The number of old people (over 60) is expected to grow from 600 million in 2000 to two billion in 2050. Eighty percent of this population will be living in developing countries. The number of “older old” people (over 80) will be unprecedented in the developed world.1
While these stats are not new, the issue of global aging has been brought to the forefront because of the financial crisis. Cities across the U.S. are realizing that for some, within five years, retiree health care will cost more than employee healthcare and will consume nearly 1/3 of the cities’ budgets.2 Some US states want to declare bankruptcy to alleviate debt, including pensions. Europe’s rapidly aging populations may be the seed of a new financial crisis.
There are a number of factors contributing to the global aging crisis. The first is falling fertility rates. Most developed countries are not reproducing at the 2.1 replacement rate. For many, the rate is quite a bit lower: 1.3 in Japan and Germany and 1.4 in Italy and Spain. Rising life expectancy is a second factor. Life expectancy worldwide has increased 21 years since the 1950s. In developed countries, the percent of elderly people is expected to rise from an average 22 percent today to an average 31 percent in 2040.3
Center for Strategic and International Studies (CSIS) report4
A Center for Strategic and International Studies (CSIS) report, The Global Aging Preparedness (GAP) Index, provides a comprehensive assessment of 20 countries’ preparedness to deal with global aging issues within their countries. The GAP index has two sub-indices: the “fiscal sustainability index” and the “income adequacy index.” The fiscal sustainability index measures: public burden, fiscal room, and benefit dependence. The income adequacy index measures: total income, income vulnerability, and robustness of family support.
Most countries’ retirement policies focus on fiscal sustainability or income adequacy, but not both.India, Mexico, and Chile are the most fiscally prepared countries, while Italy, France, Brazil, the Netherlands, and Spain are the least fiscally prepared countries. The Netherlands, Brazil, and the United States are the most prepared vis-a-vie income adequacy, while China, Korea, and Mexico are the least prepared countries.
There is a wide variation in public old-age dependency burden across the 20 GAP countries. Emerging markets have comparatively low public burden because of young populations and non-universal, public benefits systems. Brazil is an exception because of its generous public pension system. The percent of GDP dedicated to old age benefits is expected to grow, by 2040, to 15-20 percent in Canada, Australia, the United States, Switzerland, the UK, Japan, and Sweden and 22-26 percent in Germany, the Netherlands, France, Italy, and Spain.
Pensions and other cash benefits account for most of the total projected old-age spending burden in 2040. While health benefits account for a large share of the growth in total old-age benefit spending.
Fiscal room examines the ability to accommodate growth in public old-age depen¬dency burden by raising taxes, cut¬ting other spending, or borrowing funds. In Europe, many countries already have a high tax burden, so increasing taxes would actually slow the economy and worsen unemployment. These countries will have to reduce government spending. Countries with large public sectors have more budget room than tax room. While countries with small public sectors, like Japan and the United States, have less budget room than tax room. Reducing government spending might lead to the cutting of vital public services. For most countries borrowing funds is not an option.
Across the 20 GAP countries, the degree of elderly dependence varies widely. A high level of public dependence means a low reliance on private income, such as private pensions or income from jobs. Public benefits (not including health benefits) account for 50 percent of total elderly cash income in Russia and Germany; 55-60 percent in Italy, Spain, and France; 60 percent in Brazil; and, 74 percent in Poland. India, Mexico, or Korea have low dependence on public benefits and could remove nearly all public benefits without increasing elderly poverty.
In most developed countries, the elderly have a relatively high income and living standard, but it is generally lower in developing countries. Emerging markets spend less on pensions and health care. Many elderly in these countries work in agriculture and low-wage, service sector jobs. The outlook for developing countries in general is worrisome though because they are not project to gain much in total income.
For some countries, low coverage is the problem. Only 34 percent of the Chinese workforce earns a public or private pension. For others, the problem is an unsustainable public pension system, such as Poland (which is moving less generous two-tiered system with personal accounts). Mexico has low coverage (39 percent of the workforce) and low replacement rates. In some countries, such as China and Korea, assistance from children makes up for the spotty benefits coverage.
Reining in old-age dependency costs is easier in countries with a relatively high elderly standard of living, even if there is a high degree of dependence on public benefits. Cutting benefits is more difficult for countries with relatively low living standard of living for the elderly. Only two percent of the elderly in Netherlands live in poverty while it is 36 percent in Korea. Most developing countries (except Brazil and Poland) have high elderly poverty rates. Old-age poverty floors were implemented in Brazil and Chile and have been effective in keeping the elderly from slipping into poverty.
Multigenerational living is common in the developing world. In Brazil, Chile, Mexico, China, and India, more than 50 percent live in a multigenerational setting. The percent is under 20, or even 10 percent, in most developed countries. For some countries, family support is problematic. China has the 4-2-1 problem, in one child is expected to take care of two parents and four grandparents.
The CSIS report offers seven strategies that could be used to increase income preparedness and improve fiscal sustainability:
- Reducing public pension benefits: This is the single most pressing challenge for the GAP countries. Many countries have made promises to do so, but have not yet implemented them. There is considerable political resistance from the aging electorates.
- Reducing health-care cost growth: This must be a high priority for developed countries, especially Netherlands, France, and the United States.
- Extending work lives and Increasing funded pension savings: Both strategies not only increase income for the elderly, but also do not burden the young. Europeans would benefit from these strategies.
- Strengthening poverty floors: This should be a high priority in some emerging markets. All countries though will need to pass on savings to improve poverty protections.
- Increasing fertility rates and Increasing immigration: Both work in a similar manner, except increasing immigration works without the lag.
The problems associated with global aging do not only affect governments, businesses and society at large are impacted as well. One problem not addressed in the GAP index is the loss of knowledge and skills of the current older workforce.
Manufacturing and blue collar jobs will face major problems filling positions left by todays, older workers. Canada’s mining industry is predominantly carried out by workers over the age of 50.5 BMW’s German plants are dealing with an older workforce (in factories throughout the country). To accommodate older workers, BMW management changed the plants and received worker input to make the plant friendlier to the aging workforce. Seventy changes were made in the plants to reduce strain and increase productivity.6
While collar jobs are at risk as well. In New Zealand, half of the academic workforce is over 60. Lower academic salaries and relatively few research facilities (and funding) account for this trend.7
Baby boomers and the current generation of older workers are working longer for personal fulfillment reasons and to increase their savings. This will certainly alleviate some of the fiscal and preparedness issues address in the GAP report. However the issue of job and skill loss will also need attention.
Countries, such as the U.S, will need to decide if they still want to support the manufacturing industry. If yes, they will need to quickly retool a new generation of workers. If not, they will need to focus on new industries and fields attractive to today’s workforce, while keeping in account how to handle the current aging workforce.
1 “Strengthening Older People’s Rights: Towards a UN Convention.” Global Action on Aging.
2 Greenhouse, Steven. “States Aim Ax at Health Cost of Retirement.” The New York Times. February 13, 2011.
3 Jackson, Richard and Neil Howe and Keisuke Nakshima.“The Global Aging Preparedness Index.” Center for Strategic and International Studies. October 2010.
5 “First Nations may be answer to aging mining workforce.” CTV News. January 30, 2011.
6 Roth, Richard. “How BMW Deals With an Aging Workforce.”CBS News. September 5, 2010.
7 Woodfield, Charlotte. “Universities face staff shortages.” The National Business Review. February 1, 2011.