age of exit from the labourforce), both across countries and within countries acrosstime, as well as between men and women. For example,according to OECD data, in South Korea, men work onaverage 11.0 years beyond their normal retirement age,whereas in Slovenia men leave the labour force on average5.4 years before their normal retirement age. Women inSouth Korea work 11.2 years longer, while women in Polandleave the labour force 7.2 years before normal retirementage [47].

Data from 1970 to 2014 also suggest that across countries,people have been leaving the formal labour force atprogressively earlier ages over time, with a slight reversal tothat trend in recent years (Figure 7). The OECD-34 averageretirement age for men in 1970 was 68.4 years, but this fellto a low of 63 years by 2004 before slowly rising again to65.1 years in 2016.

Using any single age threshold for the support ratio willmask the fact that many people above the age thresholdremain in the workforce, particularly in low-incomecountries, and many other older people who are not in theworkforce are economically independent, are not dependenton the state for their incomes and pay tax on asset-basedincome and pensions. Not all younger people below the agethreshold are economically active; as of May 2017,seasonally adjusted EU youth unemployment (under 25years) was 16.9% according to Eurostat. Increases inworking-age unemployment rates increase the ratio of thosewho are genuinely dependent to those who are supportingthem. This is a particular problem given high youthunemployment in many countries – but has no effect on thesupport ratio metric itself. There are alternativemeasurement approaches to the support ratio, whichprovide more useful information and are addressed in thefollowing section.

There are alternative and better approaches tomeasure the old-age support ratio

In essence, the old-age support ratio seeks to answer animportant policy question: will the older portion of thepopulation become so large that it is unsustainable tocontinue to support it in the same way as before? Thechallenge is determining how most accurately to capture thecomparison between the size of the population requiringsupport and the size of the supporting population. There areadditional caveats to consider, including the fact that thesupported population may be supporting itself to someextent through its own taxes, providing informal care forother people requiring support, or through income fromsavings and assets. Two alternative approaches attemptmore properly to account for changes in population healthand disability, and for changes in the number of consumersand producers.

Accounting for health and disability can be done throughthe prospective old-age dependency ratio (POADR), whichtakes forecasted increases in life expectancy into accountand is defined as the number of people in age groups withlife expectancies of 15 years or fewer, divided by the numberof people aged 20 years or older in age groups with lifeexpectancies greater than 15 years. Another option to adjustfor disability is the adult disability dependency ratio (ADDR),which consists in the number of adults at least20 years old with disabilities, divided by the number ofadults at least 20 years old without them (see Box 4).

Box 4: Accounting for health and disability in the old-age support ratio

Simply put, people ‘age’ at different rates and the fact that someoneis above a particular age threshold does not mean they arenecessarily ‘dependent’. Demographers have made great progress indeveloping indicators that account both for changes in lifeexpectancy and changes in disability when calculating support ratios[48]. One option is the POADR, defined as the number of people inage groups with life expectancies of 15 or fewer years, divided by thenumber of people over age 20 in age groups with greater than15 years of life expectancy. The POADR has generally been shown toincrease less rapidly than the regular old-age support ratio over thecoming years. In Western Europe, for example, while the proportionof the population over age 60 is expected to increase from 21% in2010 to 46% by 2100, the proportion of people with fewer than15 years of life expectancy remaining is only expected to increasefrom 13% to 19% by the end of the century [49].Another option isto adjust for disability, since it is disabled people who typically mostrequire support. The ADDR is defined as the number of adults at least20 years old with disabilities, divided by the number of adults at least20 years old without them. Disability can be defined, for example,based on activity limitations, while the relationship between disabilityrates and mortality, as well as disability rates across ages, can bemodelled. Estimates from the United Kingdom suggest, for example,that while the regular old-age dependency ratio will increase from27% (2005–10) to 41% (2045–50), the ADDR will stay unchanged at10% during the same time period.

Alternatively, we can also gauge the level of ‘dependency’by accounting for the actual numbers of consumers andproducers in the old-age dependency ratio. This can becalculated by taking the population at each age group andweighting by average labour income and consumption atthat age (see Box 5).

Box 5: Accounting for the number of consumers and producersin the old-age support ratio

This option aims more thoughtfully to quantify both the economicallydependent population and the economically active population. Datafrom the National Transfer Accounts (NTA) can be used to relate theeffective number of consumers in the population to the effectivenumber of workers [50–52]. This is done by taking the population ateach age and weighting it by average labour income or consumptionat that age (where those aged 30–49 are considered to be the‘baseline’ effective producer or consumer). Such an approachincorporates age-specific variation in labour force participation,unemployment, hours worked and productivity, as well as age-specific variation in needs or wants according to consumptiondata.This type of support ratio also yields a second indicator, referred

24 Overview brief

to as the first demographic dividend, and calculated as growth in thesupport ratio itself. The first dividend is intended to reflect the effectof population change on economic growth that results from changesin the concentration of the population at working ages. That is, if theeffective number of producers is growing more slowly than thenumber of consumers (i.e. a negative first dividend), economicgrowth will be slowed as a result. In the United Kingdom, forexample, since approximately the turn of the 21st century, there hasbeen a decline in this support ratio (i.e. an increase in consumersrelative to producers or, alternatively, a reduction in producers relativeto consumers), which is expected to continue through the end of thecentury. The first dividend calculations reveal the direct impact of thison economic growth, showing that ageing is expected to sloweconomic growth by as much as 0.6 percentage points per yeararound the year 2025. The advantage of this approach over theregular old-age support ratio is that it does not dichotomize thosewho need support and those who provide support according tobeing above or below a pre-determined (and largely arbitrary) agethreshold. However, not all consumers are still necessarily in need ofor in receipt of financial support from producers since they may liveoff asset-based income or by spending private savings. Also, such anapproach says nothing of whether consumers are in need of supportbecause they are in poor health and cannot support themselves.Since the data are based on baseline cross-sectional per personconsumption and labour income estimates, estimates of this supportratio and first dividend over time do not capture cohort effects (e.g.differences in savings rates across cohorts), which could havesubstantial yet unmeasured effects on the need for financial supportamong older people in the future.

Paying for the consumption of older people inEuropean countries

It is clear that there are difficulties understanding the degreeto which societies will need to provide financial support toolder people in the future, both to deliver services for themand to ensure income security. To explore this further, wereview data on consumption levels (including consumptionof services provided free at the point of use) by age, andhow that consumption is currently paid for across countries.Sustainability may depend both on the levels of supportneeded and the mechanisms used.

Figure 8 shows that there are variations in per personconsumption expenditure (which includes health and long-term care) by age across a selection of countries.Consumption also includes some services that may not bepaid for at the time, such as housing, which in many cases ispaid for earlier in life but consumed over the life course. Insome countries, consumption levels stay relatively constantthroughout adulthood, while in others consumptionincreases significantly at older ages. For example, in Swedenper person consumption at age 65 was just over half of thelabour income of a 30-49-year-old working-age person.However, for those at age 80 it increased to nearly 80% ofworking-age labour income, and by 90+ it was over 130%.

In nearly all of the 59 countries with data available, perperson consumption is greater for older people than forchildren, the other age group whose consumption on

Figure 8: Per person consumption by age, selected countries

Age

0%

20%

40%

60%

80%

100%

120%

140%

160%

0 10 20 30 40 50 60 70 80 90+

Brazil

Brazil

Chile

Chile

China

China

Costa Rico

Costa Rico

Finland

Finland

Germany

Germany

India

India

Indonesia

Indonesia

Japan

Japan

Mexico

Mexico

Nigeria

Nigeria

Philippines

Philippines

Slovenia

Slovenia

South Korea

South Korea

Spain

Spain

Sweden

Sweden

Taiwan

Taiwan

Thailand

Thailand

Uruguay

Uruguay

USA

USA

As a

per

cent

age

of la

bour

inco

me

for i

ndiv

idua

ls a

ged

30–4

9 ye

ars

old

in e

ach

resp

ectiv

e co

untr

y

Source: [51,52].

Note: Data are made comparable by dividing by the simple average of labour income for individuals aged 30–49 years old.

25

25The Economics of Healthy and Active Ageing

average exceeds their own labour income. However, privatespending, rather than public spending, largely drives thispattern. This is because, while children generally have nohistory of paid income or assets on which to draw, someconsumption of older people is financed through their ownprivate assets and savings. This in part enables older peopleto consume at higher levels overall. Public spending onconsumption is greater per person for children than for olderpeople in all but 14 countries (Australia, Japan, Taiwan,Cambodia, India, Costa Rica, El Salvador, Canada, UnitedStates, Finland, France, Germany, Sweden and the UnitedKingdom). In many of these countries, having a relativelysmaller share of children in the population (assuming fertilityrates are and remain low) could partially offset the totalpublic financial burden.

Consumption by older people is financed in a variety ofways, including through continued work, assets (e.g.spending down savings and income from investments),pensions (which can analytically be a combination ofspending down assets and investment income), familysupport and other private transfers and public transfers (e.g.health and long-term care and pay-as-you-go publicpensions); pensions and public transfers are of coursefunded in part by taxes generated from labour income. InEurope, most consumption among those over age 65 isfunded by public transfers (Figure 9), whereas in otherregions, such as Latin America and the Caribbean, publictransfers fund only around half of consumption (though thismasks differences by country, such as in Brazil, where publictransfers play a major role). In Cambodia, China, Taiwan andSouth Korea, familial support is very important to financeconsumption at older ages, whereas in India, South Africa,Indonesia and Thailand, there is somewhat more reliance onasset income.

These data cannot tell the full story. Since they aggregate allpeople over the age of 65, they do not distinguish betweenpatterns in the ‘young old’ and ‘old old’, or between thericher and poorer. Moreover, because demand for health andlong-term care increases in the last years of life, which insome countries will have major implications for publictransfers, patterns may vary between those of the same ageat some distance from death and those more proximal to it.There is a general trend that consumption expendituresincrease at older ages in many countries. However, it isimportant for policy-makers to understand better themagnitude of the increase in spending, the patterns acrossthe population, and the extent to which older peoplefinance their own consumption or rely on government,before taking actions that reduce access to public funds forall older people in an attempt to increase sustainability ofthe welfare state.

It is not only the levels of support that may be important forsustainability but also the mechanisms used and theperceived fairness of these. Countries that rely on labour-based contributions to fund health and long-term care willsee an increasing share of costs paid by employed people,whereas systems that use revenues from a broader base,including taxes on consumption, will spread the burdenacross those with higher income and consumption, whichincludes some older people. Entitlements to services orpensions based on earlier contributions may be consideredfairer than other public or private transfers. It is useful tounderstand both the overall level of transfers and the toolsused to achieve these.

Figure 9: How consumption is financed for people over age 65 in selected European countries

-20

0

20

40

60

80

100

120 Asset-Based Reallocations

Public Transfers

Private Transfers

Labor Income

GBR 2007SWE 2003ESP 2008SVN 2010ITA 2008HUN 2005DEU 2008FRA 2011FIN 2006AUT 2010

Perc

ent o

f con

sum

ptio

n

Source: [51,52].

Note: Negative shares (mainly for net private transfers) mean that older people give more financial assistance to others (e.g. to their children) than they receive.

26 Overview brief

Where older people hold considerable assetwealth, this can also contribute to economicgrowth

It is worth noting that the savings and assets (i.e. formalpension and life assurance systems, or private savings andinvestments) accumulated by people to finance theirconsumption at older ages may also indirectly lead toeconomy-wide productivity growth if the savings and assetstranslate into increased capital investment. Given slowerlabour force growth and lower fertility, this can lead toincreased capital per worker and, ultimately, to greaterproductivity and economic growth [53].

In the United Kingdom, for example, older people’s assetsare estimated to contribute positively to economic growth,adding between 0.6–0.8% to GDP growth annuallythroughout the 2010s [53]. If the period of retirement getslonger and the working life stays the same, then the needfor savings will increase and investment will also increase.Longer working lives and shorter retirement durationreduces the need for saving. The key point is that saving forretirement can have macroeconomic effects through theavailability of capital and the effects on labour productivity.

People who are in poor health accumulate fewer assetsduring the life course because they have shorter lifeexpectancies, lower earnings and higher out-of-pockethealth care costs [54]. Improving health can therefore bothincrease the extent to which people can save for retirementand reduce the costs of care.

Older people continue to contribute tax revenues

Despite some degree of self-financing in some countries, akey concern is the potential increase in the need for financialtransfers from the working population to the non-working(retired) population. If the de facto retirement age remainsconstant and life expectancy increases, there will be a needfor increased transfers. Projections are made on the impacton public transfer through taxation and public transfers (thefiscal support ratio). Without changes in policies, the ratio oftax revenues to transfers will increase in Africa and Southand Southeast Asia but will fall in East Asia and Europe (seeTable 1).

These projections do not take account of possible policyactions that might improve health and increase employmentin older ages. Public transfers also depend on other policiesthat encourage private saving for retirement. Since taxes areraised on earned and unearned incomes, asset transactions,consumption, wealth and profits of business, trends infuture revenues will depend on the structure of the taxsystem. Countries with a high dependence on payroll taxesand charges are likely to see falling revenues if the numbersemployed fall. This suggests that the mechanisms for raisingtaxes fairly may have to adapt to fewer people beingemployed and more people being supported on pensionsand income from savings.

Considerable public revenues are still likely to be generatedfrom older people through other forms of taxation. Olderpeople who are not in paid work continue to pay taxes onincomes, consumption and property. As shown in Figure 10,tax revenues generated from purely non-income sourcescomprise around 30% to upwards of 50% of tax revenuesin OECD countries.

While older people may, on average, contribute less towardsthe public sector than working-age people, older peoplemay finance a considerable portion of the consumption ofothers through taxation. Data on the share of publicrevenues contributed by older people could itself beregularly reported to better understand the dynamics ofrevenue generation and population ageing [46].

Evidence is needed on the implications of furtherbroadening taxation beyond labour income to takeadvantage of revenue generation potential from olderpopulations. Research from Japan, for example, suggeststhat, while demographic shifts will deleteriously impactpublic finances under current law, changes to publicfinancing such as broadening the tax base (including someincreases in consumption taxes), in addition to somereductions for social security benefits, would improvesustainability and be beneficial for economic welfare [56].However, distortionary effects from consumption taxes couldbe detrimental to overall welfare. The extent to which thesesorts of changes to financing systems are beneficial, as wellas feasible from economic growth, political and equitystandpoints should be considered.

An additional source of both uncertainty and opportunity isthe possibility of stimulus to economic development asdifferent players in the economy take advantage of newopportunities and markets for products and services aimedat older people. Box 6 summarises the key issues.

Box 6: The Silver Economy

The Silver Economy is a concept that tries to capture the economiceffects and opportunities resulting from population ageing. Theissues and opportunities were outlined in a report for the EuropeanCommission in 2018.

Older consumers already comprise a large part of the economy – it isestimated that the value of consumption across the EU by those over50 was €3.9 trillion in 2015 and is projected to rise at around 5%per year, reaching 5.7 trillion by 2025. By 2025 43% of thepopulation in the EU will be over 50.

While the Silver Economy is set to grow, it will also lead to changes inpatterns of needs and wants. In general consumption by olderpeople tends to be on goods and services that are labour intensive,such as health and social care, housing, food and transport.

Table 1: Fiscal support ratios, by region

Fiscal support ratios (projected tax

revenues relative to public transfers as %

values in 2015)

2035 2055 DifferenceAfrica 110 117 7.6East Asia and the Pacific 87 77 – 10.1South and Southeast Asia 109 114 4.7Latin America and the Caribbean 94 83 – 11.0Europe 85 78 – 7.1

Sources: [51,52].

27

27The Economics of Healthy and Active Ageing

Countries with high levels of unemployment may see this fall aspatterns change, but there may also be challenges for countries withlow unemployment to meet the changing needs.

As well as changing the pattern of needs and wants, the SilverEconomy will drive changes in how some services are provided.Technologies that support better management of health conditions,that promote independence, or that increase efficiency in caredelivery can meet growing needs and potentially offer strongincentives for innovation. These may be in areas such as smarterhomes, remote monitoring, robotics, transport and mobility, andhealth informatics. In some cases new approaches may improveoutcomes of care and lower costs. Such developments may alsofurther change the relationship between disability and independence,and can improve the quality of life for people with limited mobility.Better systems of health information and records will be crucial tointegration of care, changing how resources are used so that theymeet needs more fully and increase the efficiency of care delivery.

Ageing potentially opens up new markets in areas such as activeageing and silver tourism. Physical activity levels are low in olderpopulations, despite strong evidence of its importance for healthyageing. It is likely that demand will move to different types ofexercise and facilities. Older tourists have different preferences, andincreasingly can afford to take holidays. Ageing will bring a fall inthe demand for some existing education services, but brings newopportunities for lifelong learning.

The Silver Economy will also bring opportunities for increasedemployment of older people as it becomes feasible to design jobsthat take account of different skills and capacities. As the supply ofyounger workers becomes more limited there will be strongincentives to develop more age friendly employment opportunitiesand job redesign.

Many of the trends and ideas in the Silver Economy resonate with theideas in this report. Ways need to be found to help older people tobe more active and to stay well, to be able to contribute more topaid and unpaid work. Silver economy interventions may helpachieve and compression of morbidity and better capacity to managechronic disease.

The extent to which a ‘Silver Economy’ contributes toeconomic growth in an ageing population depends on theresources available for consumption and service use by olderpeople, which in turn depends on their incomes, which inturn depend on income from work, investments andtransfers. It also depends on there being a willingness tomeet care needs in innovative ways and using new productsand services.

The overall effects of population ageing on economicgrowth are difficult to estimate, but the negative effects ofpossibly fewer workers and possibly lower productivity maybe offset by increases in innovation, investment and labourproductivity. Much also depends on the extent to which thecurrent capacity of the economy is being used – whereunemployment is high, there may be little effect of ageing.Greater savings in the economy can also decrease the needfor tax-based funding for income security in older age.

4. The policy options: How can decision-makersrespond to population ageing?

The conceptual framework for the policy brief depicted inFigure 1 identifies four main types of policy interventionsthat will contribute to healthy and active ageing, as well aseconomic and fiscal sustainability, in the context ofdemographic change:

I. Policy interventions to promote healthy and activeageing – (Intervention 1) in Figure 1

II. Policies to promote cost-effective health and long-term care interventions (Intervention 2)

Figure 10: Share of tax revenues by source, OECD countries, 2015

0

20

40

60

80

100 Percent linked to goods, wealth, estates etc.

Percent linked directly to income (from labour and non-labour)

Percent linked directly to labour

Unite

d St

ates

Unite

d Ki

ngdo

m

Turk

ey

Switz

erla

nd

Swed

en

Spai

n

Slov

enia

Slov

ak R

epub

lic

Portu

gal

Norw

ay

New

Zea

land

Neth

erla

nds

Luxe

mbo

urg

Latv

ia

Kore

a

Italy

Isra

el

Irela

nd

Icel

and

Hung

ary

Germ

any

Fran

ce

Finl

and

Esto

nia

Denm

ark

Czec

h Re

publ

ic

Chile

Cana

da

Belg

ium

Aust

ria

Source: [55].

28 Overview brief

III. Policies that support paid and unpaid work(Intervention 3)

IV. Policies to support acceptable, equitable andefficient funding and income transfers(Intervention 4)

The evidence presented here shows that, while ageingpresents challenges, the pure effects of ageing are oftenexaggerated; they are more glacier than avalanche [57], andmany of the problems are amenable to policy interventions.A better understanding of the pure effects of ageing, and ofthe extent to which policy actions can lead to sustainableoutcomes, provides a basis for maximizing the benefits andminimizing the costs associated with ageing.

Policies should aim to reduce needs in older people (or slowdown the increase in needs), manage those needs efficiently,and maximize the contribution that can be made by olderpeople. It is also clear that some of the policy focus shouldbe outside the conventional health system.

I. Policies to promote healthy and active ageing

Health promotion and prevention interventions at older agesare important to promote successful, healthy and activeageing. In this section, some effective actions to promotehealthy behaviours throughout the life course and at olderages are outlined, followed by an overview of preventioninterventions that aim to prevent or slow disease progressionor delay care dependency.

Health promotion and disease prevention throughoutthe life course and at older ages by targeting behavioural risk factors

There is considerable research on how to achieve successful,healthy and active ageing [58,59]. In the United States, forexample, data suggest declines in disability at older agesbetween the 1980s and early 2000s were driven in part bydeclines in heart and circulatory conditions, many of whichare preventable by tackling risk factors such as high bloodpressure, smoking, excess alcohol use, obesity, unhealthydiets and sedentary lifestyles [20,60]. Indeed, the WHOestimates that lifestyle changes linked to these risk factorscould reduce the disease burden in people aged over 60 bymore than half [61].

There is growing evidence that adopting healthier lifestylescan have important health effects even when behaviouralchanges are adopted in later life. For example, there is goodevidence that those who quit smoking at age 65 live longerlives [62] and have lower rates of pulmonary conditions,cardiovascular disease risk and mild cognitive impairmentthan those who continue to smoke [63]. Extensive researchhas also linked increased physical activity in older ages withlower hazard of disability and improved balance, mobility,cognition and wellbeing [64–66].

Despite clear evidence on the importance of maintaininghealthy lifestyles at older ages, there is a lack ofunderstanding on how to achieve behaviour change in olderadults. Promoting health in older adults has not been awidely adopted policy priority and there are fewinterventions tailored towards older people [67].

Despite a small knowledge base, there is evidence oneffective strategies to promote behaviour change in olderadults. A systematic review on smoking reported thatprovision of cessation medications (nicotine patch or gum,bupropion or varenicline) significantly reduced smoking ratesin older adults in the United States, with increasedeffectiveness when combined with behavioural counselling[68]. A review by Kelly et al. also found some evidence thatintensive, multifaceted interventions involving personalizedfeedback, physician advice, educational materials andfollow-up may be effective in reducing excess alcoholconsumption in older adults [69]. Similarly, there is emergingevidence from a number of countries that walking groups[70] and use of pedometers [71–73] are effective atpromoting long-term walking and step-counts among olderadults, although it is not known whether this level of activitywill result in health benefits.

Research also shows that despite low priority often beinggiven to prevention in many health systems, there are cost-effective strategies. In particular, ‘best buy’ interventions thattarget population-wide behaviour changes, includingrestrictions on advertising, regulations on the availability oftobacco, alcohol and unhealthy foods, and taxes and thatinfluence the costs of different behaviour choices, are oftenshown to be highly cost-effective [74]. There is currently lessunderstanding of the cost-effectiveness of strategies at theindividual or community level, making this a priority forfurther research. A key challenge is to identify the mainbehavioural risks threatening the health of the next cohortsof older people and implementing corresponding cost-effective preventive strategies.

Preventing or slowing disease progression

While preventing disease by health promotion and diseaseprevention has been shown to be effective and cost-effective, better management of chronic conditions andearlier intervention to prevent disease progression can alsobe cost-effective. Since the majority of people in older agehave two or more chronic conditions, much can be done toimprove the care of these illnesses to prevent disability anddependency through effective management of non-communicable diseases (NCDs) and related medical riskfactors. Extensive literature from the United States hasdemonstrated that lifestyle modifications for older peoplerelated to smoking, diet, physical activity and alcohol intakecan be effective at improving glycaemic control in peopleliving with diabetes [75,76], can help to lower bloodpressure [77,78] and can reduce heart attacks and strokes[79,80].

Secondary prevention and rehabilitation delivered throughhealth services also play a key role in reducing dependencyin older adults. This includes age-appropriate use of effectiveand cost-effective medications, such as aspirin or oralanticoagulants (e.g. warfarin), to reduce recurrence ofstrokes, and anti-hypertension therapies, including ACEinhibitors, to lower blood pressure [81,82]. Althougheffective treatment and lifestyle strategies are available, itcan often remain challenging for older patients to adhere toNCD management, in particular for those with multiplechronic conditions and cognitive decline.

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29The Economics of Healthy and Active Ageing

To assist older patients in managing NCDs, it is becomingincreasingly common for primary care to use multifacetedself-management programmes that provide education andsupport to patients to enable self-titration of medicines andself-monitoring of symptoms. Randomized controlled trials(RCTs) have shown that self-management can effectivelyimprove health behaviours, lower blood pressure andimprove the health status of individuals with previouslydiagnosed heart disease, lung disease, stroke and arthritis[83,84]. Self-management is sometimes supported by theuse of interactive digital interventions (IDIs) that affordpatients access to detailed, personalized feedback and allowhealth professionals to monitor patients’ conditionsremotely. Meta-analyses have shown that these are effectiveat improving asthma [85] and hypertension [86] control,although more evidence is needed on their cost-effectiveness and effectiveness for older adults.

Preventing cognitive decline

A key focus to prevent care dependency should be onpreventing cognitive decline. There is some evidence thattaking a multidomain approach can improve or maintaincognitive function. For example, a Finnish randomized study(known colloquially as ‘FINGER’) to prevent cognitiveimpairment and disability with interventions in diet, exercise,cognitive training and vascular risk monitoring found thatcognitive functioning either improved or remained constant[87].

A growing body of evidence also indicates thatcomputerized brain-training programmes may be effective indelaying cognitive decline. The ACTIVE clinical trial, forinstance, randomly assigned US participants aged 65 yearsor over to receive memory, reasoning or processing speedtraining [88]. After 10 years, ACTIVE found that interventionparticipants reported fewer declines in IADL than controlsand had improved reasoning and speed, but not memory[88]. Similarly, three other RCTs determined that interventionparticipants had improved memory and processing speedcompared with controls [89]. Although computerizedtraining represents a potentially effective avenue to preventcognitive decline, it is still unclear how frequently braintraining should be undertaken and how the reach ofprogrammes can be expanded, particularly in hard-to-reacholder adults.

Preventing falls and reducing frailty

Resistance training or other interventions promoting physicalactivity at older ages may be effective to prevent or reducefrailty [90,91]. A wide body of evidence in particular hasexplored the impact of exercise programmes on reducingfalls in older people. A much researched fall preventionintervention is the Otago Exercise Programme, whichconsists of muscle strengthening and balance trainingdelivered by trained professionals. Research has shown theprogramme to be both cost-effective and effective inreducing falls and fall-related injuries, particularly in theoldest age groups, and the programme has beensuccessfully adapted internationally to a variety of caresettings [92–95].

In general, research suggests that exercise is likely to bemore effective in preventing falls than other strategies suchas removal of environmental hazards or assistive technology

in homes [96]. However, this may depend on the type ofexercise undertaken and the intervention setting. Forinstance, a systematic review determined that Tai Chireduced risk of falls, but only in those at lowest risk offalling, while exercise more generally is effective inpreventing falls in community-based settings, but the impactin care homes is less clear [96].

II. Policies to promote cost-effective health and long-term care interventions

While most estimates suggest that ageing will increase costsof health care, the effects are small and manageable. Thelarge increases in health care costs have been shown to bedriven mainly by adopting and paying for new treatmentsand services, and widening access to existing treatments.Much of this is highly desirable, but many new services havebeen included without full evaluation of their usefulness orcost-effectiveness. An important step is to ensure that thesechoices to include services in entitlements to care are cost-effective, and in particular that they are cost-effective forthose people who are offered them. Many treatments havenot been properly evaluated for use in older people (who areoften excluded from trials and studies) and may not be cost-effective for people with multiple chronic conditions. Therising costs from adopting new treatments and wideningaccess are not really costs of ageing but rather the costs ofdecisions to pay for additional services.

A key question for the financial viability of health systems inthe context of population ageing is therefore whether futurehealth care provided to older people becomes moreexpensive relative to younger people. If there is a substantialrise in per person spending on older people relative toyounger people, this will become a major driver ofexpenditure growth and will undermine sustainability. Anumber of policy options are, however, available to containageing-related health care expenditure growth. Some ofthese options include greater use of innovative cost-effectivetechnology; increased integration or coordination of care;and incentives to provide rational care towards the end oflife.

Use of innovation and technology for efficiency gains

Achieving efficiency gains in care for older people is difficultgiven the high labour intensity involved compared to carefor younger people [97]. Nevertheless, better use oftechnology can help dampen these so-called Baumol effectsand reduce the overall cost of medical treatment for olderpeople [97,98].

Making greater use of information and communicationtechnology (ICT) services can help improve efficiency oflong-term care delivery. This may be through the use ofelectronic health records or e-commerce across and withincare settings to improve care coordination or the use oftelemedicine to support delivery of remote health care. Theuse of telemedicine in particular is being increasinglyadopted to enable medical professionals to provide timelyassessments, support and advice to frail older people andtheir carers. However, although evaluations have suggestedthat telehealth may be an effective approach for improvingcare management for older adults with long-term conditions[99,100], there is little evidence to show it is cost-effective

30 Overview brief

[101,102]. Use of assistive technologies, such as digitalmemory aids or automated medication dispensers, tosupport older people to live independently for longer havealso been shown to improve the quality of life and healthoutcomes for older people, although there is little evidenceavailable on cost-effectiveness [103].

Overall, there is limited understanding of the incentives touse technological innovations for the treatment of olderpeople and the efficacy of technologies in general,particularly in long-term care settings [98]. Further work isneeded to assess the use of innovative technologies,supported by health technology assessment (HTA), for thetreatment of older people, including their potential tocontain health care expenditure growth. This is especiallyimportant as the adoption of innovative technologies inlong-term care is becoming increasingly viable as newtechnology costs fall.

Integration of health and long-term care and other service delivery models

There has also been widespread interest in new models ofcare delivery, particularly given the complex care needs ofolder populations. One such approach (really comprisingmany different approaches) is to harness the expertise ofproviders in both the health and long-term care sectors byintegrating care in an effort to improve quality of care and,ideally, improve efficiency [104].

Integrated care can take many forms and is understood inmany ways. However, a distinction can be made betweenthree types of integration, ranging from full integrationcomprising complex mergers of organizations, to increasedcoordination between professionals and teams, and finallyto linkage where organizations develop protocols andprocedures to improve referral and management of patients’needs [105]. Integration can be horizontal and take placebetween providers working at the same level or verticalbetween providers working at different levels.

There are many varied examples of delivering coordinated orintegrated health and long-term care. One example oforganizational integration can be found in Torbay, England,where multidisciplinary teams from health and social carehave been brought together in community hospitals [106].These integrated teams have been given control of pooledhealth and long-term care budgets to support older peopleat risk of hospitalization to remain independent for longer. Itis estimated that increased integration in Torbay createdsavings of £250,000 in the first year; increased access tointermediate care; and led to a 24% fall in emergency bedday use for people aged 75 years and over [106]. There isother evidence that case management targeting frequentemergency room attendees can be cost-effective and reduceunnecessary and expensive hospital utilization [107].

A number of countries have developed approaches toprovide coordinated home care, to help delay admissions tohospitals or nursing homes. A notable example is theBuurtzorg (‘care in the neighbourhood’) scheme in theNetherlands, initiated in 2007 to enable district nurses toprovide integrated home care with support from socialservices, general practitioners and other providers, whileencouraging links with informal carers [108,109]. The modelhas resulted in higher levels of satisfaction for both patients

and health professionals, and has contributed to loweradmissions to hospitals and nursing homes. Due to itssuccess, the model is currently being adapted to settings inMinnesota, Japan and Sweden [109].

Developing defined pathways of care is a common approachto care linkage. One example of a defined pathway isdischarge planning, which is designed to promote the safeand timely transfer of patients from one care setting toanother [110]. Systematic reviews have found that dischargeplanning tailored towards individuals can reduce length ofhospital stay and may increase satisfaction of patients andhealth care professionals [111], while comprehensivedischarge planning with individualized follow-up is moreeffective at reducing readmissions than other interventions[110]. These findings suggest that appropriate andindividually tailored discharge planning may reduce delayedtransfers of care and hospital admissions, although neitherreview was able to draw conclusions on cost-effectiveness.

Addressing incentives for expensive care for older people towards the end of life

On all plausible assumptions, the needs for and costs oflong-term care are likely to experience a large percentageincrease (albeit from a low base). This should be affordablesince the absolute amounts are quite small, but neverthelessthere is a need to look carefully at how resources are used.In many countries, financial incentives lead to too manypeople being cared for in nursing homes, and it is oftendifficult to access support that helps families to keeprelatives at home. While costs are likely to rise, the increasemight be contained with better value being found for theresources employed.

Health care costs near to the time of death are an importantdriver of observed higher health care expenditures for olderpeople. While it is important not to deny people effectiveservices based on age or ill health alone, it is equallyimportant not to subject people to treatment that isexpensive, distressing and unlikely to bring benefits – over-treatment can be as bad as under-treatment. It is widelyaccepted that people should be allowed to die with dignity.One challenge is the lack of consensus in terms of what itmeans to have a ‘good death’.

Policy interventions which provide incentives for providers tooffer appropriate end-of-life care are needed. There is nowgood evidence that supporting better treatment and carechoices near the end of life can reduce the use ofunnecessary treatments and tests, lower costs and improvethe experiences of both patients and carers [112] – and, insome cases, this can also achieve longer survival [113]. Thishas been shown to be particularly effective when patientshave complex multimorbidity [114]. As the proportion ofpeople approaching the end of life with complex diseasesincreases, there will be increased scope for better outcomesand lower costs with better choices. Some of the reasons forover-treatment are financial incentives, with it beingcommon for more expensive services to be included inentitlement packages, while lower-cost support may not be.There might be scope to achieve better outcomes and lowercosts if more rational structures and incentives were put inplace to support people with complex needs and those nearthe end of life [115].

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31The Economics of Healthy and Active Ageing

III. Policies to support paid and unpaid work

Keeping older people active and working – paid, unpaid or amix of both – is a key economic and fiscal priority. Whethera person continues to work in older age depends on bothpersonal and broader contexts: personal circumstances andpreferences, adaptability of the work environment to thespecific needs of older people, employer and employeeattitudes to work and productivity at older ages, as well asrules regarding pension ages, will all play a role. Unpaidwork is important in sustaining the availability of paidworkers (through, for example, providing unpaid child care)and directly provides useful inputs into a wide range ofcommunity and care services. In the case of providing carefor dependent relatives, the availability of unpaid workersoften depends on supporting the caregivers. This may be inthe form of financial allowances to meet costs, respitesupport and paid caregivers to supplement unpaid work. Inthis section, we review interventions to support working atolder ages, including workplace interventions to promotehealth and productivity, retirement and pension policies, andinterventions to support carers and those combining careresponsibilities with employment.

Workplace interventions to enable people to worklonger

There is strong evidence that health problems are causepeople to exit the labour market at all ages [116], with a‘health shock’ after the age of 45 especially likely to lead tolabour market exit, although the magnitude of the effectvaries considerably among European countries [117]. Thereis evidence from England that older people who are in goodhealth are more likely to ‘unretire’ and participate in theworkforce at older ages than those who are unhealthy[118].

There is growing recognition that workplace healthpromotion interventions, such as screening activities toidentify potential health risks and lifestyle managementactivities to improve health and health behaviours, can keepolder workers healthy and productive [119,120]. Somecountries, most notably those in Central Europe, haveresponded by developing national policies to supportworkplace health promotion for older workers [121].

In many cases, a person is not able to continue in work thatrequires physical strength and stamina, but may be willingand able to do other less physically demanding work. Peoplemay not wish to continue to have high levels of stress andresponsibility but would be willing to use their skills in lesspressured roles. Adapting work practices to accommodateolder workers’ needs and circumstances can also help olderpeople remain in work. Good evidence shows that flexibleworking practices, part-time working, job-sharing andworking from home, can help older people, particularlythose with health issues or caring responsibilities, remain inemployment for longer and can result in healthier livesoverall [119,122,123]. Research from the New Dynamics ofAgeing Programme also demonstrates that commuting canpose a substantial barrier to older people remaining inemployment, necessitating development of locally drivenstrategies, such as car-sharing or free travel on publictransport, to improve the journey to work [119].

Changes to the physical work environment can supportolder workers to remain in employment, while contributingto improvements in productivity [124]. An example of asuccessful innovation can be found in the experience ofBMW, which piloted a production-line initiative in 2007 tosupport older workers. The pilot introduced a number ofphysical changes to the work environment (e.g. weight-adapted footwear and wooden flooring) to reduce physicalstrain on workers [125]. In one year, the pilot achieved a 7%productivity improvement and by 2009 had contributed to asignificant reduction in absenteeism and qualityimprovement [125].

Retirement and pension policies

The reasons for retirement can be hard to detect – forexample, a person might retire in order to care for a familymember and change from paid to unpaid work. There arecircumstances where a person might be willing to work butnot in their current role, so the choice to retire is to leave aspecific job rather than to leave the workforce. Incomes inretirement vary greatly, and this can affect the experience ofretirement and may affect health. This suggests that policieson rules for retirement, continued paid work, pensions andother income support in older age should be morethoughtful than simply raising statutory retirement ages.They are likely to include options for working less than full-time; to change to different types of work; and to sourceincome from combinations of paid work and pensions. Itshould be feasible to design rules that reduce the costs ofpensions, increase the available workforce, and improvehealth in those who wish to work, without introducingnegative effects on those who cannot or do not wish tocontinue in paid work.

There are often constraints on the choice to be supported byboth some pension income and some income from work –in some cases, the person loses pension income at a ratethat makes work unprofitable. There can also be penalties interms of pension for moving to a lower salary prior toretirement or moving to part-time work. While it isimportant to have fair and efficient rules around pensions,much could be done to make work more attractive to olderpeople, both in terms of income and the work experience.

In an effort to improve financial sustainability of pensionsystems and public finances, there is a push in manycountries to raise the retirement age. Current standard agesfor access to pension were often set at times when lifeexpectancy beyond that age was short. Raising theretirement age can reduce pressures on government budgetsby raising payroll contributions from people staying in paidwork and reducing benefit payments. If jobs are available,this is likely to increase the number of older people who areworking and reduce the numbers who are retired. However,remaining in work may also have important, perhapsunpredictable, health implications (see Box 7). There is alsosome evidence that increases in official retirement ages maylead some older people to leave the labour market byalternative pathways, such as collecting unemployment anddisability benefits until they reach the (higher) retirement age[126].

32 Overview brief

Box 7: Health implications of remaining in paid and unpaidwork for longer

There may be important health implications of changing the age ofretirement. Health status and labour market participation are closelylinked: while those who are in poor health may face difficulties doingwork, evidence also suggests that there are complex causalrelationships between work and health. Some studies find thatretirement is beneficial for mental health, although there is onlylimited evidence of effects on physical health [127,128]. Retirementmay also reduce health care utilization [129]. However, there is alsoconvincing evidence that retirement can be bad for health [130,131].The effects may also be gendered, impacting differently on men andwomen, and be affected by expectations of gendered roles [132].Other researchers investigate the impact of retirement on cognitivefunction. Consistent with the ‘use it or lose it’ hypothesis, earlyretirement is often associated with declines in cognitive function[133–135]. This suggests that encouraging retirement at older agesamong those who are able and willing to continue to work, maypromote cognitive function later in life. However, recent researchfinds that in the United States, older Americans required to wait untilolder age to receive full social security benefits are reachingretirement age with poorer cognition and more physical limitationscompared to previous cohorts; the precise reasons are unknown[136].

Supporting the provision of informal care by promoting carer well-being

Providing support to carers to increase their well-being isimportant to enhance their quality of life and to increasetheir propensity to provide care. Strategies that supportinformal carers through training or by providing cash forcare have been shown to be effective in reducing carers’stress and may also improve the quality of care [137].

Research on training for carers suggests the potential toimprove carer and patient well-being, but outcomes arelikely to be dependent on the conditions (e.g. stroke ordementia) targeted, as well as the organization and contentof training [138]. For example, RCTs from the UK found thatstroke education programmes for patients and carers in theUK were not effective at improving the emotional well-beingof carers [139,140], but did improve knowledge of stroke[139] and patient anxiety [140]. Findings on dementia careeducation programmes did, however, improve carer well-being and also reduced negative feelings toward the patient[141] and social isolation [142].

Extensive research has shown that cash-for-care benefits inthe form of vouchers (e.g. as provided in Finland), home-care grants (e.g. Ireland), direct payments (e.g. England) orpersonal budgets (e.g. Netherlands) can be vital tools inencouraging the well-being and sense of worth, as well asimproving the quality of life, of informal carers [143–145].Cash benefits can often be a critical source of householdincome that enables individuals to carry on providinginformal care, especially for those that have had to reducework hours or are looking after a partner who has leftemployment due to illness [146]. Evidence suggests that the

higher the amount of cash-for-care benefits, the higher thelikelihood of providing care, particularly for those on lowincomes [143,147].

However, it is important to acknowledge that cash-for-carebenefits can act as a disincentive to take up formalemployment, in particular for those on low incomes andwomen [147,148]. Carer allowances may also disincentivizecarers from working additional hours or increasingemployment earnings in order to stay within carer allowanceeligibility thresholds [23].

Supporting unpaid carers who also remain in formal employment

Much emphasis has been placed on implementing reformsto enable carers to combine unpaid care with paidemployment [146]. These include the introduction of paid orunpaid leave and flexible working arrangements [137]. InJapan, for example, amendments to the Child Care andFamily Care Leave Act in 2009 introduced ‘Time off forcarers’, which entitled carers to five days of unpaid leave peryear, with further reforms in 2016 exempting carers fromworking overtime and increasing opportunities for flexibleworking for the care period [149].

The 2016 reforms also enabled carers of older people totake 93 days of long-term Family Care Leave (originallyintroduced in 1995) in three parts to account for varyingintensity of care at the beginning, middle and terminalphases of care [149]. A study by Ikeda (2017) analysed thepotential impact of these reforms, concluding that long-termleave and a reduction in working hours are likely to beeffective in keeping people in the workforce if care isprovided over a short-term period, but flexibility in theworking schedule is more important if the period of care islikely to be longer [149].

IV. Policies to support acceptable, equitable and efficient funding and income transfers

Population ageing, coupled with changes in the share of thepopulation in paid work, may have important effects onpublic finances, including but not limited to health and long-term care revenues. This is especially true in systems largelydependent on formal payroll contributions. To cope withchanges in the labour market structure (some of which mayresult from population ageing), financing systems may needto diversify revenue sources. This has already happened insome countries, where funds from general tax revenuessupplement funds from direct payroll contributions. Theways health systems and other types of public transfersrelated to older people are financed can have importantpolitical and societal implications, which must also beconsidered to maintain the public acceptability of thewelfare state.

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33The Economics of Healthy and Active Ageing

Ensuring stable and sufficient revenues for healthand long-term care systems in the context of population ageing

Countries are increasingly interested in diversifying the taxmix for health and long-term care financing. Nevertheless,there is considerable debate over the optimal mix of taxesfor health and long-term care funding, in terms ofgenerating stable and sufficient revenue in an equitablemanner.

Labour markets serve as an important source of funding forpublic-sector revenues. If a large proportion of older peopleretire at the same time, this will limit revenues. Health andlong-term care financing systems that are heavily reliant onpayroll contributions may need to be redesigned to fill thefinancing gap from general revenues or private sources, toensure they continue to generate sufficient, stable revenues.

Population ageing will also have important effects forgeneral taxation. Both the level of direct taxes (e.g. income)and indirect taxes (e.g. spending on goods and services) varyover the life course and changes in the population agedistribution could have notable effects on the ability togenerate government revenues. As populations age,governments that depend highly on payroll taxes will likelysee a slowdown in revenue generation growth as a result ofdeclines in the share of the population in paid employment.However, older people who are not in paid work maycontinue to play a role in public revenue generation throughconsumption taxes (e.g. VAT or sales tax) as well as thoughtaxes on non-labour income and assets (e.g. property).

Increasing reliance on locally raised taxes or, conversely,centrally raised taxes is one focus of ongoing debate andreforms, with countries moving in different directions. InFinland and Sweden, for example, greater centralization offinancing systems for health and long-term care is proposedto reduce inefficiencies and simplify existing multi-sourcefinancing systems [150,151]. In contrast, England hasrecently increased the share of long-term care revenue raisedthrough local taxes by introducing an adult social careprecept in 2016 as part of local area (council) taxes to relievefinancial pressure on adult social care budgets [146].Concerns have, however, been raised that the precept willenhance local variability in the provision of social care, aswealthier local authorities are able to collect more taxrevenue than less affluent authorities [152].

The use of hypothecation (or earmarking) of payroll or ‘sin’taxes has been seen by some as a potential source offunding. Proponents of hypothecation advocate that itincreases transparency and may make people more willing topay higher taxes as they are able to see where their taxes arespent [153–155]. Counter-arguments note thathypothecation can introduce unwelcome budgetary controlsthat ensure spending is determined by revenue generatedrather than based on changing needs and demand, whilerevenues may not increase if funding from other tax sourcesis concomitantly decreased [156,157]. Moreover,

hypothecation remains vulnerable to economic fluctuations,resulting in unstable revenue streams that are harder tosmooth in comparison to tax-generated revenues.

Long-term care insurance

The most fundamental reforms to long-term care financingin recent years have seen some countries shift to mandatorylong-term care insurance arrangements. Notable examplesof these reforms can be seen in Germany, Japan and Korea,countries with previously long-established social healthinsurance systems. These countries have developed variedlong-term care insurance designs, but all share commonfeatures, with individuals contributing proportional toincome through payroll or pension contributions andcoverage extended to all irrespective of income andavailability of alternative informal caregiving options[158,159].

Germany also remains one of the few countries to haveimplemented some form of pre-financing to prepare for thepotentially heavy burden on long-term care that is likely toemerge as a result of the retirement and ageing of the baby-boomer generation. The government has established afutures fund that is financed by set-aside contributions of0.1% from long-term care insurance, which will not be useduntil 2035, when baby-boomers are expected to need long-term care [160. However, whether the fund will remainunused for as long as envisaged remains unknown.

There is currently little evidence on the sustainability of long-term care insurance arrangements. It should, however, benoted that, like hypothecation of taxes, long-term careinsurance can introduce unwelcome budgetary controls thatensure spending is determined by revenue generated ratherthan based on changing needs and demand. Long-term careinsurance also remains susceptible to economic fluctuationsand cycles, which are harder to smooth out than for generaltax revenues.

Improving acceptability of income transfers

Incomes and costs of care for people who are not workinguse private savings, formal contributory pension and relatedmechanisms, and transfers by the state through taxation.While the expectation of a longer period of retirement initself creates some incentives for increased private savings,the treatment of savings and pensions in the tax system caninfluence the extent to which people opt to save forretirement. However, in most countries, state transfers are aprimary source of income in older age, and it is importantthat the mechanisms used to collect and pool theseresources are considered fair. Acceptability of higher taxesand transfers varies between countries and can depend inpart on the transparency of the process and the perceivedfairness of the rules. Policies discussed throughout this briefthat allow more income from work can reduce the need fortransfers, while improved health can also reduce the costs ofcare.

34 Overview brief

5. Building on what we know and improvingthe evidence base for policy-making

Policy-makers require high-quality information to makeinformed decisions and develop policies with respect toolder people. This overview of evidence on some of the costsand benefits associated with population ageing suggeststhat older people are likely to be less costly to societies thanoften perceived, both in terms of health and long-term care,but also in terms of other consumption expenditure, whichin many countries is in part self-financed by older peoplethemselves. Older people also provide benefits that arefrequently not measured, such as in the form of informalcaregiving or remaining in paid work at older ages,particularly if they are healthy.

There are many benefits from investing in the health of olderpeople, not least for the sake of economic growth andsustainable public finances. Any questions regarding thecosts of interventions to support the health and activity ofolder people should have good information about howmuch these actions could produce in terms of benefits fromnot only an economic perspective, as discussed in detail inthis brief, but also to improve quality of life and experiencesin older age. As has been described above, these sorts ofbenefits are not often properly taken into account.

One of the main goals of the European Observatory’s serieson the Economics of Healthy and Active Ageing is to get abetter understanding of the gaps in knowledge and to focusefforts on these areas. Our approach is to use theconceptual framework described in this overview brief as abasis to inform the programme of work. This includes effortsto:

• clarify the degree to which older people are living longerin better or worse health and to understand thedeterminants of key trends

• better understand how population ageing affects healthand long-term care (both formal and informal)expenditure trends

• explore policy options that improve the efficiency ofhealth care expenditure at older ages, including rationalend-of-life care

• explore policy options that achieve stable and sufficientrevenues for health and long-term care systems in thecontext of population ageing

• better quantify the economic and societal benefits ofolder people

• understand the relationships between work and health,and identify salient policy options that maximize olderpeople’s potential to contribute

• consider the political economy challenges to ensuringpopulation ageing is not used as a red herring by thoseseeking to dismantle the welfare state.

These areas and more are topics we will be investigating indetail as part of the Economics of Healthy and Active Ageingseries.

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35The Economics of Healthy and Active Ageing

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The economics of healthy and active ageing series

WILL POPULATIONAGEING SPELL THE ENDOF THEWELFARE STATEA review of evidence and policy options

Jonathan CylusJosep FiguerasCharles Normand

World Health OrganizationRegional Office for EuropeUN City, Marmorvej 51,DK-2100 Copenhagen Ø,DenmarkTel.: +45 39 17 17 17Fax: +45 39 17 18 18E-mail: postmaster@euro.who.intweb site: www.euro.who.int

Print ISSN 1997-8065

Web ISSN 1997-8073

The European Observatory on Health Systems and Policies is apartnership that supports and promotes evidence-based healthpolicy-making through comprehensive and rigorous analysis ofhealth systems in the European Region. It brings together a widerange of policy-makers, academics and practitioners to analysetrends in health reform, drawing on experience from acrossEurope to illuminate policy issues. The Observatory’s products are available on its web site (http://www.healthobservatory.eu).