The Ageing of Sri Lanka’s population in the coming decades poses many challenges. Sri Lanka’s population pyramid, which was originally broad-based, is now converting to an “urn-shaped” which depicts ageing at the top. Age structure transition is not an unnatural phenomenon as the society develops, but the issue is when life expectancy increases, the elderly population increases and when the fertility rate reduces, there is a reduction of new workers to the country’s labour force.
The United Nations’ forecast of the age structure transition of Sri Lanka from 2007 to 2050 shows an increasing share of the aged population (60 years and above) from 11.2 per cent to 29.4 per cent. The value of the Ageing Index, which measures the number of persons aged 60 and above per 100 persons under age 15, would rise from 47.9 in 2007 to 179.2 in 2050. Sri Lanka’s ranking in the Ageing Index has deteriorated from 66 in 2007 among 192 countries to 71 in 2013. The old age dependency ratio would rise from 11.0 in 2007 to 37.7 in 2050. This is clear evidence that ageing has become a critical issue for Sri Lanka.
When life expectancy of formal sector employees increases relative to the acknowledged retirement age, the elderly become increasingly dependent on social security benefits provided by the state. This suggests that government expenses on behalf of the aged need to increase alongside the increasing ageing population. Likewise, economically inactive retirees account for a large and growing share of the total population. Therefore, each worker has to support more and more retirees under public pension and healthcare systems. Other economic challenges due to ageing are increased demand for financial support, improved and expanded healthcare, and upgraded public infrastructure. The government needs to finance institutional facilities for the aged due to changes in family structures.
High dependency ratios imply that for every worker paying taxes, there are more elderly citizens. These signal the need to allocate more resources for the elderly which would finally impact on committing resources for long-term development projects. The current inadequate employment opportunities for females imply that Sri Lanka has a large potential in future to utilize this idle resource as gender participation rates in the economy generally increase with higher educational attainment.
For several reasons, the country’s retirement schemes do not adequately cover the expenditure needs of the elderly at retirement. The informal sector that constitutes about two-thirds of the labour force who are poor, are largely unprotected by social security systems currently available. It is high time to consider a comprehensive national social security scheme to benefit the wider public and to minimize adverse effects on other economic variables.
A serious problem is the reduction in the real value of retirement benefits in the extended retirement period. Increased life spans mean that post-retirement periods are longer, which in turn require sustainable public finances to cater to diverse needs of the elderly population. Retirement benefits are often deficient in terms of adequacy and equity in Sri Lanka. To mitigate these, government can take measures like gradually shifting away from full government financing of Public Servants’ Pension Scheme, increase the age of eligibility to gain benefits, and promote incentives for other forms of savings by working age population. There must be incentives to save more during working years.
If elders’ needs are met via life cycle savings as in many developed countries, Sri Lanka could increase its assets base which would affect favourably on economic growth. These would not only re-allocate resources, but also change people’s perceptions regarding the role of government. For this however, financial sector infrastructure should be strengthened so that a reliable environment is created for people to save enough on their own for retirement, and also the political economy of Sri Lanka should be considered.
Rapid ageing process in Sri Lanka leads to emergence of several policy issues which would definitely become intense in the years to come. Transfer payments and other increased expenditure on elderly could lead to high implicit debt which is shared by both taxpayers and adult children of the aged. A further discussion of ageing in Sri Lanka would follow in my next column.