January 25, 1996
"A Graying World Must Rethink Pension Systems"
San Jose Mercury News
By Timothy Taylor
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IN 1996, the front edge of America's post-World War II baby boom turns 50. A happy half-century to Bill Clinton, Cher, Sylvester Stallone, Dolly Parton, Reggie Jackson, Tricia Nixon Cox, Gregory Hines and Liza Minelli, all of whom, according to my sources at People magazine, were born in 1946.

With the inevitability of a calendar, this group will hit 65 in the year 2011. With ever-lengthening life expectancies, a fair number of them will live into the 2030s and even the 2040s.

This demographic wave will lift the share of Americans above the age of 60 from 16.8 percent in 2000 to 28.2 percent in 2030. The aging of the boomer generation, together with the existing structure of Social Security and Medicare, is going to wreck the federal budget. If you think the present dispute over how to balance the budget by 2002 has generated some bitterness, you haven't seen anything yet.

Almost every country in the world must figure out how to deal with the retirement needs of an increasingly elderly population, as illustrated by the examples in the table.

In developed countries like the United States, Japan, and Germany, the proportion of elderly will grow dramatically in the next three decades, and then level off. Russia and nations of eastern Europe like Poland show a similar pattern.

The proportion of elderly in much of Latin America and east Asia is typically about 8 to 10 percent, about half the level in the developed economies. In these countries, the elderly proportion of the population will roughly double by 2030, and then continue growing after that at a slower rate.

In many of the world's poorest nations, only about 5 percent of the population is elderly now. Some countries like Bangladesh and Egypt will see that percentage double or more by 2030, and then continue rising. Others, like Nigeria and Ethiopia, will see little growth in their elderly population until after 2030, but their elderly population will blossom later in the 21st century.

In 1960, half of the world's population over 60 lived in developing countries. By 1990, it had risen to two-thirds. By 2030, after the changes in Asia, Latin America, and parts of Africa, the proportion will rise to about four-fifths.

These projections are less speculative than you might think. Remember, those will be over 60 in 2030 are already young adults. Even those who will be above 60 years of age in 2050 have already been born!

Old age is a time when people need support through pensions, health insurance, and assisted living arrangements. To afford the needs of the coming surge of the elderly, the nations of the world can either find ways to save for the future starting now, or battle it out in a few decades.

The political tendency, of course, is to postpone a decision. But retirement systems that collect money from workers and distribute it to the elderly - like America's Social Security and Medicare systems - simply won't work well when the elderly are a quarter or a third of the entire population.

The proportion of elderly drawing benefits in such a system is uncomfortably, distressingly high, compared to the number of workers contributing. Countries that don't increase savings now will face miserable choices by 2020 or 2030: either taxes on workers will soar, perhaps doubling from present levels, or benefits for the elderly will plummet.

To avoid this outcome, economists at the World Bank argue that every country should consider how to push its citizens into privately run but mandatory programs that will require a minimum level of saving for old age, while encouraging higher levels of savings. The government will oversee such programs, and assure that those with low incomes have money put aside on their behalf.

Developed economies like the United States, Japan and Germany have a combination of private pensions and health insurance, and government programs like Social Security and Medicare. In these countries, the goal must be to bulk up the existing private systems, and to announce loudly that a couple of decades into the future, government programs for the elderly will cover only a bare minimum.

In eastern Europe, private retirement systems barely exist. Even worse, governments have promised retirement benefits that are not far from western European levels, even through countries like Poland and Russia are far too poor to support such generous benefits. These countries have the difficult task of building private sector programs while reneging, either openly or quietly, on the government retirement benefits that have been promised.

Middle-income and poor countries have somewhat smaller populations of elderly now and for the next few decades. Many of them are just now putting official retirement systems, both private or public, into place. For these countries, the main issues are not to sabotage their budgets by overpromising government retirement benefits, and to set a clear expectation that people will need to rely heavily on their own saving for old age.

The global population is graying. Around the world, it's time to rethink what the government can reasonably provide for the elderly, and the extent to which we require people to save in advance for their own old age.

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