It is said that ‘demographics are destiny’ and this is certainly a theme that figures into our economic assessment of Bermuda and one that we have discussed many times in the past. By now no one on this Island should be surprised that Bermuda is facing an unprecedented wave of ageing, or a “grey tsunami”, as the baby boom generation — defined as those people born between 1946 and 1964 — move to the end of their productive careers. The magnitude of this shift will create numerous issues for our local economy, some of which include pressure on entitlement programmes and weak economic growth.

Recently the Department of Statistics released a report with detailed annual population growth estimates called ‘Bermuda’s Population Projections: 2010-2020’. The survey is available online and the web address is included in the online version of this story at www.royalgazette.com.

As we have been saying for some time, the population of Bermuda has been decimated by the loss of thousands of expatriates (and likely negative emigration among some Bermudians).

The report goes on to suggest that the average annual population growth rate in Bermuda will be negative from 2010 to 2020.

Some key highlights from the report:

• Bermuda’s mid-year population was 64,129 in 2010 and is projected to decrease to 61,566 by 2020, a decline of four percent (or an annual rate of -0.4 percent).

• In 2010, the average annual population growth rate was -1.4 percent and by 2020 it is expected to reach -0.04 percent

• The median age will rise from 41 years in 2010 to 46 years by 2020. In fact, half of the Island’s population will be over 46 years old by 2020.

• The proportion of seniors (65 years and older) will climb from 14 percent in 2010 to 20 percent by 2020.

• Another indicator of ageing is the old-age dependency ratio which estimates society’s capacity to maintain the quality of life for seniors. The old-age dependency ratio will soar from 19 in 2010 to 30 by 2020. This means that in 2020 there will be 30 seniors (65 years and older) for every 100 people of working age (15-64 years).

• It is evident from the leading causes of death statistics that Bermuda progressed to the fourth stage of epidemiological transition, whereby personal behaviour and lifestyles influence the patterns and levels of disease and injury. As a result, the population has become less healthy (Statistics, 2010:23). Between 2006 and 2011, the overall health of Bermuda’s population declined by three percent (Bermuda Health Council, 2011:20).

• Bermuda’s natural population increase declined from 0.46 percent in 2010 to 0.12 percent in 2020.

• As a universal convention for developed countries, women need to have about 2.1 children on average to replace herself and her partner and to account for infant mortality. Between 2010 and 2020 the total fertility rate for Bermuda’s women is expected to decline from 1.75 to 1.58 children per woman.

The report does not anticipate immigration to exceed emigration and actually projects NEGATIVE net immigration figures out to 2020.

Future Implications

To quote the report: “The past 60 years witnessed a shift in the demographic profile of Bermuda’s population. In the future, two major phenomena will dominate. Firstly, Bermuda’s population will begin an unprecedented decline; and secondly, there will be a shift in the island’s age structure as the population continues to age. Bermuda’s evolving demographic profile will have fewer children, an older workforce and more elderly people.”

There are many future implications for these trends and for a nation as small as Bermuda their effects will be very evident.

Bermuda suffers from a ‘denominator problem’ — its obligations continue to rise while this amount is getting divided among less and less people. In general, a reduction in population brings with it less demand for goods and services as well as pockets of excess supply. Many businesses demand a certain population size to remain viable.

Lower Density

One potentially positive and obvious indication of this outright decline in the population is the reduction of the density seen on the Island, and the consequent decline in resource utilisation (eg less traffic, pollution, etc), no doubt applauded by environmentalists. Population density is a measure of the average population per unit of area and is a basic indicator of geographic distribution. In 2010, Bermuda’s total civilian non-institutional population was 64,237. The Island’s total land area was 20.74 square miles. Therefore, the total population density for Bermuda was 3,097 persons per square mile. This was an increase over the 2,992 persons per square mile measured ten years earlier. If we assume 2014 population estimates are correct; however, the current population of only 61,777 actually suggests the current population density is only 2,979 persons per square mile or less than the density seen in 2000! It would be hard to argue that Bermuda is currently congested or overcrowded at this point unless you felt it was so back in 2000.

Zero Economic Growth

From a purely economic perspective, the expected decline in Bermuda’s population over the next decade could have some serious implications. Numerous factors can determine a country’s economic success in the short run: interest rate policy, government spending, inflation and consumer sentiment, for example. In contrast, getting a longer term idea of a country’s potential growth rate essentially relies on two factors: working population and productivity. A growing population is the source of an increasing workforce and the more productive these workers are, the wealthier they become. In the long run, a country becomes rich or stagnates depending on its mix of people, innovation and investment. If a country gets this critical mix right, short-term fluctuations in economic growth seldom matter.

This brings us to a very simple economic equation:

?Population + ?Productivity = ?GDP

We have estimated this in the past and originally came to the conclusion that Bermuda’s long-term economic real growth rate was essentially zero percent. Our recent productivity growth estimates for Bermuda over the last five and ten-year periods come out to -0.8 percent per annum, while since 1996 (the oldest data I have) productivity growth in Bermuda has exhibited an annualised growth rate of 1.3 percent based on our estimates. Updating our analysis on the projected population changes, suggests the working population (defined as the age cohort between 15 and 65) is estimated to fall one percent per annum. Taking these two factors into account (assuming the long-run productivity growth rate) our estimated potential real GDP growth for Bermuda remains essentially zero (1.3% + -1.0% = 0.3%). At this stage, only net immigration can solve this dilemma (see below).

Sovereign Solvency

The report also mentions: “Van Dalen and Henkens state population decline can be a negative occurrence because (1) the tax base decreases, but if government expenditures are fixed or slow to adjust, deficits accumulate, and tax rates will eventually have to rise; and (2) if certain population levels are needed to finance public goods (eg schools, hospitals, public transport) that are essential for a community to function, and the population drops below these thresholds, the process of depopulation may speed up.” (Van Dalen and Henkens, 2011:445).

According to Van Dalen and Henkens, “in order to avoid an increase in tax rates, it is important for governments to act quickly once a population begins to decline so that public expenditures are reduced in line with the tax base (2011:445).” Thus the government needs to continue to be resized for this much smaller population base and economy. I fear any sizeable tax increase would deter investment and/or employment on the Island thus the economy needs to grow in conjunction with increased government efficiencies. Assuming our growth rate mentioned above and assuming two percent inflation, the government will need to run a primary budget surplus of roughly one percent or grow its economy in excess of its estimated potential by three percent just to stabilise the debt situation. The former would essentially require an increase in government taxes/revenues of about 18 percent or budget cuts of some $165 million (nearly equivalent to closing the entire Ministry of Public Works and the Ministry of Health & Seniors) based on the 2014/15 budget estimates. Without massive foreign investment or a wave of new employment the latter is virtually impossible, and if it were not accomplished with working bodies residing and staying on the Island it would be simply transitory and not sustainable.

Unsustainable Healthcare

The grey tsunami is now washing on to our shores as older residents are now an expanding portion of the population. According to the United Nations, if fewer than four percent of a country’s population is 60 and over (or 65 and over), it is ‘young’; four percent to seven percent of elderly persons represent a ‘mature’ population and more than seven percent is an ‘aged’ population (McPherson 1983:83). As early as 1950, Bermuda progressed into the mature stage with six percent of its population 65 years or older. By 1980, Bermuda’s age structure was considered to be ‘aged with nine percent of its population 65 years and older’.

In 2010, Bermuda’s elderly population increased to 14 percent and by 2020 it is anticipated to represent 20 percent of the total population. This crushing demographic shift is placing an enormous burden on Bermuda’s future youth and work force. The healthy working population is being asked to shoulder an ever-increasing level of the costs associated with the Island’s healthcare. The amount each household spent on healthcare was roughly $10,300 on average in 2013, a 47 percent increase from 2004. This was also a greater increase than the 30 percent rate of inflation during this period.

In 2013, households headed by seniors spent $10,919 per year on healthcare, up from $6,000 in 2004. Seventy-six percent (76 percent) of that expenditure was comprised of health insurance (Department of Statistics, 2005 and 2014). In fact, health expenditures as a percentage of GDP are now the third highest in the OECD as of 2011, coming in at 11.8 percent of GDP.

The Death of Pensions

The decline in the number of births and workers has far-reaching consequences for a pay-as-you-go type pensions such as the Bermuda Government’s Contributory Pension Fund (CPF). This is because the contributions that are paid into the fund in a given year by workers are generally paid out as benefits in the same year. Quoting the findings from the Spending and Government Efficiency (SAGE) Commission, “the CPF faces the challenge of a lower ratio of workers to pensioners. This scheme is 43 percent funded; the underfunded portions amount to $2,066 million. Left in its current structure, workers would have to pay ever increasing amounts in contributions for people who are retired. This is an untenable option.” Without a rising denominator (contributors to the CPF) the numerator (retirees and pensioners) will eventually swamp the fund’s ability to pay. In fact the SAGE interim report states: “Based on the most recent best estimate projections, the Public Services Superannuation Fund (Government employees), if continued in its current form, (that is, with a significant unfunded amount of $983,000,000 which continues to increase annually), will last until 2046 and then be exhausted. This means that any person aged 27 who retires at the plan’s retirement age of 60 and who worked in Government and whose contributions have vested, will find that there will be no assets in the fund to pay a pension.”

Plain and simple, the declining population has placed entitlements at risk.

Solutions

There are only a few ways to halt a shrinking population and some of these are outlined in the report:

• Fewer deaths

• More births

• Less emigration

• More immigration

• A combination of the above

Fewer deaths and more births is more of a long-term solution and will essentially have little to no impact on the next ten to 20 years. Fewer deaths, of course, would be nice and may be possible with advanced medical technologies but it won’t really arrest the shift in the Island’s working-age population, although raising the retirement age would increase the working-age population. Life longevity may also brings with it further complications, like increased draws over time from pensions and a higher portion of the population that creates extensive utilisation of healthcare.

This really leaves us with less emigration and more immigration. This will only be accomplished through improved employment options locally and a strengthening economy which provides increased job opportunities.

One aspect that would attract investment and hopefully make immigration to Bermuda by future entrepreneurs and businesses more palatable would be an open and transparent immigration policy that has a path to citizenship. Otherwise Bermuda could risk remaining a transitory nation subject to the whims of the global economy.

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd. Anchor Investment Management Ltd is licensed to conduct investment business by the Bermuda Monetary Authority. He can be reached via e-mail at nkowalski@anchor.bm