Why Population Aging Matters: A Global Perspective by National Institute of Aging - HTML preview

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part-time employment opportunities for older

countries, there is an important relationship

workers will become more important. Rising

between the incentives for workforce participation

retirement ages also will spur reconsideration

of older workers and the provisions of social

of early retirement provisions. Studies of

security programs. The study highlights the

retirement rules around the globe suggest that

analytical power of focusing on the design of

increasing workforce participation at older ages

national retirement systems and the importance

will require policy changes in national social

of incentives.

security systems. A major ongoing NIA-funded

Figure 11:

PUBlIc PeNSIoN INceNtIveS to leAve tHe lABoR

FoRce FoR meN IN 11 coUNtRIeS

Percent of men age to not working


















1 A D L


= > < = 3


Source:.Gruber.J,.Wise.DA,.eds .. Social Security and Retirement around the World. .Chicago,.IL:.

University.of.Chicago.Press,.1999 .


. . . . w H y P o P U l A t I o N A G I N G m A t t e R S : A G l o B A l P e R S P e c t I v e



t r e n d

Evolving Social Insurance Systems





systems .

Expenditures in today’s 25 EU countries consumed

one-eighth of gross domestic product in 2003

(Figure.12) . In the future, the economic wel -being

of older populations wil depend on a combination of

income sources—earnings from continuing to work,

social insurance programs, occupational pensions,

and private savings. Public policies affect each of

these sources, and proposed policy reforms have

both costs and benefits. More empirical research,

including cross-national comparative research, is

needed to inform the development of policy.

Many countries already have taken steps toward

the pensionable age, nearly one-third of African

reforming their old-age social insurance programs

countries that offer social insurance benefits to

(see box on page 23, “The Chinese Experience”).

their older populations have a life expectancy less

One common reform has been to raise the age at

than the statutory pensionable age for men and, in

which workers are eligible for ful public pension

most cases, also for women.

benefits. In 1983, the United States changed

the age at which workers are eligible for full

Another strategy for bolstering economic security

retirement benefits to increase incremental y

for older people has been to increase the

beginning in 2003. Japan raised the pension age for

contribution or tax rate on workers. Twenty-four

men from 60 to 65 and for women from 57 to 65

countries (two-thirds of which are in Europe)

in the past 15 years. The highest current statutory

now have payrol tax rates that equal or exceed

pensionable age is 67 for workers in Norway and

20 percent of wages. While payrol taxes raise

Iceland. Increases in pensionable age have focused

needed revenues, they have the potential to

on women, who as recently as the early 1990s

discourage work in the formal sector. Other

were entitled to draw pensions at a younger age

measures to enhance income for older people

than men in most countries. About 60 percent of

include new financial instruments for private

countries now have the same pensionable age for

savings, tax incentives for individual retirement

both men and women. While the trend is to raise

savings, and supplemental occupational pension

t R e N D : e v o l v I N G S o c I A l I N S U R A N c e S y S t e m S


Figure 1:


A PeRceNtAGe oF GRoSS DomeStIc PRoDUct: 00



























as.wel .as.early.retirement.benefits.due.to.reduced.capacity.to.work .

Source:.European.Statistical.System.(EUROSTAT) ..Available.at:.http://epp .eurostat .ec .europa .eu ..

Accessed.January.8,.2007 .

plans. Eight countries already have chosen to make

A trend toward defined contribution plans (in

occupational pension plans mandatory.

which employees contribute a portion of earnings,

sometimes with matching contributions from

Sixteen countries, primarily in Asia and the Pacific,

employers, into investment accounts that they

have a Provident Fund, a compulsory savings

control) rather than defined benefit plans (in

program that is funded ful y with investments

which employers guarantee specified levels of

typical y managed by the government. Most

pension payments in the future) is evident. Among

existing Provident Funds were established in the

private-sector workers covered by an occupational

1950s; very few have been established since 1985.

pension plan in the United States, 40 percent

Instead, countries wishing to achieve a closer link

were in a defined benefit plan in 2000, down from

between contributions and benefits have adopted

84 percent in 1980. In contrast, the number of

some form of individual accounts. Chile, in the

workers in defined contribution plans increased

early 1980s, was the first to introduce individual

nearly fivefold from 1975 to 1998. In the private

accounts as part of a defined contribution plan.

sector, the popularity of defined contribution

More than 20 other countries, mostly in Europe

plans is not driven by population aging but by

and South America, have since fol owed suit. In

increased job mobility, global competition, and

some countries, however, individual accounts are

the growth in the number of smal er firms. An

notional—in other words, no real accumulation

important question concerning this trend is

of wealth exists because workers’ contributions

whether defined contribution plans, which shift

fund existing pension obligations. Depending on

risk and decisionmaking to the employee, will

their design, individual retirement accounts may

provide adequate income security for the duration

be risky for account holders who make uninformed

of retirement.

decisions about diversification.

. . . . w H y P o P U l A t I o N A G I N G m A t t e R S : A G l o B A l P e R S P e c t I v e The.Chinese.Experience:.Rethinking.Social.Security.


Although China is rapidly urbanizing, it

defined contribution individual account. Owing

remains a predominately rural country. The

to the unfunded liabilities of the former system,

majority of Chinese workers are not yet covered

individual accounts have remained largely notional

by any formal pension system. Among those who

as today’s workers pay for today’s pensioners.

have been and are now covered, there has been

a steady rise in the number receiving formal

Social security reforms in China were brought

pensions during the past 25 years. Concurrently,

about primarily because of the restructuring of

there has been a sustained decline in the ratio of

State-owned enterprises and changes associated

covered workers to pensioners in China, a trend

with the movement toward a market economy.

that threatens the wel -being of the Nation’s

However, new pressures have emerged in light of

formal old-age security system.(Figure.13) .

the rapid pace of population aging. Researchers

Fol owing a decade of experimentation, a new

are cal ing for a higher retirement age to counter

framework for old-age security emerged in the

the fal ing ratio of workers to pensioners. The

mid-1990s. The intent is twofold: (1) To replace

Government is also considering converting to a

cradle-to-grave support provided by State-owned

system with a ful y funded component, which

enterprises with an expansion of coverage beyond

raises questions about funding the transition to a

the State sector and (2) to introduce pooled funding,

new system. Another concern with this approach

which deflects risk. The new system includes a

is where to invest funds that wil accumulate in

defined benefit pension providing a 20-percent

individual accounts, given that China’s capital

replacement rate of the average wage and a

markets are relatively immature.

Figure 1:

cHINA’S DeclINING RAtIo oF coveReD woRKeRS




















Source:.China.Ministry.of.Labor.and.Social.Security.and.China.National.Bureau.of.Statistics .. China

Labor Statistics Yearbook. Beijing:.China.Statistics.Press,.various.years;.and.China.National.Bureau.of.

Statistics .. China Statistical Abstract. Beijing:.China.Statistics.Press,.2006 .

t R e N D : e v o l v I N G S o c I A l I N S U R A N c e S y S t e m S


t r e n d

Emerging Economic Chal enges


Population. aging. wil . have. dramatic. effects. on. local,.

regional,.and.global.economies ..Most.significantly,.financial.

expenditures,.labor.supply,.and.total.savings.wil .be.affected ..

In the past 5 years, academics and policymakers

to decline. Some European countries, including

have begun to direct attention to the potential

France, Germany, Greece, Italy, Russia, and the

economic impact of unprecedented demographic

Ukraine, already have seen an absolute decline

change. Currently, however, we do not ful y

in the size of their workforce. And in countries

understand the interaction between policies and

where tax hikes are needed to pay for transfers

economic growth. A good deal wil depend on how

to growing older populations, the tax burden may

wel markets function.

discourage future workforce participation. The

Population aging wil strain some national budgets.

impact on a country’s gross domestic product will

Countries with extensive social programs targeted

depend on increases in labor productivity and that

to the older population—principal y health care

country’s ability to substitute capital for labor.

and income support programs—find the costs of

Less developed countries can shift their economies

these programs escalating as the number of eligible

from labor-intensive to capital-intensive sectors

recipients grows and the duration of eligibility

as population aging advances. Options for more

lengthens. Further, few countries have ful y funded

developed countries may be more constrained.

programs; most countries fund these programs

Because countries age at different paces, it is

on a pay-as-you-go basis or finance them using

possible for the elements of production—labor

general revenue streams. Governments may

and capital—to flow across national boundaries

be limited in how much they can reshape social

and mitigate the impact of population aging.

insurance programs by raising the age of eligibility,

Studies predict that, in the near term, surplus

increasing contribution rates, and reducing

capital will flow from Europe and North America

benefits. Consequently, shortfal s may need to be

to emerging markets in Asia and Latin America,

financed using general revenues. Projections of

where the population is younger and supplies of

government expenditures in the United States

capital relatively low. In another 20 years, when

and other OECD countries show major increases

the baby boom generation in the West has mostly

in the share of gross domestic product devoted to

retired, capital likely will flow in the opposite

social entitlements for older populations. In some

direction. However, these studies rest on the

cases, this share more than doubles as a result of

uncertain assumption that capital will flow easily

population aging.

across national boundaries.

As countries reach a relatively high level of

Traditionally, labor is viewed as less mobile than

population aging, the proportion of workers tends

capital, although migration could offset partially

. . . . w H y P o P U l A t I o N A G I N G m A t t e R S : A G l o B A l P e R S P e c t I v e the effects of population aging. Currently,

Retirement resources typically include public and

22 percent of physicians and 12 percent of nurses

private pensions, financial assets, and property.

in the United States are foreign born, representing

The relative importance of these resources varies

primarily English-speaking African countries,

across countries. For example, a groundbreaking

the Caribbean, and Southeast Asia. The foreign-

study revealed that only 3 percent of Spanish

born workforce also is growing in most OECD

households with at least one member age 50

countries. Over the next 10 years, the European

or older own stocks (shares), compared to 38

experience wil be particularly instructive in

percent of Swedish households.(Figure.14) .. The

terms of the interplay of aging and migration.

largest component of household wealth in many

countries is housing value. This value could fall

The life-cycle theory of consumption and savings

if large numbers of older homeowners try to sell

is that households accumulate wealth during

houses to smaller numbers of younger buyers.

working years to maintain consumption in

retirement. The total of a country’s individual

Financial markets need to be flexible and

life-cycle savings profiles determines whether

innovative to meet the needs of aging

households in that country are net savers or

populations. Undoubtedly, population aging

nonsavers at any point in time. A country with

will create new economic pressures. At the

a high proportion of workers will tend to be

same time, however, it will create exciting

dominated by savers, placing downward pressure

opportunities for expanding our collection of

on the rate of return to capital in that economy.

financial tools to accommodate a changing world

Countries with older populations will be tapping

(see box on page 26, “Expanding Opportunities

their savings and driving rates of return higher

for Economic Growth”).

because of the scarcity of capital.

Figure 1:


(UNIt tRUStS) AND StocKS (SHAReS): 00

+% HlZYZc



















Note:.Data.refer.to.households.with.at.least.one.member.age.50.or.above ..

Source:.Börsch-Supan.A,.Brugiavini.A,.Jurges.H,.Mackenbach.J,.Siegrist.J,.Weber.G,.eds .. Health, Ageing and Retirement in

Europe. First Results from the Survey of Health, Ageing and Retirement in Europe. .Mannheim:.Mannheim.Research.Institute.for.the.

Economics.of.Aging,.2005 .

t R e N D : e m e R G I N G e c o N o m I c c H A l l e N G e S


Because of fertility declines, nearly all

have contributed between 1 and 2 percentage

countries have experienced, or wil soon

points to income growth between 1970 and

experience, a large increase in the share of their

2000 for most regions of the world. However,

population concentrated in the working ages.

demographic dividends are not automatic; they

This increase should raise per capita income

depend on the existence of strong institutions

and government tax revenues, leading to the

and policies that transform population aging into

first demographic dividend. An analysis of

economic growth. Weaknesses in the governance

228 regions suggests that the first dividend lasted

and management of pension programs—for

30 to 35 years in most developed and transitional

instance, significant tax evasion and unsustainable

economies. It was considerably longer in much of

increases in public pension benefits—can offset

Asia and Latin America, and it likely wil be longer

the benefits of demographic dividends, as can

stil in sub-Saharan Africa. The economic gain

persistent high levels of unemployment and

resulting from large numbers of young workers

underemployment. As a result, governments and

critical y depends on the policy environment. In

employers may be tempted to make promises to the

several countries in East and Southeast Asia, for

working-age population that prove difficult to keep.

example, large birth cohorts reached working

ages with valuable skil s and high educational

A useful tool for understanding dividends and their

attainment, and export-oriented economies were

impact is to estimate production and consumption

flexible enough to put their skil s to productive

over the life cycle.(Figure.15) . Researchers can

uses. In other countries, however, weak educational

use these estimates to account for transfers across

systems and labor market rigidities have resulted

generations, examine savings patterns, estimate

in a youth employment crisis rather than the

spending on public programs, and assess the

hoped-for demographic dividend.

burden of family support for older people.

In the decades fol owing the youth bulge in

Figure 1:

the labor force, as the large cohorts move into

ecoNomIc lIFe cycle oF

their middle and later working years, a second

A tyPIcAl tHAI woRKeR

demographic dividend is possible. This is because

the peak productive ages in a modern economy

Annual per capita labor income and consumption (in baht)

are also peak ages for saving, and in a modern



economy, savings can be mobilized for productive

investment. With an unusual y large proportion of


the population consisting of workers in their 40s

and 50s, countries should be able to increase their


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