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 Date:1/18/2010

 

World News
Our Geriatric World
Dan Harvey talks with Richard Jackson at the Center for Strategic and International Studies on global aging’s social, economic, and geopolitical challenges.

As if we don’t have enough global problems to worry about, social scientists just handed us one more. They call it global aging, and it involves substantial shifts in age demographics.

Compared to imminent global warming and end-of-oil, age may seem insubstantial. However, the Center for Strategic and International Studies (CSIS) warns that we need immediately address the issue. Global aging left unattended, the organization cautions, will foster enormous economic, social and geopolitical problems that will leave neither developed or developing nations unscorched. Corrective action is needed now, as the window of opportunity is rapidly closing, CSIS says.

Global aging, as explained by CSIS, refers to the significant age shift in demographic structure. Simply stated, the world’s elderly population is increasing while its youthful population is decreasing.

We’re not talking about a theoretical asteroid that astronomers predict might collide with the earth centuries from now. Global aging’s impact is already being felt. It has already positioned the world within a demographic revolution unlike anything previously witnessed in humanity’s history, and it will become more pervasive in the next several decades, observers aver.

Two sweeping factors contribute to this shift, indicates Richard Jackson, director of CSIS’s Global Aging Initiative (GAI), a research program that explores long-term international and economic impact. These include falling fertility rates (i.e., fewer births per woman) and rising longevity (i.e., people are simply living longer than they used to). These combined factors created a global age profile that sees a decreasing younger population concurrent with an expanding older population. “It first began manifesting in rich countries in the developed world and has extended into areas of the developing world,” says Jackson about this viral problem.

As CSIS indicates, for most of human history, the elderly (people aged 65 and over) never comprised more than 3 percent of the total population. The percentage has risen: In today’s developed world, the elderly represent 15 percent. By 2030, they could represent as much as 25 percent (by that year, the world’s median age is projected to be 45).

But don’t these represent positive factors? (After all, since the late ‘60s and early ‘70s social commentators advocated ZPG [zero population growth] and, in more recent years, healthcare professionals championed life-extension strategies.) Not necessarily. The overall picture proved to be more complex. Further, implications are problematic.

The most substantial implication, Jackson says, involves the rising financial burden related to the elderly. “Graying means paying. Developed countries that have initiated social insurance systems will certainly experience a rising fiscal burden related not just to healthcare but to pensions and social services,” he points out. “The greater portion of this burden falls on the young. Benefits toward the elderly are generally paid through current taxes, rather than though funded savings programs.”

There are other problems. Decreased fertility leads to decreased economic growth. “Over time, falling fertility rates translates into slower growth in the working-age population and, in turn, diminished economic growth,” Jackson specifies. “Within the next 10 years, the contracting of work forces that global aging fosters will engender slowed-down GDP growth.”

That’s on the youth side. On the graying side, the rising average workforce age could contribute to the decreased productivity. “Research reveals that productivity peaks at mid-life and declines at advanced age, so an aging workforce could drag down economic growth,” says Jackson.

And that leads into the next area that, as Jackson concedes, is speculative: An aging population could possibly affect the mood of a society, as far as risk-taking. Risk-related behavior, applied to business, fosters economic growth. Where would we be without the innovators, experimenters and business gamblers? “A less risk-adverse society would be less willing to assume the uncertain but necessary investments that foster [economic growth and technological innovation],” says Jackson.

He adds that two more elements can come into play. “As the average age of the workforce increases, so does the average age of the electorate, and this could have serious impact on political and societal change, particularly as it involves areas of entitlement and healthcare reform,” he observes.

Then there is the geopolitical dimension. “Rapidly aging countries may be less able to project power and maintain security, because service-age populations will grow much more slowly and even decline,” Jackson anticipates.

So, global aging represents a multifaceted challenge: On one side it encompasses pensions and affordable healthcare; on another, it involves economic growth; and on a third side, it involves a nation’s economic and military stability in a precarious global order.

With such complexities, solutions aren’t immediately apparent. But Jackson points to some models that countries have adopted, specifically related to social insurance, which has a direct impact on economy.

“With the way social insurance is structured in many countries, the growing elderly population inevitably imposes a burden on both the economy and younger workers,” says Jackson. “The silver lining may reside in the restructuring of these systems, shifting the focus more toward savings and attitudes about retirement age rules. Benefits may need to be based on more than just age. Many older people not only remain physically and mentally productive but would also like to retain their status as productive members of society.”

But accommodation may require a major paradigm shift. “The world needs to change as far as how it structures social insurance, public benefits programs and, very importantly, how employment contracts are developed and the way the workplace is structured,” advises Jackson, adding that solutions could involve more flexible working arrangements and phased retirements. “We’re just beginning to see some of this happening, and that’s a positive change.”

In the meantime, in some countries, the burden posed by the aging population will enlarge within labor markets that aren’t particularly flexible. While national governments realize the need to change, no single country has gotten it right yet, observes Jackson. “At the same time, different countries have instituted reforms and initiatives that lead to a solution, and the United States could learn a lot from what’s taking place abroad,” he observes

For instance, Australia doesn’t have a payroll taxed-financed social security system. Rather, it deploys a public pension system that relieves burden on the younger population and the government. “The system involves a means-tested, basic benefit that qualifies average-income individuals. Thus, it doesn’t benefit the affluent and it’s relatively inexpensive,” describes Jackson. “On top of all of that, it has a huge mandatory funded pension system where employers contribute at least 9 percent of pay into a fund owned by workers. Such a funded system is different than the pay-as-you-go system utilized in places like the United States, where the young are burdened.”

Australia has come closest to getting it right, comments Jackson. “In the future, elderly Australian citizens will have a high standard of living without imposing a burden.”

Other countries, he indicates, have understood better than the United States that part of a workable solution to issues related to an aging system involves investment into the young. “This helps make arising generations as productive as possible by doing things like making it easier for families to raise children,” says Jackson. “After all, the ultimate input into a social insurance system resides not in payroll taxes but in the children. They will be the future workers that support the old, to the extent that a system isn’t based on savings. Countries that have done the most in this area include France and Sweden and other Scandinavian countries. I’m not necessarily advocating their approach, but there are advantages to universal state-subsidized day care and government-mandated paid maternity leaves.”

Another example he points to is a system established in countries such as Germany, Italy, Japan and Sweden. “They’ve begun indexing benefit programs according to the demographic. Essentially, it means that retirement age automatically rises according to life expectancy. One result is that benefit levels automatically diminish if the ratio of workers to retirees decline. This helps control long-term costs.”

As he assesses the global situation, Jackson finds it amazing, if not outrageous, that the United States is the only major country that has yet to enact pension reform. But he adds a caveat to this observation: “It’s important to realize that many other countries face a larger age wave. In the United States, we have a large baby-boom generation ready to retire that will shock the labor market. But we still remain youthful. We’ll remain the youngest of the richest countries until at last 2040, because our fertility rate is still relatively high. We also have substantial immigration.”

Immigration will be a crucial element in this fearful new world of global aging. Right now, as Jackson observes, immigration best benefits the United States. “Immigrants tend to be entrepreneurial, so they come here because they know they can find work,” he says. “Conversely, in European countries, they’ll only find a welfare benefit.”

So, looking ahead, Jackson says that demographics aren’t quite as severe in the United States. “Also, we have flexible labor markets, as well as broad and deep capital markets, and we still have a strong entrepreneurial component within our culture. Those are big advantages.”

Still, the global aging wave proceeds, and big advantages might merely be sandcastles positioned in front of the incoming tide.

Jackson indicates the world areas that will experience tsunami-level problems. “In regions such as Asia and Latin America, fertility rates have plunged. At the same time, the countries have aged dramatically. In the developed world, our main problem is finding out how to afford the promises first made back when the workforce was young and growing and the elderly were small in number. So, it’s largely a fiscal problem. But in undeveloped regions, the elderly don’t even have pensions or healthcare. They depend on their family. But families aren’t having as many kids anymore. The question is how to support the elderly with anything close to a decent standard of living.”

A good question – and a scary one.