Why Population Aging Matters: A Global Perspective
Introduction: The Cost of Waiting
Global aging is a success story. People today are living longer and generally healthier lives. This represents the triumph of public health, medical advancement, and economic development over disease and injury, which have constrained human life expectancy for thousands of years.
But sustained growth of the world’s older population also presents challenges. Population aging now affects economic growth, formal and informal social support systems, and the ability of states and communities to provide resources for older citizens. Nations must quickly recognize the scope of the new demographic reality and adjust current policies accordingly. Experience has shown that such adjustments may be painful—changes in retirement ages and medical benefits, for example, are not widely popular. But experience also shows that it is easier to address problems sooner rather than later, when the cost of waiting may become insurmountable.
We can think about preparing for older age on both an individual and societal level. On an individual level, people need to focus on preventive health and financial preparedness. We know that many individuals approach older age with little or no savings. A simple example illustrates the financial cost of waiting to save and the value of a more farsighted perspective. A 40-year-old worker who begins to save $10,000 per year will accumulate $700,000 by the time he is 70 years old, assuming an interest rate of 5 percent per year. If he had begun saving when he was 30 years old, he would only have needed to save $5,500 per year to accumulate the same amount by age 70.
Calculating the cost of waiting at the national level is much more complex, but similar reasoning applies. Just as for individuals, small and gradual changes distributed over a longer time horizon are more easily absorbed by a country than sudden and more substantial actions required to meet a particular savings target over a shorter time horizon. Countries and international organizations are now developing detailed models in recognition of looming costs and the need for pension reforms to ensure sustainable old-age support. In 2006, the European Commission and the Economic Policy Committee submitted a report to European Finance Ministers with new projections of economic and budgetary costs for European Union (EU) member states. While Europe currently has four people of working age for every older citizen, it will have only two workers per older citizen by 2050 as a result of the baby boom generation retiring and life expectancy increasing. Given current policies, the pension, health, and long-term care costs associated with an aging population will lead to significant increases in public spending in most member states over the next half century. Gross domestic product growth rates are projected to fall across the EU, and in the absence of policy changes, the potential EU economic growth rate will be cut in half by 2030.
While some countries have initiated changes in retirement age that promise to ease the burden of public spending, the EU analysis emphasizes that such changes alone are inadequate. During the next few years, countries must exploit a fast-closing window of opportunity to intensify reform before demographic effects come to bear. The EU report notes that, similar to the impact of an individual worker delaying savings, delays at the national level will increase the costs of adjustment and shift an enormous economic burden to the next generation of workers and taxpayers.
Publication Date: September 2011
Page Last Updated: September 19, 2011