a special report on ageing populations june 27th 2009 · a special report on ageing populations...

A special report on ageing populations June 27th 2009

AGE.indd 1AGE.indd 1 16/6/09 15:51:2216/6/09 15:51:22

The Economist June 27th 2009 A special report on ageing populations 1

Age is creeping up on the world, and any moment now it will begin toshow. The consequences will be scary, says Barbara Beck

next page). To put it another way, in the richworld one person in three will be a pensioner; nearly one in ten will be over 80.

This is a slowmoving but relentless development that in time will have vast economic, social and political consequences.As yet, only a few countries with alreadyold populations are starting to notice thee�ects. But labour forces are now beginning to shrink and numbers of pensionersare starting to rise. By about 2020 ageingwill be plain for all to see. And there is noescape: barring huge natural or manmadedisasters, demographic changes are muchmore certain than other longterm predictions (for example, of climate change). Every one of the 2 billion people who will beover 60 in 2050 has already been born.

The reasons whyWhat is making the world so much older?There are two longterm causes and a temporary blip that will continue to show upin the �gures for the next few decades. The�rst of the big causes is that people everywhere are living far longer than they usedto. This trend started with the industrialrevolution and has been slowly gatheringpace. In 1900 average life expectancy atbirth for the world as a whole was onlyaround 30 years, and in rich countries under 50. The �gures now are 67 and 78 respectively, and still rising. For all the talkabout the coming oldage crisis, that issurely something to be grateful for�espe

A slowburning fuse

STOP thinking for a moment about deeprecession, trilliondollar rescue pack

ages and mounting job losses. Instead,contemplate the prospect of slow growthand low productivity, rising public spending and labour shortages. These are theproblems of ageing populations, and ifthey sound comparatively mild, thinkagain. When the IMF earlier this monthcalculated the impact of the recent �nancial crisis, it found that the costs will indeed be huge: the �scal balances of theG20 advanced countries are likely to deteriorate by eight percentage points of GDP

in 200809. But the IMF also noted that inthe longer term these costs will be dwarfedby agerelated spending. Looking ahead tothe period between now and 2050, it predicted that �for advanced countries, the �scal burden of the crisis [will be] about 10%of the ageingrelated costs� (see chart 1 onthe next page). The other 90% will be extraspending on pensions, health and longterm care.

The rich world’s population is ageingfast, and the poor world is only a few decades behind. According to the UN’s latestbiennial population forecast, the medianage for all countries is due to rise from 29now to 38 by 2050. At present just under11% of the world’s 6.9 billion people areover 60. Taking the UN’s central forecast,by 2050 that share will have risen to 22%(of a population of over 9 billion), and inthe developed countries to 33% (see chart 2,

An audio interview with the author is at

Economist.com/audiovideo

A list of sources is at

Economist.com/specialreports

Su�er the little childrenMost of the rich world is short of babies.Page 3

A world of MethuselahsThe bene�ts, and the costs, of living longer.Page 4

The silver dollarThere is money to be made in the grey market, but it takes thought. Page 6

Scrimp and savePensions will have to become far less generous. Page 7

Work till you dropRetirement has got out of hand. Page 9

China’s predicamentGetting old before getting rich. Page 11

Into the unknownThe world has never seen population ageingbefore. Can it cope? Page 13

Also in this section

AcknowledgmentsMany people helped with the preparation of this report. Inaddition to those mentioned in the text, particular thanksgo to Andrew Biggs, David Bloom, Gary Burtless, MarikoFujiwara, Chiemi Hayashi, Ludwig Kanzler, Je�reyKingston, Laurence Kotliko�, John Llewellyn, Lu Jiehua,George Magnus, Atsushi Seike, Machiko Osawa, HaruoShimada, Richard Suzman, David Wise and a wealth ofexperts at the OECD.

1

More articles about ageing are at

Economist.com/ageing

2 A special report on ageing populations The Economist June 27th 2009

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cially since older people these days alsoseem to remain healthy, �t and active formuch longer.

A second, and bigger, cause of the ageing of societies is that people everywhereare having far fewer children, so the younger age groups are much too small to counterbalance the growing number of olderpeople. This trend emerged later than theone for longer lives, �rst in developedcountries and now in poor countries too.In the early 1970s women across the worldwere still, on average, having 4.3 childreneach. The current global average is 2.6, andin rich countries only 1.6. The UN predictsthat by 2050 the global �gure will havedropped to just two, so by midcentury theworld’s population will begin to level out.The numbers in some developed countrieshave already started shrinking. Dependingon your point of view, that may or may notbe a good thing, but, as this special reportwill argue, it will certainly turn the worldinto a di�erent place.

The temporary blip that has magni�edthe e�ects of lower fertility and greaterlongevity is the babyboom that arrived inmost rich countries after the second worldwar. The timing varied slightly from placeto place, but in America�where the e�ectwas strongest�it covered roughly the 20years from 1945, a period when nearly 80mAmericans were born. The �rst of them arenow coming up to retirement. For the next20 years those babyboomers will beswelling the ranks of pensioners, whichwill lead to a rapid drop in the workingpopulation all over the rich world.

As always, the averages mask considerable diversity. In the richer parts of Asia thepopulations of Japan, South Korea and Taiwan are already old and will rapidly geteven older. Europe is split several ways:

Germany, Italy and Spain, for instance,now have tiny families and are thereforeageing fast, whereas France, Britain andmost of the Nordic countries have morechildren to keep them younger. In easternEurope, and particularly in Russia, birthrates are low and life expectancy has alsotaken a knock. America, thanks to a resilient birth rate and high immigration, willstill be fairly youthful by midcentury.

Most developing countries do not haveto worry about ageing�yet. Although birthrates have dropped, populations are stillyoung and will remain so for a few decades yet, even though HIV/AIDS haskilled o� many active adults. But in thelonger term the same factors as in the richworld�fewer births, longer lives�willcause poorer countries to age too. Andeven before that happens, the absolutenumbers of older people there will swellalarmingly, simply because these countries are so populous. They already have490m over60s, and that total is due tomore than triple by 2050. Since most poorcountries have little or nothing in the wayof a statefunded welfare net, those numbers will he hard to manage.

Alone among developing countries,China is already ageing fast. This is mainlybecause for the past 30 years it has beenkeeping a tight lid on population growth.This did not quite amount to a �onechildpolicy�, as it is often called (the averagenumber of children per woman was closerto two), but it was highly e�ective in stabilising numbers. The population will peakat about 1.46 billion in 2030 and then decline gently. Although China has seen stupendous economic growth in recent years,it is still some way o� being rich, so it willhave trouble absorbing the cost of this rapid ageing. This special report will take acloser look at what it is doing about theproblem, but will otherwise con�ne itselfmainly to the developed world.

Fewer hands make heavy workMacroeconomic theory suggests that theeconomies of ageing populations are likely to grow more slowly than those of younger ones. As more people retire, and feweryounger ones take their place, the labourforce will shrink, so output growth willdrop unless productivity increases faster.Since the remaining workers will be older,they may actually be less productive.

In most rich countries the ratio of people of working age to those of retirementage will deteriorate dramatically over thenext few decades. In Japan, for instance,which currently has about three workers

to every pensioner�already one of thelowest ratios anywhere�the number willhalve by 2050. True, there will be feweryoung people to maintain, but childrencost less than old people and the overallburden will be much heavier than it isnow. The OECD has estimated that overthe next three decades the agerelated decline in the labour force could cut growthin its member countries by a third compared with the previous three decades.

Ageing will a�ect �nancial markets too.According to Franco Modigliani’s and Richard Brumberg’s lifecycle theory of savings, put forward in the early 1950s, peopletry to smooth out their consumption overthe course of their lives, spending more intheir youth and old age and saving more intheir middle years; so as populations age,savings in the economy as a whole will berun down and assets sold o�. This has ledto fears of an �asset meltdown� as everyone sells at the same time. But a number ofacademic studies have so far failed to �ndmuch evidence of this. Older people inAmerica, for instance, do save less thanthose in their middle years, but as a groupnot much less.

James Poterba, an economics professorat MIT, says America has three kinds of retirement households: the least wello�,perhaps a quarter of the total, who willmaintain something close to their previous standard of living on Social Securityand Medicare, even with few savings; therichest 1015%, who hold signi�cant assetsand may not need to draw them down;and the large majority in between, whowill have to rely on their own, often inadequate, savings in retirement.

For the public �nances, an ageing population is a huge headache. In countrieswhere public pensions make up the bulkof retirement income, these will eitherswallow up a much larger share of the

2A greying world

Source: “World Population Prospects”, United Nations, 2009

Population aged 60 and over, % of total

1950 70 90 2010 30 50

0

5

10

15

20

25

30

35

95

269

416

Number, m

110

490

1,592

Developed countries

Developingcountries

F O R E C A S T

1What crisis?

Source: IMF

Net present value of impact on fiscal deficit ofrecent crisis and age-related spending to 2050% of GDP

0 250 500 750

G20

Spain

United States

Britain

Germany

France

Italy

JapanCrisisAging


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budget or they will have to become a lotless generous, which will meet political resistance (and remember that older peopleare much more inclined to vote than younger ones). Spending on health, which inmost rich countries has been going up relentlessly anyway, is likely to grow evenfaster as patients get older. And because ofa huge increase in the number of over80s,a lot more money, and careful thought, willbe needed to provide longterm care for

them as they become frailer.What can be done? As the IMF puts it,

�the �scal impact of the [�nancial] crisis reinforces the urgency of entitlement reform.� People in rich countries will have tobe weaned o� the expectation that pensions will become ever more generous andhealth care ever more allencompassing.Since they now live so much longer, andmostly in good health, they will have to accept that they must also work for longer

and that their pensions will be smaller. Will the recession make it easier or

harder to introduce the required reforms?If people are feeling poorer, they maythink that their government should domore for them, not less. Yet some say that ifeverything is in a state of upheaval already,change becomes easier to bring about.They cite a phrase currently much used inthe Obama White House: �Never waste agood crisis.� 7

IN GERMANY a mother who neglects herchildren is known as a Rabenmutter (ra

ven’s mother). Many older Germans slapthat label on women with small childrenwho go out to work. Young women in Germany, as elsewhere, are torn. They enjoytheir jobs but �nd it hard to combine themwith having a family, for a host of practicalreasons such as school hours and lack ofchild care as well as public disapproval.Faced with that dilemma, some give upwork. Others give up having children.About a quarter of the current generationof German women in their 40s have remained childless. The country’s fertilityrate (the number of children a woman canexpect to have in her lifetime) is now arockbottom 1.3�the same as in Japan andItaly, where similar attitudes prevail (seechart 3). The chancellor, Angela Merkel,has acknowledged that her country needsto be more childfriendly.

This is not just because children are niceto have. As almost everybody lives everlonger, a reasonable supply of young people is needed to counterbalance�and fundthe pensions of�a growing number of older folk. In fact, fertility rates have droppedsteeply in all OECD countries in the pastfew decades, from an average of 3.2 children per woman in 1960 to 1.6 now. Therate needed to keep the population stable(assuming unchanged mortality rates andno net immigration) is 2.1. According to theUN’s latest population estimates, fertility iscurrently below replacement level in over70 countries, which account for nearly halfthe world’s population. But even in the remaining, poorer, half of the world, fertilityrates have come down spectacularly, from5.2 in 197075 to 2.6 now. This has been themost important factor by far in the ageing

of populations around the world.In a few countries where fertility rates

are already very low, such as Japan andSouth Korea, they are still falling. But inothers the decline has been arrested and insome, including America, Britain andFrance, it has been reversed in the past decade or two. That has encouraged governments in a number of rich countries to believe that, with the right policies, they toocould boost fertility to closer to replacement levels and help moderate the socialburden of ageing. But it will not be easy.

Encouraging women to have more babies used to be politically fraught. Radicalfeminists everywhere opposed the idea,and in Germany, Italy, Portugal and Spain itcarried fascist baggage. But times havechanged and now a number of countriesare actively encouraging larger families.

Japan has seen especially rapid greying.Immediately after the second world war itwas one of the world’s youngest devel

oped countries, with a median age of 22.But because so few people were having babies, the median age has doubled sincethen and is still rising fast. The population,currently about 127m, has already startedto decline. It will drop below 100m by 2046and continue downwards rapidly thereafter, according to a white paper preparedfor the Cabinet O�ce�unless the birth ratecan be nudged up (or the Japanese canovercome their dislike of immigration).

A special unit in the Cabinet O�ce isnow working on measures to persuadeyoung Japanese families to do their bit. It isconsidering things like bigger family allowances, more favourable tax treatment offamilies and many more nursery places toshorten the long waiting lists. To put moresteam behind such initiatives, the government in 2005 appointed a minister for gender equality and social a�airs, Kuniko Inoguchi. She has been a tireless campaignerfor Japanese women, though her job soonfell victim to a change of government.

Will these e�orts bear fruit? FlorianCoulmas, director of the German Institutefor Japanese Studies in Tokyo and authorof a book on �Population Decline and Ageing in Japan�, is one of many who thinknot. He reckons that the only way Japanesewomen can manage their di�cult lives isby postponing marriage and having fewer,if any, children. Because of the country’sculture of long working hours, husbandswith good jobs spend little time at homeand expect their wives to cope with all domestic tasks. No wonder that 70% of Japanese women stop work when their �rstchild arrives. If they return to it at all it isusually much later, and then mostly tobadly paid and unchallenging parttimejobs. By then they may already be caught

Su�er the little children

Most of the rich world is short of babies

55 65 75 85 95 05

3Hushabye baby


Fertility rates

France

1950 60 70 80 90 2000 10

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Germany

Italy

Japan

Britain

United States


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1

up in another domestic bind: looking aftertheir husband’s old parents.

Japan is an extreme example, but manyother rich countries have similar problems. One reason why there are fewer babies is that women everywhere are marrying and having children much later in life.Between 1970 and 2000 the mean age atwhich women had their �rst child in arange of OECD countries rose by morethan a year every decade, and many morewomen now have their families in their30s. The question is whether they have thesame number of children as before but later, or whether they will have fewer overall.

Anna Cristina d’Addio, an expert onfertility policy at the OECD in Paris, thinksthey will probably have fewer children intotal than if they had started earlier, eventhough more of them now give birth intheir 40s. Surveys show that women generally start o� wanting bigger families thanthey end up with. If the children do notstart arriving until later in life, there is lesstime to reach that ideal number. And oncepeople have got used to smaller families,

the number of children they say they wantshrinks too. Demographers talk about a�lowfertility trap�.

Postponing marriage and childbirth ispart of a bigger change in the lives of manywomen in rich countries. Over the pastfew decades many more of them havebeen getting more highly educated andtaking paid jobs. That changed their ideasabout what they wanted out of life. For awhile birth rates were lower in countrieswhere lots of women worked outside thehome, but more recently that trend hasbeen reversed: higher fertility and higheremployment rates for women go together.

That may not be as counterintuitive asit seems. In a modern society children arean economic liability, not an asset. Theyhave to be fed, clothed, housed, lookedafter, educated and entertained. As a ruleof thumb, economists reckon that a familywith one child needs 30% more incomethan a childless couple to maintain thesame living standard. The obvious way tokeep the household �nancially a�oat is forthe mother to go out to work.

If governments anxious to rejuvenatetheir populations want her to do that, theycan help in a number of ways. Extensiveresearch in 16 OECD countries has shownthat there is a strong correlation betweenhigh female employment rates and largegovernment cash transfers to families, generous replacement pay during parentalleave, the availability of plenty of parttime work and lots of formal child care.Where all these things are present, fertilityrates tend to go up. France and most of theNordic countries have embraced such policies and been rewarded with a rise in fertility close to replacement level. It does notcome cheap: the OECD reckons that theyspend 34% of GDP on direct bene�ts tofamilies, far more than do Germany, Japanand southern Europe.

The odd ones out are America and Britain, which both have lots of women atwork and fertility rates close to replacement level (with immigration making upthe rest). Neither of them exactly spoils itsfamilies with �nancial inducements orstateprovided child care, but their �exiblelabour markets make it easy for women toget back into work after childbirth, andpublic opinion approves of working mothers. They also have high levels of teenagepregnancy that help bump up the �gures.

Ms d’Addio says the very low fertilityrates now seen in many OECD countriesare not inevitable, and governmentsshould try to lessen the obstacles to childbearing faced by individuals and families.But having children is a personal choice,and if people really do not want themthere is nothing governments can do. TheUN expects fertility in developed countriesto recover somewhat by 2050, to 1.8 children per woman, but many experts thinkthat forecast is too optimistic. 7

Just the one, thanks

IT IS written in the Bible’s Book of Genesisthat Methuselah lived to be 969. He held

the record, but there seem to have beenplenty of other multicentenarians aroundat the time, including Noah and old Adamhimself. Their ages are not to be taken literally. In another part of Genesis, man’s lifespan is put at a mere 120 years. The personwith the longest documented life in modern times, Jeanne Calment, reached 122,

but no one else has come close. In most of recorded history even the

more familiar three score years and tenwas rare. Angus Maddison, an economichistorian, has estimated that life expectancy during the �rst millennium AD averaged about 25 years (which in practicemeant that lots of children died veryyoung and many of the rest survived tomiddle age). The big turnaround came

with the industrial revolution, mainly because many more children survived intoadulthood, thanks to better sanitation,more control over epidemics, improvednutrition and higher living standards.

By the beginning of the 20th centuryaverage life expectancy in America and thebettero� parts of Europe was close to 50,and kept on rising. By midcentury thegains from lower child mortality had

A world of Methuselahs

The bene�ts, and the costs, of living longer


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mainly run their course. The extra yearswere coming from higher survival ratesamong older people. The UN thinks thatlife expectancy at birth worldwide will goup from 68 years at present to 76 by 2050and in rich countries from 77 to 83. (Theseare averages for both sexes; women generally live �ve or six years longer than men,for reasons yet to be fathomed). Most experts now agree that there will be furtherrises, but disagree about their extent.

Things fall apartSome of them argue that the human lifespan is �nite because bodies, in e�ect,wear out; that most of the easy gains havebeen made; and that the rate of increase isbound to slow down because people nowdie mostly of chronic diseases�cancer,heart problems, diabetes�which are harder to �x. They also point to newer healththreats, such as HIV/AIDS, SARS, bird �uand swine �u, as well as rising obesity inrich countries�to say nothing of the possibility of fresh pandemics, social and political unrest and natural disasters.

Nearly 30 years ago James Fries at Stanford University School of Medicine put aceiling of 85 years on the average potentialhuman life span. More recently a team ledby Jay Olshansky at the University of Illinois at Chicago said it would remain stuckthere unless the ageing process itself canbe brought under control. Because infantmortality in rich countries is already low,they argued, further increases in overalllife expectancy will require much larger reductions in mortality at older ages. In MrOlshansky’s view, none of the lifeprolonging techniques available today�bethey lifestyle changes, medication, surgeryor genetic engineering�will cut older people’s mortality by enough to replicate thegains in life expectancy achieved in the20th century.

That may sound reasonable, but the evidence points the other way. Jim Oeppen atCambridge University and James Vaupelat the Max Planck Institute for Demographic Research in Rostock have chartedlife expectancy since 1840, joining up the�gures for whatever country was holdingthe longevity record at the time, and foundthat the resulting trend line has been moving relentlessly upward by about threemonths a year. They think that by 2050 average life expectancy in the bestperforming country could easily reach the mid90s.

Rises in life expectancy have been habitually underestimated because itseemed unlikely that the improvementcould go on for ever, and just as regularly

the �gures have had to be revised soon afterwards. Some experts now think theremay be no theoretical limit at all, pointingto the huge rise in the number of centenarians in the past few decades. In Americathey are the fastestgrowing section of thepopulation, with an increase from 3,700 in1940 to over 100,000 now.

Why are people living ever longer? Robert Fogel at the University of Chicago, a Nobel prizewinner in economics, reckonsthat improved medical care and technology are only part of the answer. Anotherpart, he thinks, is something he hasdubbed �technophysio evolution�. Overthe past few centuries humans have developed more resilient physiques becausethey gained unprecedented control overtheir environment and their living conditions. Western people’s average body sizehas increased by 50% over the past 250years. Larger body size (but not obesity),Mr Fogel’s research has shown, is associated with better health and longer life.

But modern life has its downsides too.Stress is often seen as a lifeshortening factor�though perhaps the e�ects are not aslethal as some people think, or else the Japanese, who are famous for working longhours, would not have the highest life expectancy in the world.

Another hazard of a�uence is gettingfat. Around 1020% of the adult populationin many rich countries, and over 30% inAmerica, are now clinically obese. Overweight people are at greater risk of cardiovascular and respiratory diseases, cancer,typeII diabetes and other lifeshorteningailments�though it is not yet clear whether the e�ects are strong enough to cancelthe trend to greater longevity.

And life expectancy can go down aswell as up. In much of eastern Europe itstarted dropping in the 1980s in response tothe upheaval in the region, and despite asubsequent slight recovery it has still notregained the level of the 1960s.

People almost everywhere could extend their life spans further just by doing afew sensible things, such as not smoking,drinking only in moderation, eating lots offruit and vegetables and taking regular exercise. Educated folk are better at keepingto such rules, and as a group they livemarkedly longer than those with only basic schooling. Richer people, unfairly, alsolive longer than less wello� ones, even inthe developed world.

But all this is tinkering at the edges.Mankind’s dream has been to conquerageing altogether, and scientists are working on it. Sparepart surgery to replacewornout bits of the anatomy is alreadywellestablished and will get better withthe use of stemcell technology. For a moregeneral e�ect, experiments on rodentshave shown that a severely restricted butbalanced diet can increase their lifespanby about 30%. But nobody knows whetherthis would work in humans, and even if itdid, there might be few takers.

The longerterm hope is to �nd a way ofswitching o� the ageing process by manipulating the appropriate genes, which intheory could make people nearimmortal(though they could still die of accidentsand diseases). But if that were feasible, theconsequences would need to be carefullythought through. In Jonathan Swift’s �Gulliver’s Travels�, the hero meets a tribe ofimmortals, the Struldbruggs, who far frombeing wise and serene turn out to be a miserable lot: �Whenever they see a funeral,they lament and repine that others havegone to a harbour of rest to which theythemselves never can hope to arrive.�

Hale and heartyPeople in the rich world can now expect tolive, on average, more than a quarter of acentury longer than they did 100 years ago.Is that a blessing or a Struldbruggian curse?Clearly it depends on whether they become old and frail at the same age as beforeand just limp on for much longer, or if theextra years are hale and hearty ones.

Most of the evidence supports the morecheerful view. Research led by KennethManton at Duke University found that inrecent years disability above the age of 65in America has been falling signi�cantly. Inother rich countries the picture is moremixed. When the OECD recently looked at Blessing or curse?


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12 member countries, it found clear signs ofa recent decline in disability in elderly people in only �ve of them (including America). But other studies produced more optimistic results.

By and large, people do now seem to remain in good shape for longer. Moreover,the period of ill health that usually precedes the �nal goodbye has got shorter inthe past few decades, which demographers call �compression of morbidity� (as

a rule of thumb, the bulk of spending onan individual’s health care is concentratedin the last year or two of life, and particularly in the �nal six months). This compression has a variety of causes, including theshift from manual to physically less demanding whitecollar work, rising levelsof education and muchimproved healthcare and medical technology, from keyholesurgery to heart pacemakers. Eighty, it issaid, is the new 65.

But even fairly �t older people needmore health care than younger ones, notleast because they often su�er from chronic diseases that are expensive to treat. Inthe EU, one estimate puts healthcarespending on the elderly at about 3040% oftotal health spending. So will the betterhealth of an ageing population, good as ithas been for so many, impose una�ordable costs on publichealth budgets?

Over the past few decades all OECD

WHEN Tokyo residents of a certainage want to go shopping, they head

for Sugamo, in the north of the city. Themain street, Jizodori, features a variety ofshops selling food, sweets, medicaments,bits and bobs and, most notably, a hugechoice of woolly underwear in bright red,a favourite colour with the elderly because it is thought to be lucky and healthgiving. The local McDonald’s has a section with seats designed for older people,and a karaoke bar o�ers songs from thegood old days. For spiritual refreshment,there is the fourcenturiesold KoganjiBuddhist temple, where visitors buy incense and pray for a long life�and a quickand easy exit.

Jizodori has a long tradition, but businesses everywhere now realise that in future there will be a lot more older folkwith money to spend. In most rich countries the babyboomers born after the second world war were more numerous, better educated and better paid than anygeneration before them. When thoseboomers retire, they will want to do it instyle, plastic surgery and all.

What else might they spend their money on? The glossy magazine published byAmerica’s AARP, a powerful lobbying organisation for the over50s that boasts40m members, is bursting with ads. Ifthose advertisers have got their marketright�and they are paying big money forthe older eyeballs�this group of customers can be persuaded to buy a plethora ofproducts, from travel and �nancial services to mobile phones, medicines andcomfy beds.

Some businesses are already adjustingtheir ranges to cater for the grey market.

Volkswagen, for example, has developeda car called the Golf Plus that has higherseats and more space than the standardmodel. A number of consumergoodsmakers have started making smaller packsizes for older, smaller households.

Japan, which has already had lots ofpractice with older consumers, has developed some ingenious new products forthe grandparent generation. They includea furry robot seal, sold as a pet substitute,that has proved a hit with lonely old folk.And makers of personalcare products recently put on a Tokyo fashion show for incontinence pads, featuring pink and frillyvarieties instead of the dull old white sort.

This is a tricky market to tackle. Advertisers are often accused of trying too hardto sell to the young when much of the

spending power is now concentrated inolder age groups, but it is not a simple matter of moving �from rocking horse to rocking chair�. When companies try to caterfor older customers, they do not alwaysget it right. Attempts to �seniorise� ads, forexample, have mostly drawn a poor response because their targets think ofthemselves as younger than they reallyare. That refusal to settle for being �old�will only get stronger as the babyboomers start turning 65.

But the hardest thing about selling toolder people is that they are such a heterogeneous group. Someone in his 70s maybe in frail health and living in an old folks’home; or he may be running for presidentof the United States, as John McCain didlast year. There are many shades of grey.

There is money to be made in thegrey market, but it takes thoughtThe silver dollar

Jizodori’s temptations


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countries have seen their health spendinggrow considerably faster than their economies. Ageing populations will add furthermomentum to that growth. Howard Oxley,a healthcare expert at the OECD, reckonsthat increased spending on health andlongterm care for the elderly couldamount to an extra threeandahalf percentage points of rich countries’ GDP bythe middle of the century�and a lot moreif spending on medical technology continues to go up at current rates.

Measured by spending on health careas a share of GDP, America already topsthe list, shelling out the equivalent of morethan 15% of GDP (see chart 4). The American government’s healthcare spendingwill be hugely a�ected by ageing becauseof Medicare, the statefunded healthcareprogramme for the elderly and disabled,and Medicaid, the programme for the poor(and often also old, because it covers longterm care).

President Barack Obama is determinedto reform his country’s healthcare systemto improve coverage and, eventually, drivedown costs. More money does not alwaysproduce better results. People in Americaare less healthy and die sooner than in Britain, which proportionately spends littlemore than half as much on its health care.According to David Cutler, an economicsprofessor at Harvard who has advised thepresident on the reform, even doctors believe that around 30% of money spent onhealth care in America is wasted.

Peter Orszag, head of the O�ce of Management and Budget, has recently beenpraising the work of a group of medical experts at Dartmouth Medical School, led by

Elliott Fisher, which has been compiling anatlas of regional variations in Americanmedical practice and healthcare spending, mainly for people on the Medicareprogramme. It found that in 2006 Medicare spending varied more than threefoldacross American hospital referral regions.Again, higher spending does not seem toresult in better care or greater patient satisfaction. Because the system has encouraged the provision of lots of doctors, specialists, hospitals and expensive diagnostickit, all of them are kept busy without muchregard to results.

The trouble with health care in America, says Muriel Gillick, a geriatrics expert atHarvard Medical School, is that peoplewant to believe that �there is always a �x.�She argues that the way Medicare is organised encourages too many interventionstowards the end of life that may extend thepatient’s lifespan only slightly, if at all, andcan cause unnecessary su�ering. It wouldoften be better, she thinks, not to try sohard to eke out a few more hours or weeksbut to concentrate on quality of life.

Take careBut long before they get to that point, growing numbers of old people will becomeless able to look after themselves and needmore care. Across the OECD, spending onlongterm care is already equivalent toaround 15% of total health spending and isrising fast. The great bulk of that care�anestimated 80%�is still provided by familyand friends, the traditional source of support for the elderly. But more women aregoing out to work, so fewer of them havetime to look after old folk and formal help

is becoming increasingly important. In most developed countries only a

small minority of over65s�between 3%and 6%�live in institutions. Keeping oldpeople in nursing homes or hospitals is expensive, sta� is hard to �nd, and in anycase most people would much rather belooked after at home. Many countries arenow providing grants to adapt homes, paying families for the care they provide andsupplying helpers to give a hand withthings like dressing and bathing.

With far more people reaching a greatage, a lot more such care will be needed infuture. How will it be paid for? A few farsighted countries�including Germany, theNetherlands, Luxembourg and Japan�have already introduced mandatory longtermcare insurance schemes. Others mayhave to follow. 7

4And much more to come

Sources: “Society at a Glance”, OECD, 2009; United Nations

Health spending as % of GDP, 2006

0 5 10 15 20

UnitedStates

France

Germany

Canada

Sweden

Italy

OECD

Britain

Spain

Japan

Public Private

Current life expectancy,

years

77.8

80.9

79.8

80.4

80.8

80.9

78.9

79.1

81.1

82.4

THE past few decades have been thecushiest time ever to be a pensioner in a

developed country. Not only has the worldbeen getting ever richer (at least until veryrecently), which rubbed o� on pensionerstoo; but as a group they have also becomemuch more comfortable relative to the restof the population. In recent years mandatory pensions across the OECD, net of taxes and socialsecurity contributions, averaged over 70% of previous net earnings forpeople on average pay and over 80% forthe lowpaid. For the bettero� the replace

ment ratio was lower, but they can cope. The o�cial retirement age in most

countries has stayed much the same eventhough people are living a lot longer, sopensioners have been getting more yearsin which to enjoy themselves without thepressures of work. In fact, many of themstopped working well before it was timefor their gold watch because they were offered irresistible inducements to go early.In Austria, for instance, the o�cial retirement age for men is 65 but the average actual age is 59, which means that many of

them leave even earlier.Being generous to pensioners was af

fordable in 1980, when in the rich worldthere were only about 20 people of retirement age for every 100 people of workingage. But that ratio has already risen to 25%and by 2050 it will be around 45%, meaning that there will be only about two workers for every pensioner. In some countriesthings will be much worse: Japan is heading for a ratio of over 70%. Something hasto be done.

The most urgent need for reform will be

Scrimp and save

Pensions will have to become far less generous


2

1

in public pensions, which in most developed countries are the biggest source of retirement income. They usually make upmost if not all of the pensions of low andmedium earners. Most of these pensionswork on the payasyougo (PAYG) principle, whereby today’s workers pay for today’s pensioners, on the understandingthat the next generation will do the samefor them when their time comes.

Now that labour forces are starting tocontract and the number of pensioners isrising, these schemes are rapidly becomingunsustainable. One theoretical answer isto move to funded schemes, in which pensions are paid out of a big pot of accumulated savings. Such schemes are commonin the private sector, but a public PAYG

scheme is very hard to turn into a fundedone because one generation of workerswould have to pay both for themselvesand their parents’ generation.

UnsustainableMany rich countries already spend around8% of GDP on public pensions, and some�Germany, Italy, France�a lot more. RichardJackson at the Centre for Strategic and International Studies (CSIS), a thinktank inWashington, DC, calculates that if nothingis done the cost of state pensions in developed countries will almost double, froman average of 7.7% of GDP now to about 15%by 2050. In Japan and some �old� westernEuropean countries it could rise to wellabove 20%.

In a �nochange� scenario public expenditure on health would also rise steeply, so by 2050 the developed world wouldbe spending nearly a quarter of its GDP onthese two items alone. To prevent increases on that scale, about half the richcountries have already introduced variousreforms over the past decade that havemade their pensions less generous. Manymore cutbacks are bound to follow.

The most obvious thing that needed reconsidering was the retirement age. WhenAmerica introduced its Social Security(public pension) scheme in 1935 to preventpoverty in old age, the retirement age was65 and life expectancy at birth was 62. In1983 a decision was made to raise the o�cial retirement age to 67, but in steps so tinythat the move will not be completed until2027. Life expectancy at birth in Americanow averages about 78, so the promise of apension is worth a great deal more than itwas back in the 1930s. As it happens, America’s public pension system is among therich world’s less generous (which meansthat �nancing it should remain manage

able), but it still accounts for more thanhalf the average pensioner’s income.

In the past few decades a number ofgovernments o�ered various carrots to encourage people to start drawing their pensions before the o�cial retirement age.They often claimed that this would free upjobs for younger people. Any economistcould have told them that this was a primeexample of the �lumpoflabour� fallacy(the idea that there is only a �xed numberof jobs in an economy at any one time) andwould not work. It didn’t, but the workerswere happy to go and their employerswere happy to lose them. Private de�nedbene�t �nalsalary schemes (explainedbelow), where they existed, also encouraged early retirement because they did notimpose an actuarial penalty on peopleleaving before the due date.

All this meant that the actual (�e�ective�) retirement age in many rich countries, particularly in Europe, dropped wellbelow the o�cial one. By 2004 in theOECD as a whole only 60% of people agedbetween 50 and 64 were working (compared with 76% for those aged 24 to 49). Itwas the opposite of what was needed todeal with rising life expectancy, so in recentyears governments in many countrieshave started to dismantle some of the incentives to leave early, against �erce political resistance. This has halted, and in somecases reversed, the trend towards ever earlier retirement.

But that is only a beginning. Italy, whichhad a particularly una�ordable publicpension scheme, has not only raised the retirement age but also increased the number of contribution years needed to qualify for a pension and cut back on bene�tsfor the highest earners�though the e�ects

will be felt only by people who retire from2017 onwards. A number of other countries are gradually reducing the replacement rate of their pensions, particularlyfor the bettero�, though most of themhave been careful not to squeeze the poorest pensioners too hard.

Good try, but it didn’t workBritain, unusually, found itself having tomove the other way. Its state pension hadbecome impossible to live on, thanks to alittlenoticed decision by a Conservativegovernment in 1980 to link the rise in thestate pension to living costs instead of average earnings. In 2006 a governmentappointed commission chaired by Lord Turner recommended reinstating the linkwith earnings, which is due to happen in2012. Britain’s solution to the problem ofuna�ordable public pensions�to downsize them and hope that the private sectorwould �ll the gap�had proved untenable.

Now the debate about sustainable pension systems for the future is all aboutspreading the load over several pillars.There should be a basic state pension tomeet basic needs in old age, perhaps withan earningsrelated element on top of it; aprivate occupational pillar, with employers and employees both making contributions; and a voluntary pillar, with privateindividuals saving for their retirementthrough a variety of instruments. Governments are expected to do their bit not onlyby providing the statefunded part, butalso by o�ering tax incentives for the second and third pillars.

To take the pressure o� public pensions, many governments have encouraged private pension plans, which have expanded rapidly in the past ten years. Inhalf the members of the OECD privatepensions are now either mandatory orcover the vast majority of the workforce.In some countries, including America,Australia, Denmark and Switzerland, private pensions now account for up to half oftotal retirement income.

But even before the recent �nancial crisis it was clear that shifting more responsibility for retirement income to the workersthemselves raises big problems. In countries where public pensions are relativelysmall, such as America, Britain and Ireland, people are simply not saving enoughto maintain their living standards in retirement. McKinsey, a consultancy, recentlylooked at the �nances of a large sample ofbabyboomers, due to start drawing theirpensions soon, and found that about twothirds of them had failed to make enough

5The comforts of old age

Source: “Pensions at a Glance”, OECD, 2007

Net mandatory pension benefitsAs % of net median earnings, 2005

0 20 40 60 80 100 120

Netherlands

Spain

Italy

Sweden

Canada

France

Germany

United States

Britain

Japan


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1

�nancial provision for their retirement tomaintain their previous standard of living,even though as a group they had alwaysearned well. That �ts with the trend of asteady decline in American personal sav-ing rates in the past 20 years.

And even those who had been puttingmoney by for their old age may now behaving second thoughts. In America oneof the main vehicles for occupational pen-sions are 401(k) plans, named after a sec-tion in the Internal Revenue Code that al-lows employees to make tax-freepayments into a de�ned-contributionplan. Employees can choose from variousinvestment options, usually a range of mu-tual funds. Last year’s stockmarket crashcaused a huge drop in the value of mostsuch plans. Many people who hadplanned to retire in the near future foundthey had to carry on working. Suddenlyprudence did not seem such a good idea.

In countries where private occupa-tional pensions play a large part, such asAmerica and Britain, they have becomeless opulent and more uncertain. In recentyears there has been a big shift from de-�ned-bene�t schemes (where the eventualpension depends on a formula that takesinto account the level of pay and years ofcontributions) to de�ned-contributionschemes (where a certain level of contribu-tion is agreed on and the money invested,with the eventual pay-out depending onthe return on that investment).

De�ned-bene�t schemes worked �neas long as stockmarkets were rising, en-abling companies with such schemes totake �pension holidays��putting a freezeon further contributions because their in-vestments had done so well. But whenmarkets turned down, large holes openedup in companies’ pension funds that hadto be �lled from current operations. Life ex-pectancy also proved longer than forecast.

De�ned-contribution schemes avoidsuch problems for the companies by hand-ing all the risks to employees. It is the em-ployees who have to worry about howtheir pension investments will performand whether they will have enough to liveon when they retire. If their pension fundsare invested in their own company (notrecommended, but it happens), they couldlose everything, as workers at Enron, an

energy company that collapsed spectacu-larly in 2001, found to their cost. Most peo-ple do not know enough about �nance tomake informed investment decisions.

In America, which began to move awayfrom de�ned-bene�t schemes two de-cades ago, de�ned-contribution plans al-ready account for the great majority ofprivate-sector pension schemes. Compa-nies in Britain started later but advancedfaster. Earlier this month two large Britishcompanies, BP and Barclays, announcedthey were closing their de�ned-bene�tschemes, respectively, to new and existingmembers. De�ned-contribution plans arenot only riskier for the employee, but com-panies often contribute less to them andthe resulting payouts are smaller.

In future, a growing number of peoplewill have to manage on less generous andmore uncertain occupational pensions.The big exception are public-sector work-ers, typically accounting for 10-20% of thetotal workforce in rich countries, who forthe most part continue to enjoy good de-�ned-bene�t pensions. But their privilegesare now coming under �re.

So if state pensions are having to bereined back, private pensions are gettingmeaner, riskier and less predictable, andmoney saved for retirement is threatenedby �nancial crises, what is the man in thestreet to do to make ends meet? The onlything for it, say all the experts in unison, isto carry on working. 7

There goes my 401(k) plan

HOW much golden leisure can you ex-pect at the end of your working life?

The OECD has calculated for how manyyears people in its member countries arenow likely to be drawing their pensions,starting not from their o�cial but their ac-tual retirement age. It found that mencould look forward to between 14 and 24years in retirement and women between21 and 28 (see chart 6, next page). In manycountries that was half as long again as in1970, and in some of them twice as long.And the �gures are probably an underesti-mate because they are based on life expec-tancy as it is now, not as it will be in future.

Retirement has been overdone. Theoriginal idea was that people should enjoya bit of a rest after a life at work, but no-

body imagined that the rest would stretchto almost a quarter-century. Some coun-tries have already raised their o�cial re-tirement age; others are debating whetherit still makes sense to have a speci�c retire-ment age at all. One widely touted idea isto phase in retirement over a number ofyears. It does not seem like a good idea forpeople to be working at full tilt one dayand twiddling their thumbs the next.

From an economic point of view, get-ting people to work for a few more yearswould solve many of the problems associ-ated with ageing populations. By carryingon, those workers will not only save thepublic purse money by not drawing a pen-sion but will also continue to pay taxes andsocial-security contributions, so those ex-

tra years are doubly valuable. Moreover�though it seems an outlan-

dish thought in the middle of a deep reces-sion and rising unemployment�ageingpopulations are likely to cause labourshortages. In some countries and somesectors these are showing up already. InGermany, where the labour force is due tostart shrinking from next year, a study bythe Institute for the German Economy inCologne identi�ed a shortage of about70,000 engineers in 2007, a rise of nearlyhalf on the year before. The obvious placeto look to �ll such gaps is among well-qual-i�ed older people, and indeed the institutefound that companies had stepped uptheir recruitment of engineers over 50.

Many countries already have laws to

Work till you drop

Retirement has got out of hand

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prevent discrimination on age grounds.America led the way with its Age Discrim-ination in Employment act in 1967, de-signed to make sure that the over-40s(greybeards of their day) were given thesame job chances as younger people.Among other things, it prohibited refer-ence to age in job advertisements. The acthas since been amended a couple of timesand now rules out mandatory retirementon age grounds for most jobs. That seemsto have helped keep older workers in jobs.

The European Union in 2000 issued adirective that obliges member countries toban discrimination in employment on anumber of grounds, including age. Franceimposes a tax called the Delalande contri-bution (now being phased out) on employ-ers who sack older workers. Although thiscan be quite hefty�up to a year’s pay�itdoes not appear to have saved many jobs.Rather, it has discouraged employers fromhiring older workers.

Various countries have concocted an al-phabet soup of initiatives and pilot pro-jects to get older people into work andkeep them there, with mixed results. Advo-cacy groups for older people such as Amer-ica’s powerful AARP, and a growing num-ber of similar organisations that arespringing up in other rich countries, havehelped to raise awareness of the issue. Butsurvey after survey �nds that where em-ployers have a choice, they prefer to hireyounger workers. Are they right?

On the face of it, there are plenty of rea-sons to plump for youth. In most countries,pay goes up as workers become more ex-perienced and productive, and then de-clines again towards the end of their ca-reers. But in some places�for example,France, Germany and Spain�pay justkeeps rising. So even assuming that work-

ers remain just as e�ective as they get older(see below), at some point they end up be-ing too expensive for what they o�er.

But employers are also doubtful thatolder workers can still hack it. Vegard Skir-bekk of the International Institute for Ap-plied Systems Analysis near Vienna has re-viewed a large number of studies aboutthe relationship between age and individ-ual productivity and found a fairly broadconsensus that productivity in many jobsdeclines substantially in mid-working life.

Now that so-called �3D jobs��the dirty,dangerous and demanding sort in, say,mining or steelmaking�have becomethinner on the ground, it may not matter somuch if workers become physically lessvigorous; besides, older people are in bet-ter general health these days. But there isplenty of evidence that by the time peopleare 50, some of their cognitive abilitieshave also started to decline. In particular, aquality called ��uid intelligence��includ-ing numerical skills and the ability to ad-just rapidly to new situations�begins to godownhill in middle age. Very brainy peo-ple generally do their most innovativework before they are 40. Nobel prizes areusually awarded for achievements fairlyearly in life. By contrast, �crystallised intel-ligence��general knowledge, experience,verbal ability�continues at much thesame level almost inde�nitely.

Employers think that older people may�nd it harder to pick up new skills, particu-larly in IT, which have become indispens-able for many jobs. But that may be partly

because they are invariably o�ered lesstraining than younger ones. The argumentis that they will be leaving soon and arenot worth investing in. But younger em-ployees might leave too.

All these reservations are linked to old-er workers’ individual capabilities. ButAxel Boersch-Supan at the Mannheim Re-search Institute for the Economics of Age-ing and his team have argued that whatmatters in a modern economy is the pro-ductivity of teams of workers, not individ-uals. The best solution may be to employ amixture of vigorous young and experi-enced older workers.

Older workers’ knowledge and experi-ence can easily be lost to the companywhen they retire. In a recent article in theHarvard Business Review based on hiswork with RWE, a German energy com-pany, Rainer Strack of the Boston Consult-ing Group advises managers to conduct anaudit of how the ageing of their workforcewill a�ect them in years to come and de-velop a strategy to make sure they main-tain the right skills mix.

Show me the colour of your carrotBut even if employers were happy to keepor recruit older workers, how enthusiasticwould those workers be to carry on? Thatwould depend on the circumstances. Inthe past few decades, when pensions inmost rich countries were reasonably gen-erous and early retirement was positivelyencouraged, only the most workaholic (orimprovident) continued working. But now

6Far horizons

Source: “Society at a

Glance”, OECD, 2009

*Life expectancy from

actual date of retirement

Years in retirement*, 2002-07

30 20 10 0 10 20 30

France

Italy

Spain

Canada

Germany

Britain

Sweden

OECD average

United States

Japan

MEN WOMEN

It all depends what you mean by work

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THE Beijing Ren Ai Geracomium is set ina drab, dusty village just outside the

Chinese capital. Grouped round a pleasantgarden, this old people’s home for about80 residents, aged from 50 to 96, is unusualin several respects. Its private owner is aChristian, and the home has a small chapelwhere the handful of Christian residents,along with other people of that faith livingin the area, gather for Sunday services. Thehome is run as a commercial enterprise,but Hu Wenru, its deputy director, saysthat since it opened three years ago it hasbeen only gradually building up businessand is not yet making a pro�t. Still, theowner is already preparing to launch a second one with 300 beds in the next village,so he must be con�dent of success.

The main thing that makes Ren Ai unusual is that it exists at all. Old people’shomes are a rarity in China, catering foronly about 1% of the over65s, far less thanin most Western countries. The vast majority of older Chinese live with their families. Care for the old within the family isnot only a cultural expectation, based on

the Confucian tradition of respect for ageand experience; under a law passed in 1996it is also a legal obligation. Elderly peoplehave been known to sue their families formaintenance if they fail to comply.

At present, institutional care is the lastresort for those who have no family orwho need so much help that their relativescannot cope. Many of the residents at RenAi, for example, have serious physical ormental problems, and the home has twofulltime doctors on the sta�. The place isclean and seems wellrun, but it is spartan:some of the rooms sleep six people, withone basic bathroom between them. Evenso, the fees are much higher than most ordinary people can a�ord, averaging 1,300yuan ($190) a month for the reasonably �tbut with extra charges for those who wanta single room or need lots of nursing. Someof the residents are subsidised by the government, which seems happy to let privateinitiative �ourish.

There will be a lot more need for institutional care for elderly people in future, saysDu Peng, director of the Institute of Geron

tology at Beijing’s Renmin University. Forthe past three decades China has been operating a strict populationcontrol policy,so there are now far fewer young peoplearound to take care of the elderly. This stateof a�airs is usually referred to by the niftyformula �421�, meaning that the typicalonly child today will have two parents andfour grandparents to look after�a bit of anexaggeration, but not that far o�.

It has also become harder for families tolive together because people move arounda lot more than they used to. An estimated150m migrant workers have left their ruralhomes for jobs in the big cities, thoughmany of them might return home eventually. Most importantly, because of the lowbirth rate and rising life expectancy, thenumber of over60s is expected to go upvery rapidly, from about 166m now to342m in only 20 years’ time. All this means,says Mr Du, that many more older folk willbe living in institutions.

China is still a relatively young country,with a median age of around 30. But,uniquely among developing countries, it is

China’s predicament

Getting old before getting rich

that money is getting tighter and earlyretirement deals are o�, the balance maywell have shifted.

Most of America’s babyboomers nowsay that retirement is not for them, partlybecause they fear they may not be able toa�ord it and partly because they actuallylike work. In Europe too there has been achange of heart from the retirementminded 1980s and 1990s. In a recent FT/Harrispoll 4560% of respondents in the big European countries favoured working longerfor a bigger pension (except in Germany,where only about a quarter wanted to carry on). But many older people would like aless onerous workload than they had attheir peak, perhaps working parttime.

Japan, where it is customary to workwell beyond the o�cial retirement age, hasfound ways to allow people to step intoless demanding roles. For example, at thehead o�ce in Tokyo of Hitachi, a giant global electronics company, over twothirdsof those who reach the company retirement age of 60 apply to be rehired. Thecompany can usually �nd jobs for them,explains Takane Miwa from the com

pany’s humanresources department, butoften in a di�erent division, sometimesparttime and always minus their formerjob title and seniority. The company paysthe employee about 80% of his previoussalary, which includes his public pensionand a government subsidy, so it gets him ata bargain price.

Most other rich countries have notbeen good at making use of older peoplewilling and able to work. The names of afew companies that have consistently recruited sta� past retirement age�mostlyretailers such as Britain’s B&Q and America’s WalMart�pop up time and again, butthe list never seems to get much longer. Inthe absence of a good choice of jobs, somenewly retired people manufacture theirown, turning themselves into selfemployed consultants to do much the samething as before, though perhaps at a lesspunishing pace.

It is worth bearing in mind that if manymore older people were to stay on in theformal economy, some of the things theynow do outside it and without monetaryreward would fall by the wayside. Manynewly retired folk sign up for voluntarywork, and many more get drafted into family duties, looking after grandchildren orfrail old parents. Such unpaid work doesnot show up in the GDP �gures. If the people who do it held down regular jobs,much of those things would have to bepaid for�or would not get done at all. 7

85 95 05 15 25 35 45

7Unbearable

Source: “Society at a Glance”, OECD, 2009

Dependency ratio, population aged 65and over as % of population aged 20-64

0

15

30

45

60

75

1980 90 2000 10 20 30 40 50

Italy

Japan

OECD

Britain

UnitedStates

Sweden

France

Germany

F O R E C A S T


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1

ageing extraordinarily fast, so by 2050 itsmedian age will have risen to about 45.Over the next few decades the ratio of elderly dependants to people of working agewill rise steeply, from 10% now to 40% by2050. From about 2030 the country willhave more elderly dependants than children (see chart 8), whereas in most otherdeveloping countries the opposite will remain true for the next few decades. China’s pattern of ageing is very similar to thatin Japan, Hong Kong, Singapore, South Korea and Taiwan. The di�erence is that inChina this is happening at a time when thecountry is still relatively poor.

The man who lays claim to having invented the phrase �getting old before getting rich�, in the early 1980s, is Wu Cangping, an academic at the Population andDevelopment Research Centre at RenminUniversity. At that time population ageingwas receiving little attention, and he wanted to shock the government into preparingfor it. Since then China has become a lotricher (with an income per person of about$6,000 at ppp)�though not nearly as richas most developed countries when theywere starting to age. Some Chinese demographers are now arguing that the phraseshould be amended to �getting old whilegetting rich�.

In search of a new rice bowlWhether poor, rich or somewhere inbetween, China will certainly need to spendsome money to provide a basic social safety net for its people, not just the old buteveryone. Until about 20 years ago the vastmajority of urban workers were coveredby a system known as the �iron rice bowl�.People who worked for the state, in stateowned companies or in stateapprovedcollectives, enjoyed cradletograve bene�ts ranging from housing, education andhealth care to a generous pension scheme,with an o�cial retirement age of 55 formen and 50 for women for manual workers (but �ve years more for whitecollarworkers) and a replacement rate of about80% of �nal salary. Most people retiredabout �ve years before the o�cial age.

It was too good to last, and it didn’t. Inthe early 1990s huge number of stateowned enterprises were shut down andjobs in those that survived were savagelycut. Many state �rms passed into privatehands and new private companies grewup alongside them. Whereas civil servantsand employees in stateowned �rms usedto make up nearly 80% of all urban workers, their share is now down to 20%. Thegovernment is committed to honouring

the pension promises left over from the oldsystem, but the iron rice bowl has gone.That has left a huge gap in urban workers’socialsecurity provision. Workers in ruralareas, who still make up about half the total labour force, never had much coverageof any kind anyway.

Since then the government haslaunched a series of initiatives to put anew welfare system in place. The mainconcerns are health care and pensions.Since the demise of the old system, healthinsurance coverage has been patchy and inrural areas mostly nonexistent. Health insurance is generally not portable, so if people move from one part of the country toanother they may lose their coverage. Buteven if covered, people have to make largecopayments, which for the elderly andthose with serious health problems can becrippling. A survey carried out in 2000 bythe China Research Centre on Ageing, athinktank, found that more than half theover60s’ medical expenses came out oftheir own pockets and a big chunk of therest was paid for by their families.

In April the government set out its plan

for a comprehensive reform to build a�safe, e�ective, convenient and a�ordable�healthcare system by 2020. Over the nextthree years it intends to spend 850 billionyuan. By 2011 more than 90% of the population is meant to be covered by the system. In rural areas that �gure has alreadybeen reached, but the scheme usually covers only inpatient treatment and the reimbursement rate remains very low.

The pensions system too is in �ux. Inthe early 1990s the government announced a threepillar scheme along thelines of those in many developed countries: a basic payasyou go pension towhich both employers and employeesmake mandatory contributions; fundedindividual accounts, also with contributions from employers and workers; and individuals’ private savings. This is a work inprogress. Reforms are being announced�almost annually�, says Wang Yanzhong,who heads the Centre of Labour and Social Security Studies at the Chinese Academy of Social Sciences (CASS).

So far only about a third of the population is covered by any kind of pensionscheme. The funded individual accountsenvisaged under the government’s planshave been set up, but so far there is littlemoney in them. Because of restrictions oninvestment abroad and a dearth of highyielding instruments at home, such money as has accumulated has been investedmainly in the domestic banking system,where it earns a rate of return far too low tomeet the government’s pension promises.

Jonathan Anderson, a China specialistat UBS, calculates that under the currentpension system the government could faceunfunded liabilities of up to 6% of GDP annually a few decades hence. But it couldhead them o� by a variety of means: raising contributions or increasing coverage to

Plenty of life after work

55 65 75 85 95 05 15 25 35 45

8All uphill from here


China’s dependency ratioAs % of population aged 15-64

1950 60 70 80 90 2000 10 20 30 40 500

20

40

60

80

100

Children

Elderly

F O R E C A S T


2

1

UNTIL the early 1990s nobody muchthought about whole populations get

ting older. The UN had the foresight to convene a �world assembly on ageing� back in1982, but that came and went. By 1994 theWorld Bank had noticed that somethingbig was happening. In a report entitled�Averting the Old Age Crisis�, it arguedthat pension arrangements in most countries were unsustainable.

For the next ten years a succession ofbooks, mainly by Americans, sounded thealarm. They had titles like �Young v Old�,�Gray Dawn� and �The Coming Generational Storm�, and their message was stark:healthcare systems were heading for therocks, pensioners were taking young people to the cleaners, and soon there wouldbe intergenerational warfare.

Since then the debate has become lessemotional, not least because a lot more isknown about the subject. Books, conferences and research papers have proliferated. International organisations such as

the OECD and the EU issue regular reports.Population ageing is on every agenda,from G8 economic conferences to NATO

summits. The World Economic Forumplans to consider the future of pensionsand health care at its prestigious Davosconference early next year. The media, including this newspaper, are giving the subject extensive coverage.

Whether all that attention has translated into su�cient action is another question. Governments in rich countries nowaccept that their pension and healthcarepromises will soon become una�ordable,and many of them have embarked on reforms, but so far only timidly. That is notsurprising: politicians with an eye on thenext election will hardly rush to introduceunpopular measures that may not bearfruit for years, perhaps decades.

The outline of the changes needed isclear. To avoid �scal meltdown, publicpensions and healthcare provision willhave to be reined back severely and taxes

may have to go up. By far the most e�ectivemethod to restrain pension spending is togive people the opportunity to work longer, because it increases tax revenues andreduces spending on pensions at the sametime. It may even keep them alive longer.John Rother, the AARP’s head of policyand strategy, points to studies showingthat other things being equal, people whoremain at work have lower death ratesthan their retired peers.

Younger people today mostly acceptthat they will have to work for longer andthat their pensions will be less generous.Employers still need to be persuaded thatolder workers are worth holding on to.That may be because they have had plentyof younger ones to choose from, partlythanks to the postwar babyboom andpartly because over the past few decadesmany more women have entered the labour force, increasing employers’ choice.But the reservoir of women able and willing to take up paid work is running low

Into the unknown

The world has never seen population ageing before. Can it cope?

bring more money into the system; increasing the retirement age; securing betterreturns on the accumulated funds; or reducing future payouts.

By far the most e�ective way, though,would be to raise the retirement age. In early spring the government hinted that it wasconsidering such a move, but Chen Chuanshu, vicedirector of the government’shighpowered National Committee onAgeing, says there are �diverse views� onthe matter. In principle it seems a goodidea. Average life expectancy at birth, at 74,is now 25 years higher than it was 50 yearsago, yet the retirement age has remained atthe same low level. Unless it goes up, anycomprehensive pension system that Chinamight eventually introduce will be hideously expensive.

In practice, though, both workers andemployers are strongly opposed to achange. Workers have got used to the ideaof retiring in their 50s and planned theirlives accordingly. Employers have had theluxury of being able to pick from a seemingly inexhaustible supply of vigorouspeople in their 20s and 30s. Workers intheir 40s are already considered old, andmany of those in their 50s may indeed lack

the skills needed in a modern economy. But given the low birth rate over the

past 30 years, the supply of young workersis not, in fact, endless. Cai Fang, director ofthe Institute of Population and Labour Economics at CASS, points out that there is already a shortage of young migrant workers; it started in the coastal areas in 2004and has now spread everywhere. Theworldwide economic downturn has temporarily eased the pressure, but employersin China’s coastal boom belt continue tocomplain of shortages (although 20m people are said to have lost their jobs since thedownturn hit late last year).

So there is now an economic, as well asa humanrights, case for relaxing the country’s �onechild policy�. Many Chinese academics think it can be only a matter of afew years, but the government seems in nohurry. �Family planning�, as it likes to callthe policy, is seen as a success, easing pressures on the environment and resources ofall kinds. There is no explicit populationtarget, but the latest forecasts suggest thatnumbers will keep growing from about 1.3billion now to a peak of around 1.46 billionby 2030 and then start declining gently.

In fact, even if the restrictions were

loosened immediately the birth rate mightnot tick up by very much. In the big citiesmany people are already leading the sortof lives that have brought down fertility inricher countries.

China’s government is well aware ofthe problems of an ageing population, and�is doing all the right things but not alwaysfast enough�, says Vanessa Wang, an Asiaspecialist and actuary with Mercer, a consultancy. So far the government’s main priority has been to keep up the prodigiouseconomic growth rates of recent years, butthe prime minister, Wen Jiabao, has saidthat the government is attaching growingimportance to social welfare.

Of the 4 trillion yuan economicstimulus package announced last November,300 billion has now been reallocated frominfrastructure projects to welfare schemes.Critics say China could a�ord to do muchbetter. Its public �nances are in goodshape, with its public debt at less than 20%of GDP and its �scal balance improvingrapidly. Saving, at over 40% of GDP, is highby international standards. Given the prospect of 440m pensioners by 2050, perhapsit should invest more in creating its muchadvertised �harmonious society�. 7


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and the babyboomers are going grey. In many countries immigrants have

been �lling such gaps in the labour force ashave already emerged (and remember thatthe real crunch is still around ten years o�).Immigration in the developed world is thehighest it has ever been, and it is making auseful di�erence. In stillfertile America itcurrently accounts for about 40% of totalpopulation growth, and in fastageingwestern Europe for about 90%.

On the face of it, it seems the perfect solution. Many developing countries havelots of young people in need of jobs; manyrich countries need helping hands that willboost tax revenues and keep up economicgrowth. But over the next few decades labour forces in rich countries are set toshrink so much that in�ows of immigrantswould have to increase enormously tocompensate: to at least twice their currentsize in western Europe’s most youthfulcountries, and three times in the olderones. Japan would need a large multiple ofthe few immigrants it has at present. Publicopinion polls show that people in mostrich countries already think that immigration is too high. Further big increaseswould be politically unfeasible.

To tackle the problem of ageing populations at its root, �old� countries wouldhave to rejuvenate themselves by havingmore of their own children. A number ofthem have tried, some more successfullythan others. But it is not a simple matter ofo�ering �nancial incentives or providingmore child care. Modern urban life in richcountries is not well adapted to large families. Women �nd it hard to combine family and career. They often compromise byhaving just one child.

And if fertility in ageing countries doesnot pick up? It will not be the end of theworld, at least not for quite a while yet, but

the world will slowly become a di�erentplace. Older societies may be less innovative and more riskaverse than youngerones. By 2025 at the latest, about half thevoters in America and most of those inwestern European countries will be over50�and older people turn out to vote inmuch greater number than younger ones.Academic studies have found no evidenceso far that older voters have used theirclout at the ballot box to push for policiesthat speci�cally bene�t them, though if infuture there are many more of them theymight start doing so.

Nor is there any sign of the intergenerational warfare predicted in the 1990s. Afterall, older people themselves mostly havefamilies. In a recent study of parents andgrownup children in 11 European countries, Karsten Hank of Mannheim University found that 85% of them lived within25km of each other and the majority ofthem were in touch at least once a week.

Even so, the shift in the centre of gravityto older age groups is bound to have a profound e�ect on societies, not just economically and politically but in all sorts of otherways too. Richard Jackson and Neil Howeof America’s CSIS, in a thoughtful bookcalled �The Graying of the Great Powers�,argue that, among other things, the ageingof the developed countries will have anumber of serious security implications.

For example, the shortage of youngadults is likely to make countries more reluctant to commit the few they have to military service. In the decades to 2050, America will �nd itself playing an everincreasing role in the developed world’sdefence e�ort. Because America’s population will still be growing when that ofmost other developed countries is shrinking, America will be the only developedcountry that still matters geopolitically.

Ask me in 2020There is little that can be done to stop population ageing, so the world will have tolive with it. But some of the consequencescan be ameliorated. Many experts now believe that given the right policies, the effects, though momentous, need not be catastrophic. Most countries have recognisedthe need to do something and are beginning to act.

But even then there is no guarantee thattheir e�orts will work. What is happeningnow is historically unprecedented. RonaldLee, director of the Centre on the Economics and Demography of Ageing at the University of California, Berkeley, puts it succinctly: �We don’t really know whatpopulation ageing will be like, because nobody has done it yet.� 7

When the music stops much later

a special report on ageing populations june 27th 2009 · a special report on ageing populations...

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