Low Fertility and Economic Sustainability

Study shows: Investments in education offset the negative impact of low fertility

To the point

• Education investments can ease pressure on pension system: A study by the Max Planck Institute for Demographic Research shows that investing in education can offset the effects of low birth rates on the pension system.
• Better education, higher productivity: Education increases workforce productivity and helps compensate for a smaller labor force. This reduces the burden on pensions.
• Investment pays off: Higher investment in education not only extends the number of working years, but also boosts pension income and life expectancy.

A recently published study by Mikko Myrskylä, Director of the Max Planck Institute for Demographic Research (MPIDR) in Rostock, Germany shows how  money spent on education compensates for the influence of low birth rates on long-term economic sustainability. Myrskylä and his co-authors conducted a simulation using Finish data to study how the economy shrinks when fertility is very low, and how investments in education can compensate for the smaller birth cohort size. They find that such investments increase the productivity of the workforce which compensates for its smaller size.

Myrskylä and his co-authors show in their paper that an ambitious but straightforward education investment strategy can effectively offset the negative impact of a smaller labor force on macroeconomic indicators such as pension burden. By keeping the total investment constant despite a declining number of children per birth year, this approach increases per-capita investment in education.

Investment in education not only reduces pension burden, but also extends working years, boosts pension income, enhances retirement years, and promotes longevity. “Investments in education during periods of declining fertility have the potential to improve the health and well-being of individuals while mitigating the economic challenges of a shrinking work force in low-fertility countries”, says Mikko Myrskylä.

The primary challenge associated with low fertility is its long-term effect on the population age structure. Low and declining fertility accelerate population ageing and contribute to a decreasing ratio of working-age individuals to non-working age individuals. This is a significant challenge that requires policy action.

In their study, published in the high-impact journal Demography, the researchers simulated a moderate increase in education investment per child. They maintained the total investment in education in a low-fertility scenario at the same level as it was in a higher-fertility scenario. “For example, if the number of children in the higher-fertility scenario is 100, and we invest 100 euros throughout their life into each child’s education, the total investment is 10,000 euros. If fertility drops to 80 children, the same 10,000 euros is invested – resulting in 125 euros per child over their lifetime”, explains Myrskylä. In the simulation with real numbers from Finland, the additional per-child investment would result in roughly one additional year of education per child.

Higher educated work force is more productive

“A vast number of studies document across many dimensions of life that higher education is beneficial for individuals well-being”, says Mikko Myrskylä. Higher education is associated not only to increased productivity and longer working careers, but also to better health outcomes, longer life, and higher subjective well-being and happiness.

If fewer individuals are in the work force but they are more productive and retire later due to their higher education, what happens to macroeconomic sustainability, such as pension burden? The researchers’ results indicate that the pension expenditure relative to wage sum remain roughly the same as in a simulation with higher birth rates.

This is encouraging news, especially as it has become increasingly apparent for several years that it is challenging to increase birth rates with family policies. “Concerns about global uncertainties, including climate change and economic uncertainty, have intensified. These factors contribute to people questioning their desire to have children. Additionally, the decline in stable partnerships plays a role in the decrease of fertility”, says Mikko Myrskylä. Nevertheless, family policies are crucial for the well-being of parents and children, and their absence may negatively impact birth rates.

Findings are generally transferable to other European countries

Finland presents an exceptionally interesting case due to its rapid population aging, very low fertility, and stagnant or even declining trends in education over the last decade or two. This suggests that, particularly in Finland, additional investments in education are likely to deliver significant benefits. “We are confident that our findings are generally transferable to other European countries unless one encounters a situation in which the overall level of education is already so high that productivity cannot be increased by investments into education. I am uncertain if such places exist; therefore I believe our findings can be effectively applied well across borders”, concludes Mikko Myrskylä.