101014 Global Aging Index DL Jackson LR

8/8/2019 101014 Global Aging Index DL Jackson LR

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by

RICHARD JACKSON ,

NEIL HOWE , and

KEISUKE NAKASHIMA

GAP INDEX .CS IS .ORG

The

Global

AgingPreparednesIndex


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ABOUT THEGLOBAL AGINGPREPAREDNESS INDEX

The Global Aging Preparedness Index (or GAP

Index) was developed by the Center or Stra-

tegic and International Studies Global Aging

Initiative with fnancial support rom Pru-

dential plc. The goal o the GAP Index is to

help inorm the policy debate about global

aging and ocus attention on the need or

constructive reorm in conronting one o

the transormative challenges o the twenty-

frst century. CSIS hopes that the GAP Index

will become the centerpiece o an ongoingproject that includes updates o the Index

itsel as well as in-depth country and issue

studies. Supplemental data and analysis

related to the GAP Index are available on the

Index website at gapindex.csis.org.

Copyright 2010

The Center or Strategic and

International Studies

All rights reserved.


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Table of Contents

Executive Summary ............................................ iii

Acknowledgments ................................................vii

Itrocto:e Cee o Gob ...............

1 e G Ie Freork .................7

2 e Fsc Sstbt Ie .......3ategor ne: ublic Burden ...................... 3

ategor Two: iscal oo .........................8

ategor Three: Benet ependence ...........

verall iscal ustainabilit esults .............6

3 e Icoe eqc Ie............9ategor ne: Total ncoe ........................9

ategor Two: ncoe Vulnerabilit .............3

ategor Three: ail upport ..................38

verall ncoe dequac esults ................4

4 Strtees or te Ftre ..................45educe ublic ension Benets ...................46

educe Health-are ost rowth ...............47

xtend Work Lives ......................................47

ncrease unded ension avings ................49

trengthen overt loors ...........................50

ncrease ertilit ates ................................50

ncrease igration ..................................5

onclusion .................................................5

Technical Appendix..............................................53

by

RICHARD JACKSON ,

NEIL HOWE , and

K EIS UK E N AK AS HIM A

X . .

T T T

T T L T

T B

eGlobal

AgingPreparednesIndex


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THE GLOBAL AGING PREPAREDNESS INDEX XTV mmy~iii

lobal aging proises to aect everthing ro

business pscholog and worker productivit to

rates o savings and investent, long-ter returns

to capital, and the direction o global capital ows.

erhaps ost ateull, it could throw into ques-

tion the abilit o an societies to provide a de-

cent standard o living or the old without placing

a crushing burden on the oung.

The purpose o the lobal ging reparedness

ndex (or ndex) is to provide a coprehen-

sive assessent o the progress that countries are

aking in preparing or global aging, and par-

ticularl the old-age dependenc diension

o the challenge. The ndex covers twent

countries, including ost ajor developed coun-

tries and a selection o econoicall iportant

eerging arkets or which adequate data were

available. ts projection horizon extends through

the ear 040 in order to capture the ull ipact

o the deographic transoration now sweeping

the world.

The overall ndex consists o two separate

subindicesthe scal sustainabilit index and

the incoe adequac index.

n the scal side, the ndex begins b

looking at projections o public old-age benet

spending, including both pensions and health

benets. But the ndex also goes urther. t takes

into account the diering scal roo that coun-tries have to accoodate their growing old-age

dependenc burdens b raising taxes, cutting

other spending, or borrowing. t also considers

the degree o elderl dependence on public ben-

ets in dierent countries, which a be a crucial

actor in deterining how politicall eas or di-

cult it will be to enact new cost-cutting reors

Executive Summary

GAP Index Country Rankings

Fiscal SustainabilityIndex

Income AdequacyIndex

I Neters

Meco rz

Ce US

C Ger

ss UK

o str

str See

Jp Ce C Sp

See I

US C

Kore Jp

Stzer o

Ger Stzer

UK ss

It Frce

Frce It

rz C

Neters Kore Sp Meco

Note Cotres re rke ro best to orst.


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iv ~XTV mmy THE GLOBAL AGING PREPAREDNESS INDEX

or indeed, to ollow through on reors that have

alread been enacted but not et phased in.n the adequac side, the ndex tracks

trends in the living standard o the elderl relative

to the nonelderl in each countr based on projec-

tions that actor in the ipact o changes in public

benet progras, private pension provision, and

labor-orce participation rates. t also includes in-

dicators that easure the robustness o old-agesaet nets and ail support networks, which

pla a crucial role in retireent securit in an

eerging arkets and soe developed countries.

The ndex reveals that ost countries are

doing uch better on one diension o aging pre-

GAP Index Reorm Strategy Guide

1 2 3 4 5 6 7

Reduce PublicPensionBenefts

ReduceHealthCareCost Growth

ExtendWork Lives

IncreaseFundedPensionSavings

StrengthenPovertyFloors

IncreaseFertility

RatesIncrease

Immigration

str O OO O OO O

rz OOO O O OO O O

C O OO O OO O

Ce O O O O O O

C O OO OO OOO OO O

Frce OOO OOO OOO OOO O O

Ger OOO OO OO OO OOO OOO

IOO OO OO

It OOO OO OOO OO O OOO OO

Jp OOO OO OO OO OOO OOO

Kore O O OOO OOO O OO OOO

Meco OO OOO O

Neters OO OOO OO OO OO

o OOO OO OO OOO OO

ss O OO OO O OOO O

Sp OOO OO OOO OOO OO OOO OO

See OO OO O O O

Stzer O OO O O OOO O

UKO OO OO O O O

US O OOO O OO

Reorm Guide Key No Stars = Not a Priority O = Low Priority OO = Signifcant Priority OOO = High Priority


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THE GLOBAL AGING PREPAREDNESS INDEX XTV mmy~v

paredness than the other, suggesting that todas re-

tireent policies oten entail a worrisoe trade-o

between scal sustainabilit and incoe adequac.

Three o the seven highest-ranking countries on

the scal sustainabilit index (mexico, hina, and

ussia) are aong the seven lowest-ranking coun-

tries on the incoe adequac index. our o the

seven highest-ranking countries on the incoe ad-

equac index (the etherlands, Brazil, eran,

and the K) are aong the seven lowest-ranking

countries on the scal sustainabilit index.

There are, however, soe notable exceptions.

ustralia, which cobines a low-cost, eans-

tested oor o public old-age povert protection

with a large, andator, and ull unded private

pension sste, scores in the top hal o both

indices. lthough soe real concerns about the

adequac o retireent provision or low earners

reain, ustralia appears to be on track to eet

the aging challenge. rance and tal, on the other

hand, score near the botto o both indices. ach

has legislated large uture cuts in the generosit

o its public pension sste in an eort to shore

up its long-ter sustainabilit. yet despite the re-

ors, old-age benets will continue to ipose a

heav scal burden even as the becoe increas-

ingl inadequate.

The ndex includes a reor guide that

assesses the potential pao o seven ke reor

strategies, ro reducing public pension benets

and health-care cost growth to increasing ertilit

rates and iigration. Two strategies in particu-

larextending work lives and increasing unded

pension savingsare especiall iportant, since

the allow countries to escape, or at least to iti-

gate, the trade-o between scal sustainabilit

and incoe adequac. The oer the best eans

or the worlds aging societies to aintain the liv-

ing standard o the old without iposing a steepl

rising burden on the oung.

t is encouraging that countries around the

world have begun to ove in this direction. ro

eran, oland, and weden to hile, hina,

and ndia, governents are expanding existing

unded pension sstes or jup-starting new

ones. lderl labor-orce participation rates have

also begun to rise in an countries, with espe-

ciall large increases in soe continental uro-

pean countries long known or generous earl

retireent benets. The lesson o the ndex

is not that governents are doing nothing to re-

spond to the challenge o global aging, but that

the are not et doing enough.

Ten or teen ears ago, global aging barel

registered as a polic issue. Toda, with large age

waves looing just over the horizon in ost o

the worlds leading econoies, it has becoe the

ocus o growing concern. man governents are

beginning to debateand soe have enacted

ajor reors. yet despite this progress, there ex-

ists no satisactor easure o how well countries

worldwide are actuall responding to the chal-

lenge. The lobal ging reparedness ndex is

designed to ll this gap.


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THE GLOBAL AGING PREPAREDNESS INDEX KWLmT ~vii

Acknowledgments

The authors have accuulated an debts while

working on The Global Aging Preparedness Index

and are pleased to be able to acknowledge soe

o the ost iportant here.

irst ention ust go to erena yi-ying Lin,

a consultant with the lobal ging nitia-

tive who took on the daunting task o analzing

the household incoe surve data or all twent

countries in the ndex. Without the treendous

expertise and dedication she brought to the job,

the report would be uch poorer. The authors

also wish to thank Tobias eter, who worked as

an intern with the lobal ging nitiative, or his

iportant contributions to the project, as well as

the progras other talented internsBrian Hen-

derson, Laura manseld, Travis mills, and Lin

un o.

The authors are grateul to rudential plc or

unding the project and or oering strategic assis-

tance at an crucial junctures along the wa. n

particular, the wish to thank tephen Whitehead

(roup ounications irector) or believ-

ing in the project; miles elic (irector, roup

ublic airs & olic) or his unagging support

and thoughtul eedback; and rea itken-Tur

(manager, nternational ublic airs), hilippa

ale-Thoas (roject oordinator), and mlin

vadjian (nalst, ublic airs & olic) or

helping to shepherd the report through the pro-duction process and organize its roll out. The

are also grateul to aul Hancock (egional Head

o nstitutional Business, unds), reg alisbur

(xecutive Vice resident, Jackson ational Lie),

Thoas Hurle (enior Vice resident, market

esearch & trategic evelopent), and Thoas

Boardan (enior dvisor, inancial ervices

uthorit) or their an insightul suggestions.

Jaes H. raha (reative irector, park

media roup) deserves credit or the attractive

report design. an ottesan (Web manager,

) created the project website.

n ma 00, CSIS convened an all-da round-

table at which the authors presented their prelii-

nar conclusions. The wish to thank the outside

experts who participated or their invaluable in-

put: Jaes . apretta (ellow, thics and ub-

lic olic enter); Louis no (rincipal, no

ssociates, Ltd.); eter Heller (enior djunct

roessor o nternational conoics, Johns

Hopkins niversit); aler Hoskins (pecial

dvisor, .. ocial ecurit dinistration); s-

telle Jaes (nternational onsultant on ension

eor); udolph . enner (rja and rances

miller hair in ublic olic and nstitute el-

low, rban nstitute); ugene teuerle (ichard

B. isher hair and nstitute ellow, rban nsti-

tute); and mark Warshawsk (irector o etire-

ent esearch, Towers Watson).

While the authors grateull acknowledge the

assistance the received in preparing the report,the are solel responsible or its content.


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THE GLOBAL AGING PREPAREDNESS INDEX TT~1

INTRODUCTION

There are two orces behind the transora-

tion. The rst orce is alling ertilit. eople are

having ewer babies, and this decreases the relative

nuber o oung in the population. s recentl as

the id-960s, ever developed countr was at or

above the so-called . replaceent rate needed

to aintain a stable population ro one genera-

tion to the next. Toda, ever developed countr is

at or below itand ost are ar below it. n tal

and pain the ertilit rate is .4 and in eran

and Japan it is .3.

The trend toward lower birthrates began in the

rich world, but has now overtaken ost eerg-

ing arkets as well. ertilit has allen beneath

the replaceent rate in all o ast siaand in

Korea and the other Tigers it has dropped to lev-

els as low as the lowest in the developed world.ertilit is also ar beneath replaceent through-

out entral and astern urope, and it is near, at,

or beneath replaceent in all o Latin ericas

leading econoies. lthough it reains higher

elsewhere, it has begun to all rapidl in outh

sia and uch o the musli world.

The second orce is rising lie expectanc. eo-

ple are living longer, and this increases the relative

nuber o old in the population. Worldwide, lie

expectanc at birth has increased b twent-one

ears since 950, a bigger gain over the past sixt

ears than huanit had achieved over the pre-

vious six thousand. n the developed world, lie

expectanc is now in the late seventies to earl

eighties in ever countrand it has reached the

sae level, or nearl the sae level, in soe eerg-

ing arkets. Lie expectanc toda is 73 in hina

(up ro 4 in 950), 76 in mexico (up ro 5 in

950), and 79 in Korea (up ro 48 in 950).

ut these two orces together and the result is

a draatic aging o the population. t is todasdeveloped countries, o course, that are leading

the wa into huanits graing uture. or ost

o histor until well into the nineteenth centur,

the elderldened throughout this report as

The Challengeof Global Aging

T

he world stands on the threshold o a stunning deographic transoration. t

is called global aging, and it proises to reshape virtuall ever diension o

the econo and societ over the next ew decades.


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2 ~TT THE GLOBAL AGING PREPAREDNESS INDEX

adults aged 60 and overcoprised onl a tin

raction o the population, never ore than 4 or 5

percent in an countr. n the developed countries

toda, the coprise percent. Three decades

ro now in 040, the share is on track to reach

3 percentand thats just the average. n Japan

and the astest-aging uropean countries, it will

be approaching or passing 40 percent.

The developing world as a whole is still uch

ounger, but it too is agingwith soe coun-

tries traversing the entire deographic distance

ro oung and growing to old and stagnant or

declining at a breathtaking pace. B 040, Brazil

and mexico will be nearl as old as the nited

tatesand hina will be older. oland will be

older than rance and the K, while Korea will

be ving with eran, tal, and Japan or the

title o oldest countr on earth. (ee igure .)

We live in an era o an challenges, ro global

waring to global terroris. But ew are as certain

as global aging and ew are as likel to have such a

large and enduring ipact on the size and shape o

governent budgets, on the uture growth in living

standards, and on the stabilit o the global econ-

o. lobal aging proises to aect everthing

ro business pscholog and worker productivit

to rates o savings and investent, long-ter re-

turns to capital, and the direction o global capital

ows. erhaps ost ateull, it could throw into

question the abilit o societies to provide a de-

cent standard o living or the old without placing

a crushing burden on the oung. t is this old-age

dependenc diension o the global aging chal-

lenge that the current report explores.

Ten or teen ears ago, global aging barel

registered as a polic issue. Toda, with large age

waves looing just over the horizon in ost o

the worlds leading econoies, it has becoe the

ocus o growing concern. man governents are

beginning to debateand soe have enactedajor reors.

most o the concern, especiall in the devel-

oped world, is ocused on the rising scal cost o

governent benet progras. most developed

countries have expensive pa-as-ou-go public

FIGURE 1

Elderly (Aged 60 and Over),as a Percent o the Population

in 2007 and 2040.

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Japan

Italy

Germany

Korea

Spain

Poland

Switzerland

Netherlands

France

Canada

Sweden

Russia

Australia

UK

China

US

Chile

Mexico

Brazil

India


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THE GLOBAL AGING PREPAREDNESS INDEX TT~3

pension sstes that were put in place back in the

earl postwar decades when workers were abun-

dant and retirees were scarce, but which have now

been rendered unsustainable b the collapse in

birthrates and the stead rise in longevit. raing

also eans paing uch ore or health care, be-

cause the elderl tpicall consue at least three

ties ore per capita in acute-care services and

at least ten ties ore in long-ter care services

than the nonelderl.

aced with this daunting arithetic, several

countries have draaticall cut the generosit o

the deal uture retirees will receive copared

with todas retirees. rance, eran, tal,

Japan, oland, and weden have all revised the

benet structure o their public pension sstes

in was that, over tie, are scheduled to result in

deep reductions in the share o wages the replace.

man countries are also beginning to raise retire-

ent ages, especiall b closing down no-penalt

earl retireent options that in soe uropean

countries allowed workers to collect ull benets

in their id- or late ties. t the sae tie, gov-

ernents in an countries are tring to expand

existing unded pension sstes or jup-start

new ones in an eort to ll the incoe gap let as

state provision is scaled back.

meanwhile in the developing world, countries

are beginning to worr that the a grow old

beore the grow rich. lthough the rising scal

burden o pa-as-ou-go benet sstes is a ajor

issue in a ew countries, notabl Brazil and Korea,

the ost pressing concern is oten the growing vul-

nerabilit o the old. man developing countries

are aging beore the have had tie to put in place

the social protections o a odern welare state. n

hina and ndia, onl a raction o the workorce

is earning a benet under a pension sste, public

or private, and the ajorit o elders still depend

heavil on the extended ail or support in oldage. yet the inoral support networks on which

elders depend are alread under assault b the

orces o odernization and will soon coe under

intense new pressure as populations age and a-

il size declines. n response, soe countries are

putting in place universal public oors o old-age

povert protection (Brazil and hile), while others

are expanding coverage under oral retireent

sstes (hina and ndia).

lost everwhere, governents are also con-

sidering policies designed to ease the challenge

o global aging b altering the underling deo-

graphics theselves. ncreasing iigration is

one option. ountries like ustralia, anada, and

the nited tates that have high rates o net i-

igrationand also do a good job o assiilating

new arrivalshave a signicant deographic and

econoic advantage over countries that do not.

ot surprisingl, the pros and cons o stepped-up

iigration are being debated wherever native-

born workorces are projected to stagnate or de-

cline in the decades ahead. The issue is even on

the table in countries like Korea and Japan that

have traditionall valued their ethnic hoogene-

it. Tpicall, polic and business leaders avor

higher iigration, especiall when it is targeted

at skilled workers, while the broader public in

an countries is opposed.

There is also surging interest in pronatal poli-

cies in low-ertilit countries around the world.

ew developed countries, ost notabl rance

and weden, have long had coprehensive pro-

natal polic regiesincluding cash benets,

subsidized dacare, paid aternit leave, and job

guaranteesthat ake it easier or woen to bal-

ance jobs and babies. ow even a countr like

eran, where an suggestion that governent

should encourage higher birthrates was politi-

call taboo until a ew ears ago, is studing and

ipleenting pronatal reors. n a rearkable

about-ace, Korea recentl redened the is-

sion o its governent ail planning bureau

ro discouraging births to encouraging the.

Japan is debating how it can reorient its conserva-

tive workplace and ail cultures to ake theore supportive o working others. meanwhile

in ussia, Vladiir utin, citing uture econoic

and securit needs, has atl declared the nations

birth dearth to be the ost acute proble acing

our countr toda.


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~TT THE GLOBAL AGING PREPAREDNESS INDEX

yet despite all the concern

about global aging, there ex-

ists no satisactor easure o

how well countries worldwide

are actuall responding to the

challenge. ot all national gov-

ernents ake long-ter pro-

jections o the scal burden o

old-age benet spending, and

those that do rarel include all

benet progras. Virtuall no

governent akes an attept

to evaluate how reors are

likel to aect the long-ter ad-

equac o elderl incoe. To be

sure, there are an specialized

acadeic studies that evaluate

various diensions o aging or

retireent preparedness in

particular countries. There are

also a ew broader studies that

copare selected indicators,

such as retireent ages and re-

placeent rates, across an

countries. But while these stud-

ies are useul, the onl give a partial and inco-

plete picture.

The purpose o the lobal ging reparedness

ndex (or ndex) is to provide a ore co-

prehensive and realistic assessent o the progress

that countries are aking in preparing or their

onrushing age waves. The ndex builds on,

but renes and expands, an analtical raework

rst developed b the enter or trategic and

nternational tudies (CSIS) or a stud o aging

vulnerabilit in the developed world.1 To assess

preparedness, the ndex looks at projections

o total public benet spending and total house-

hold incoe b age through the ear 040. The

ndex covers twent countries, including ostajor developed countries and a selection o eco-

noicall iportant eerging arkets or which

adequate data were available.

cr Jckso Ne Hoe, The 2003 Aging Vulnerability Index: An Assess-ment o the Capacity o Twelve Developed Countries to Meet the Aging Challenge (Wsto, C: CSIS Wtso Wtt Wore, Mrc ).

The overall ndex con-

sists o two separate subindi-

cesthe scal sustainabilit

index and the incoe ad-

equac index.

n the scal side, the

ndex begins b looking at pro-

jections o public old-age ben-

et spending, including both

pensions and health benets.

But the ndex also goes urther.

t takes into account the dier-

ing scal roo that countries

have to accoodate their

growing old-age dependenc

burdens b raising taxes, cut-

ting other spending, or borrow-

ing. t also considers the degree

o elderl dependence on public

benets in dierent countries,

which a be a crucial actor

in deterining how politicall

eas or dicult it will be to en-

act new cost-cutting reors

or indeed, to ollow through on

reors that have alread been enacted but not

et phased in.

n the adequac side, the ndex tracks

trends in the living standard o the elderl rela-

tive to the nonelderl in each countr based on

incoe projections that actor in the ipact o

changes in public benet progras, private pen-

sion provision, and labor-orce participation rates.

t also includes indicators that easure the ro-

bustness o old-age saet nets and ail support

networks, which pla a crucial role in retireent

securit in an eerging arkets and soe de-

veloped countries.

hapter o the report describes the overall

structure o the ndex in ore detail andbrie explains the ke assuptions underling

the projections. hapter discusses the scal sus-

tainabilit index and the individual indicators that

coprise itwh the were selected, how the are

calculated, and what the reveal. hapter 3 does

GAP Index Countries

str

rz

C

CeC

Frce

Ger

I

It

Jp

Kore

Meco

Neters

o

ss

SpSee

Stzer

UK

Ute Sttes


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THE GLOBAL AGING PREPAREDNESS INDEX TT~

the sae or the incoe adequac index. hapter

4 then gathers together the strands o the stor

and assesses the potential pao o ke reor

strategies in dierent countries.

The stor contains both good news and bad

news. The bad news is that ver ew countries

score well on both the scal sustainabilit and in-

coe adequac indices. ountries that score well

on incoe adequac generall have costl public

old-age benet sstes, while countries that score

well on scal sustainabilit tend to have relativel

low elderl living standards. The good news is that

there are exceptions. ustralia, which cobines

a low-cost, eans-tested oor o public old-age

support with a large, andator, and ull unded

private pension sste, scores in the top hal o

both indices. o does hile, which has a siilar

ix o retireent policies. There are also a ew

countries that are clearl oving in the right di-

rection. eran and weden, or instance, have

scheduled deep reductions in the generosit o

their public pension sstes, but appear to be on

track to ll in the resulting incoe gap b extend-

ing work lives and increasing unded retireent

savings. lthough their scal burdens reain high,

the have been cut well beneath what the would

otherwise be without underining adequac.

The ndex also suggests that deogra-

ph need not be destin. Japan, which ust cope

with a assive age wave, nonetheless scores in

the iddle o both the scal sustainabilit and

incoe adequac indices. rance, which b co-

parison aces a relativel benign deographic

uture, scores toward the botto o both indices.

The lesson is that polic choices ake a critical

dierence. t is in the hope o stiulating debate

and ocusing attention on the need or construc-

tive reor that we oer this rst edition o the

lobal ging reparedness ndex.


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THE GLOBAL AGING PREPAREDNESS INDEX HT ~

CHAPTER ONE

The ost iportant assuption is that current

retireent policies and behavior in each countr

will reain unchanged in the uture. There are

onl two signicant exceptions to this no change

rule. The ndex projections ull reect the

uture ipact o retireent polic reors, ro

changes in benet orulas to changes in retire-

ent ages, that have alread been enacted into law

but are being phased in over tie. The also incor-

porate certain highl predictable cohort eects.

private pension coverage rates have been rising

aong ounger workers, as is the case in several

ndex countries, the increase in pension coverage

is ultiatel reected in an increase in pension

receipt aong the elderl. iilarl, i labor-orce

participation rates have been rising aong work-ers in their ties and sixties, as is also the case in

several ndex countries, that increase is assued

to translate with a lag into an increase in labor-

orce participation aong workers in their sixties

and seventies. The projections, however, do not

include additional polic or behavioral responses

beond those that are alread in the pipeline.

The ndex uses a no-change baseline be-

cause it is designed to serve as a stress test o

current retireent polic. ts purpose is not to

orecast where countries will end up, but rather

to show where the are heading on their current

courseand hence, b iplication, the agnitude

o the polic and behavioral responses that a

be required to ensure a satisactor outcoe. Tr-

ing to anticipate these responses and build the

into the baseline would obscure the ver need or

reor that the ndex is designed to highlight.

The ndex projections extend ro 007

through the ear 040. We selected 007 as the

base ear not onl because it is the ost recentear or which an data series are available, but

also because we wanted to use a snapshot o the

present that is not distorted b the current eco-

noic crisis when coparing near- and long-ter

indicator values. The 040 projection horizon was

T

he lobal ging reparedness ndex oers an new insights into one o the

greatest challenges o our tie. Beore exaining the results, however, it is

essential to understand the scenario and assuptions that underlie the projec-

tions. While the overview that ollows covers the critical issues, the interested

reader a wish to consult the technical appendix or additional details.

The GAP IndexFramework


18/76

~HT THE GLOBAL AGING PREPAREDNESS INDEX

selected because the deographic transition

in ost ndex countries will b then be largel

coplete. ven ater 040, rising longevit will

continue to push the old-age dependenc burden

steadil upward. But in ost countries, the era o

switest aging will occur between the id-00s

and the id-030s, as the collapse in ertilit rates

that has occurred over the past ew decades hol-

lows out the botto o the population praid

and as the retireent o large postwar bab boo

generations broadens the top. countr that can

successull navigate the deographic rapids over

the next three decades will, presuabl, be quite

prepared to anage the gentler current thereater.

countr that ails to eet the challenge b 040

a be ar ore concerned with conronting the

destructive legac o that ailure, ro high tax

levels to runawa debt, than with anaging an

new deographic developents ater 040.

t is also worth stressing that the deographic

projectionsor ore precisel, the relevant de-

ographic outcoesare virtuall locked in over

the next thirt ears. ven i ertilit, the ain

driver o deographic aging, were suddenl to

surge, it would have a negligible ipact on the

projected size o the working-age population or

the ratio o workers to retirees until 035 or 040.

eograph is like an ocean liner. nce it is

steaing ull speed ahead, it takes a long tie to

turn around. Beond 040, however, unexpected

deographic changes could signicantl alter the

ndex results.

n the near ter, our projections naturall ac-

tor in the ipact o the global econoic crisis

that began in 008. lthough the base ear or the

ndex is 007, the projection odel incorporates

actual 008 and 009 econoic and scal data.

or 00 and 0, the odel ollows the near-

ter projections published b the OECD or, or

non-OECD ebers, projections published b theIMF or national governents. Between 0 and

05, the odel assues that the econoic per-

orance and scal stance o each countr return

to pre-crisis noralc. s a result o the crisis,

GDP is o course lower and the public debt higher

than the would otherwise have been. neplo-

ent, productivit, and governent taxation and

spending, however, all return to pre-crisis levels.

ur assuption o a coplete and relativel rapid

return to noralc a be optiistic. To the ex-

tent that the crisis lingers, the projections in this

report a underestiate the econoic and scal

challenge that an countries ace.

n the long ter, we ake no attept to odel

uture business ccles. n the econoic side, we

use a standard global GDP projection odel that

assues a gradual convergence in productivit

growth rates across countries. n the scal side,

we ake two critical assuptions designed to iso-

late the ipact o deographic aging on public

budgets.

The rst assuption is that, ater the initial

0005 transition period, each countr adopts

a long-ter polic o debt neutralitthat is,

each countr oves toward a governent decit

(or surplus) which, when continued unchanged as

a share o GDP, would keep net governent debt

unchanged as a share o GDP. We assue that each

countr will achieve its new budget balance b an

increase (or decrease) in taxes cobined with an

equal decrease (or increase) in governent spend-

ing. While unrealistic as a short- or ediu-ter

orecast, debt neutralit is a standard assuption

in long-ter budget odels. overnents cannot

indenitel accuulate debtand it is doubtul

that the can indenitel accuulate assets either.

To suppose that the can would obscure the true

ipact o deographic aging on the uture scal

burden.

We considered akingbut decided against

an exception or countries that are targeting bud-

get surpluses as a partial solution to the aging

challenge. The historical ailure o governents

throughout the world to validate retireent

trust-und savings b running sustained gen-eral governent surpluses raises serious ques-

tions about the easibilit o this strateg. nless

retireent savings are personall owned or con-

tractuall based, there is nothing to prevent gov-

ernents ro spending, borrowing against, or


19/76

THE GLOBAL AGING PREPAREDNESS INDEX HT ~

The public pension projections used in the n-

dex are based on the specic benet rules in each

countr and, as alread indicated, take into ac-

count reors that have been enacted but not et

phased in. Whenever possible we rel on ocial

projections b national governents or, or EU-

eber countries, the uropean oission.

The health benet projections, which were ade

b CSIS, are based on a standard ethodolog. The

projections reect the ipact o deographic ag-

ing itsel, which alone will push up spending as a

share o GDP as ore o the population oves into

the older and higher-cost age brackets. The also

take into account the act that advances in edical

technolog and rising public expectations about

care and cure are pushing up per capita costs at all

ages aster than per capita GDP in ost countries.

t is the interaction o this excess cost growth

with deographic aging that akes health-care

spending such an explosive coponent o the old-

age dependenc burden.

n order to assess trends in incoe adequac,

the ndex also includes projections o to-

tal incoe b age. The odel divides household

incoe into ve broad categories: eploent

incoe, asset incoe other than unded pension

incoe, unded pension incoe, public benets,

and ail transers. We treat unded pensions as

a special class o assets because the are explicitl

designed to provide retireent incoe, are oten

intended to substitute in whole or in part or pa-

as-ou-go public pension benets, and are grow-

ing in iportance in an countries. The ndex

denition o unded pensions is airl broad. The

include public progras and private progras,

andator schees and voluntar schees,

eploer pensions and personal pensions, and

annuities and lup-su paents. The ndex

projections o unded pension benets, ost o

which were ade b CSIS, are based on a detailedanalsis o recent trends and polic reors in

each countr. ther tpes o privatel earned

incoe are projected according to stlized rules

that are described in the technical appendix.

otherwise nulliing the savings. n an case, onl

two o the twent ndex countriesanada and

Koreahave announced plans to pursue such a

polic on a signicant scale. we actored their

trust-und savings into the projections, it would

push anada up b one place and Korea b ve

places in the scal sustainabilit index. aturall,

it would have no ipact on their rankings in the

incoe adequac index.

The second assuption is that, once debt neu-

tralit is achieved, nonbenet governent spend-

ing will reain constant as a share o GDP and

taxes will be raised (or lowered) in each uture

ear in accordance with the projected change in

benet spending. n ost countries, o course,

this eans that taxes ust be raised in ever ear.

This rising tax assuption is onl relaxed or two

indicatorsthe budget roo and borrowing

roo indicatorswhere the object is to assess

the easibilit o alternative eans o paing or

the growth in old-age benet costs.

The ndex odel divides governent benets

into three categories: public pensions, health bene-

ts, and other benets. The public pension categor

includes all social insurance retireent and sur-

vivors benets, eans-tested retireent benets,

and governent eploee pensions provided

that the are nanced priaril on a pa-as-ou-

go basis. public pension sstes are unded and

benets are personall owned (as the personal

accounts sstes are in hile, mexico, oland,

and weden) or contractuall based (as govern-

ent eploee pensions are in soe countries),

benets are considered econoicall equivalent

to unded private pension benets and are not in-

cluded in the governent benet projections. The

rationale is siple: Whether unded pensions are

constituted as public or private progras, the

represent a return on retirees prior savings and

do not ipose a burden on current workers. Thehealth benets categor includes both acute care

and long-ter care. The other benets categor

includes everthing else, ro disabilit benets to

uneploent benets and housing benets.


20/76

1 ~HT THE GLOBAL AGING PREPAREDNESS INDEX

Throughout the ndex, the elderl are dened

as persons aged 60 and over, the nonelderl as

persons under age 60. The incoe o each age

group reers to the incoe o individuals within

that age group, with the exception o spouses o

heads o households, who are considered to be-

long to the sae age group as the head o house-

hold. n households containing both elderl and

nonelderl persons who are not spouses, incoe

is split between the two age groups. uch incoe

sharing is ver coon in ost developing and

a ew developed countries like tal, pain, and

Japan, where the elderl and their adult children

oten live together.

The threshold between elderl and nonelderl

a strike soe readers as earl, since in todas

developed countries ost sixt-ear-olds see

relativel oung. The threshold, however, is not

eant to indicate anthing about health, capacit,

or vigor. or does it ean that the ndex

assues that all adults under age 60 work and all

adults over age 60 are retired. The odel takes

into account actual patterns o eploent in

each countr. To the extent that the nonelderl

do not work (because the are students or sta-at-

hoe os), the projections reect this; to the

extent that the elderl do work (because the are

not retired or onl seiretired), the projections

also reect this. However, we require soe xed

dividing line between oung and old in order to

copare intergenerational transer burdens and

relative incoe adequac across countries and

across tie. ge 60 was chosen because it is now

close to the tpical age o retireent on public

benets in ost countriesuch closer, in act,

than age 65.

The ndex easures the perorance o

countries relative to each other rather than against

soe absolute standard o preparedness. We

considered establishing such a standard, butconcluded that an absolute benchark would

be arbitrar. There is no real consensus within

countries, uch less across countries, about what

constitutes an acceptable old-age benet burden

on workers or an acceptable living standard or

retirees. yet alost everone would agree that the

lower the worker burden is and the higher the

retiree living standard is the ore prepared the

countr is.

s alread explained, the overall lobal g-

ing reparedness ndex consists o two separate

subindicesthe scal sustainabilit index and the

incoe adequac index. The subindices in turn

are based on indicators grouped into distinct cat-

egories, each dealing with a dierent diension o

the challenge.

Fiscal Sustainability Index

j PUBLIC BURDEN. This categor containstwo indicators that easure the sheer

agnitude o each countrs projected

public old-age dependenc burden.

j FISCAL ROOM. This categor contains

three indicators that easure each

countrs abilit to accoodate the

growth in its public old-age depen-

denc burden b raising taxes, cut-

ting other spending, or borrowing.

j BENEFIT DEPENDENCE. This categorcontains two indicators that easure how

dependent the elderl in each countr are

on public benets and thus how politi-

call dicult it a be to reduce those

benets beneath current lawor even

to carr out reductions in benets that

are alread scheduled to take place.

Income Adequacy Index

j TOTAL INCOME. This categor contains twoindicators that easure the overall level

o and trend in the incoe o the elderl

relative to the nonelderl in each countr.

j INCOME VULNERABILITY. This categorcontains three indicatorstwo that

easure incoe adequac or iddleclass elders in each countr, a group

that will be disproportionatel aected

b changes in the generosit o retire-

ent incoe sstes, and one that

easures the extent o elderl povert.


21/76

THE GLOBAL AGING PREPAREDNESS INDEX HT ~11

j FAMILY SUPPORT. This categor containstwo indicators that easure the robustness

o ail support networks in each countr.

or each o the subindices, the countr rank-

ings are calculated as ollows. We rst tabulate the

results or individual indicators, ranked ro one

(best) to twent (worst). We then transor the in-

dicator results into index values. or each indica-

tor, the ean result is set to an index value o 50;

results that lie above and below the ean b one

standard deviation are set, respectivel, to index

values o 00 and zero. The indicator index values

thus preserve the indicator rankings while also re-

ecting the relative distance o each ranked coun-

tr, positivel or negativel, ro the center o the

pack. We next cobine the indicator index values

into categor scores, which are used to deterine

the categor rankings. inall we cobine the cat-

egor scores into overall scores and rankings or

each o the two subindices. The weights given to

each indicator and categor are described in the

technical appendix.

We considered but rejected the idea o cobin-

ing the two subindices into a single coprehensive

index. Because the lobal ging reparedness n-

dex includes countries at such dierent stages o

econoic developent, averaging the results or

scal sustainabilit and incoe adequac ight

obscure ore than it illuinates. onsider: man

developing countries have low scal burdens and

low incoe adequac, while an developed

countries have average scal burdens and average

incoe adequac. n a cobined index, these two

groups o countries would have siilar rankings,

though it is not at all clear that the are siilarl

prepared to eet the aging challenge. n the other

hand, the eaning o the rankings in the separate

scal sustainabilit and incoe adequac indices

is perectl clear.


22/76


23/76

THE GLOBAL AGING PREPAREDNESS INDEX HT TW~13

CHAPTER TWO

Cteor Oe:bc re

The public burden categor includes two indict-

ors that track the clai that public old-age benets

will place on societs total econoic resources:

j BENEFIT LEVEL:Total public benefts tothe elderly in 2040 as a percent o GDP

j BENEFIT GROWTH: The growth in to-tal public benefts to the elderly as apercent o GDP rom 2007 to 2040

s Table (on page 4) shows, there is an enor-

ous variation in the public old-age dependenc

burden across the twent countries in the

ndex. Todas eerging arkets generall have

low public burdens copared with the ull devel-

oped econoies, both because the have relativel

oung populations and because coverage un-

der their public benet sstes is oten ar ro

universal. The high-cost exceptions are oland,

which has a tpical uropean age prole, and Bra-

zil, which spends lavishl on public pensions even

though it is still deographicall a oung countr.Total old-age benets in Brazil weighed in at 9

percent o GDP in 007, copared with percent

in ndia and mexico and 3 percent in Korea and

hina. ld-age benets in ost eerging ar-

kets are projected to grow rapidl as their popula-

The FiscalSustainability Index

T

he late Herb tein, a orer chairan o the .. ouncil o conoic d-

visers, was ond o saing that things that are unsustainable tend to stop. The

GAP scal sustainabilit index cannot tell us when dierent countries will take

action to slow the growth in old-age dependenc costs, uch less what or

the action will take. What it does provide is a coprehensive easure o the

scal risks the ace. The public burden indicators, which ocus on the projected agnitude o

the old-age dependenc burden i current law reains in orce, are presented rst. The scal

roo indicators, which ocus on how easil each countr can accoodate the growth in that

burden, are presented second. The benet dependence indicators, which ocus on how politi-

call dicult it a be or countries to reduce that burdenor indeed, to keep the burden ro

rising even aster than current law would dictateare presented last.


24/76

1 ~HT TW THE GLOBAL AGING PREPAREDNESS INDEX

tions age, nearl doubling in ndia, nearl tripling

in hina, and quadrupling in Korea. ven so,

onl Brazil, where the are projected to reach 0

percent o GDP, will rank aong the ten highest-

burden countries in 040.

ven within the developed world, there is a

wide spread in outcoes. Total old-age benets

in anada, ustralia, the nited tates, witzer-

land, the K, Japan, and weden are projected

to grow to between 5 and 0 percent o GDP b

040. n eran, the etherlands, rance, tal,

and pain, the are projected to grow to between and 6 percent o GDP. The dierences are due

in part to deographics and in part to the varing

generosit o benet sstes, especiall pensions.

The lower-burden nglish-speaking countries

both spend less per capita on old-age benets and

are due to age less. witzerland spends relativel

little on old-age benets b uropean standards,

and though weden spends heavil toda it has

enacted an overhaul o its pension sste de-

signed to keep benets ro rising uch in the

uture and also has a relativel low rate o growth

in health-care spending. Japan is a special case:

t aces a assive age wave, but its pension ben-

ets are alread less than generous and are sched-

uled to be reduced even urther in the uture. The

higher-burden countries o continental urope

generall have the ost expensive public old-agebenet sstes and the astest-aging populations.

ontrar to what soe readers a suppose,

pensions and other cash benetsnot health

benetsaccount or ost o the total projected

old-age spending burden in 040. n average

Total Public Benefts to the Elderly,as a Percent o GDP, 20072040

TABLE 1

Country Ranking% o GDP

2007 2020 2030 2040

1 I 1.9 3.1 4.2 3.

2 Meco 2.4 3.2 3.9 .1

3 Ce 6.0 6.8 7.0 .

C 2.8 4.6 6.1 .

ss 5.8 7.5 8.7 1.2

o 10.1 12.0 13.1 13.

Kore 3.4 7.5 11.0 1.1

C 8.3 10.9 13.2 1. str 8.9 10.7 12.9 1.

1 US 8.9 12.5 15.1 1.3

Note Cotres re rke ro best to orst ccorto te projecto rests or 2040.


2007 2020 2030 2040

11 Stzer 9.8 12.6 15.7 1.

12 UK 12.1 14.0 16.4 1.2

13 Jp 14.1 15.4 15.9 1.

1 See 15.7 16.6 18.1 1.2

1 rz 8.8 12.5 16.3 2.

1 Ger 15.8 17.3 20.0 21.

1 Neters 12.0 15.7 20.0 23.2

1 Frce 16.6 19.4 21.8 23.1 It 18.0 19.9 22.3 2.

2 Sp 14.3 17.0 20.6 2.1


25/76


across all twent ndex countries, health benets

represent 38 percent o the total burden. n onl

three countries do the represent ore than hal:

anada (5 percent), mexico (55 percent), and

the nited tates (57 percent). Health benets,

however, do account or a disproportionate share

o the projected growth in total old-age benet

spending. n twelve o the countries, the share is

ore than 50 percent and in six o the countries it

is ore than 60 percent. n one countrhile

health benets account or ore than 00 percent

o the growth, since cash benets to the elderl

are actuall projected to decline as a share o GDP.

(etailed projections o public benets b tpe

are available at gapindex.csis.org.)

lthough the rankings or the benet level and

benet growth indicators are siilar or ost

countries, there are soe iportant dierences.

(ee igure .) ew countries, notabl Korea

and the nited tates, score uch better on level

than on growth. n the case o Korea, the di-

erence is draatic: a ranking o seven versus a

ranking o seventeen. The explanation lies ainl

in Koreas unusuall severe deographics. ts

public pension sste is not especiall generous

and leaves large gaps in coverage, but the elderl

share o its population is projected to soar ro 4

percent in 007 to 39 percent in 040, b ar the

largest increase o an countr in the ndex. The

nited tates, in contrast, aces a relativel ild

aging trend. t is the oungest o the developed

countries toda, and thanks to its relativel high

ertilit rate and substantial net iigration, it

will (despite the retireent o its large bab boo

generation) still be the oungest in 040. The gen-

erosit o its public pension sste is also od-

est b developed-world standards. What gives the

nited tates its teenth-place ranking on ben-

et growth is its exceptionall rapid rate o growth

in health-care spending.There are also a nuber o countries that score

signicantl better on growth than on level, nota-

bl weden (ten rankings higher), eran (seven

higher), Japan (seven higher), tal (six higher),

and rance (our higher). ll have enacted reors

FIGURE

Growth in Total PublicBenets to the Elderly

rom 2007 to 2040,as a Percent o GDP

US

UK

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

Note: Countries are ranked from best to worst.

Spain

Brazil

Netherlands

Korea

Switzerland

France

Italy

Canada

Australia

Germany

China

Russia

Japan

Poland

Sweden

Mexico

India

Chile


26/76


in recent ears that are scheduled to cut average

public pension benets relative to average wages

over the next ew decades. weden and tal are

transoring their traditional dened-benet ss-

tes into notional dened-contribution sstes

in which benet paouts are eectivel indexed to

the growth in the paroll tax base. rance has re-

indexed its second tier ARCO and AGIRC pensions

to prices, which again eans that average benetswill decline as share o average wages. eran

and Japan have introduced deographic stabi-

lizers that will have uch the sae eect. These

countries spend a lot on old-age benets toda

and will spend even ore toorrow. But total

spending will grow uch less than the aging o

their populations would otherwise require.

Table copares the current-law public pen-

sion projections used in the ndex with an

alternative current-deal scenario that assues

that the average retireent age in each countr

will reain unchanged in the uture and that ben-

ets will continue to replace the sae share o

wages the do toda. s can be seen, scheduledreductions in the generosit o public pension

sstes are indeed large in an countries. n

rance, pension spending as a share o GDP will be

33 percent less in 040 under the current-law pro-

jection than the current-deal projection. n tal

Public Pension Benefts to the Elderly,as a Percent o GDP in 2007 and 2040:

Current-Law versus Current-Deal Scenario*

TABLE 2

Country

% o GDP

2007Current

Law 2040Current

Deal* 2040

str . . .

rz . . .

C . . .

Ce . . .

C . . .

Frce . . .Ger . . .

I . . .

It . . .

Jp . . .

* e crret-e scero sses tt orkers tetre o ere retre t te se e te o to tt beets repce te se sre o es.

Country

% o GDP

2007Current

Law 2040Current

Deal* 2040

Kore . . .

Meco . . .

Neters . . .

o . . .

ss . . .

Sp . . .See . . .

Stzer . . .

UK . . .

US . . .


27/76


and eran it will be 36 percent less and in Ja-

pan 4 percent less. Ver large benet reductions

are also scheduled in oland, hile, and mexico,but in these countries pa-as-ou-go public pen-

sions are being replaced in whole or in part with

unded personal accounts.

The benet level and benet growth indicators

both add an iportant and dierent perspec-

tive to the ndex. The absolute spending level as

a share o GDP is clearl the siplest easure o

the total resource burden that deographic ag-ing threatens to ipose on the econo. yet the

rise in spending is also iportant, since soe so-

cieties a be institutionall and culturall better

equipped to handle high levels o public benet

spending than others. ro this perspective, the

Public Burden Category

TABLE 3

Category Ranking and Score Beneft Level Indicator (%) Beneft Growth Indicator (%) India 13 I 3.6 Ce 1.5

Mexico 121 Meco 5.1 I 1.6

Chile 12 Ce 7.5 Meco 2.7

China C 8.0 See 3.5

Russia ss 10.2 o 3.8

Poland o 13.9 Jp 4.3

Sweden Kore 14.1 ss 4.4

Australia C 14.7 C 5.2

Japan str 14.9 Ger 5.9

Canada US 16.3 str 6.0

UK 3 Stzer 17.4 UK 6.1

US UK 18.2 C 6.4

Switzerland 3 Jp 18.4 It 6.6

Germany 31 See 19.2 Frce 6.8

Korea 22 rz 20.4 US 7.4

France 1 Ger 21.7 Stzer 7.6

Italy 1 Neters 23.2 Kore 10.7

Brazil Frce 23.5 Neters 11.2

Netherlands 1 It 24.7 rz 11.6

Spain 33 Sp 26.1 Sp 11.8

INDICATOR KEYBeneft Level Indicator = ot pbc beets to te eer 2040 s percet o GBeneft Growth Indicator = Grot tot pbc beets to te eer ro 2007 to 2040 s percet o G



28/76


road ahead or Korea or the nited tates a

be just as bup as or soe countries that are

projected to spend uch ore.

Table 3 (on page 7) suarizes the results or

the public burden categor. ot surprisingl, n-

dia, which has the oungest population and the

least-developed welare state o an countr in the

ndex, ranks rst. pain, which is both one o u-ropes astest-aging countries and one o the ew

that has et to undertake an signicant reor

o its public pension sste, ranks last. n calcu-

lating the categor results, both indicators were

weighted equall.

Cteor o:Fsc ooThe rst indicator categor ocused on the pro-

jected resource burden o rising old-age benet

spending. While a large and growing burden is

certainl a cause or concern, the agnitude o

the burden alone does not tell us whether it issustainable. t is also crucial to look at the scal

roo that dierent countries have available to ac-

coodate the burden. There are three was in

which countries can adjust to higher old-age ben-

et spending: pa or the growth b raising taxes,

Total Government Revenue as a Percent oGDP, Assuming Taxes Are Raised to Pay or

All Growth in Public Benefts, 20072040*

TABLE 4


2007 2020 2030 2040

1 I 23.5 23.8 25.1 2.2

2 Meco 22.6 22.9 23.4 2.

3 Ce 29.5 26.4 26.4 2.

C 21.7 23.9 25.2 2.2

Jp 33.5 33.7 34.0 3.2

o 40.3 39.4 39.8 . ss 40.0 38.0 38.9 .

Stzer 33.9 35.9 38.8 .

str 35.7 36.6 38.7 .

1 US 34.0 37.6 40.3 1.

Note Cotres re rke ro best to orstccor to te projecto rests or 2040.

* e projectos sse tt, be 2015, ec cotr oesto ebt-etr sc bce ts rest o oeret bet.


2007 2020 2030 2040

11 Kore 33.3 36.4 39.4 2.3

12 C 40.7 41.5 43.5 .

13 UK 41.4 43.2 45.4 .

1 rz 34.8 39.6 43.5 .

1 Ger 43.9 43.9 45.8 .

1 Sp 41.1 42.4 45.6 .31 It 46.4 47.7 49.5 1.

1 Neters 45.7 47.8 51.5 .

1 Frce 49.6 52.4 54.6 .3

2 See 56.3 55.1 56.3 .


29/76


pa or the growth b cutting other governent

spending, or pa or the growth b borrowing.

The scal roo categor includes three indica-

tors that evaluate the easibilit o these strategies:

j TAX ROOM:Total government revenue in2040 as a percent o GDP(This indica-

tor assues that all benet growth

is paid or b raising taxes.)

j BUDGET ROOM: Total public benefts tothe elderly in 2040 as a percent o govern-

ment outlays (This indicator assues

that all benet growth is paid or b

cuts in other governent spending.)

j BORROWING ROOM: The net public debtin 2040 as a percent o GDP(This indica-

tor assues that all benet growth is

paid or b governent borrowing.)

Let us begin with the tax option. ot surpris-

ingl, countries with the largest projected old-age

dependenc burdens tend to end up with the larg-

est tax burdens. (ee Table 4, on page 8.) ince

the overall tax burden also depends on the overall

size o the public sector, however, there are soe

exceptions. ew countries with large public sec-

tors score uch worse on tax roo than the do

on the public burden indicators. weden, or ex-

aple, ranks seventh overall in the public burden

categor, but twentieth on tax roo. or a ew

other countries with large old-age dependenc

burdens but relativel sall public sectors, the re-

verse is true. witzerland ranks thirteenth in the

public burden categor, but eighth on tax roo.

n an countries, the tax option would lead to

total tax burdens that are considerabl higher than

todas. n 007, onl ten o the ndex countries

had a total tax burden o ore than 40 percent

o GDP and onl onewedenhad a total tax

burden o ore than 50 percent o GDP. B 040,teen would have a total tax burden o ore than

40 percent o GDP, including such traditionall

low-tax countries as ustralia, Korea, witzer-

land, and the nited ates. ive countries, all in

FIGURE

Total Public Benets tothe Elderly as a Percent o

Government Outlays in 2007and 2040, Assuming Cuts in

Other Spending Pay or AllGrowth in Public Benets*

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.

Note: Countries are ranked from best to worstaccording to the projection results for .

* The projections assume that, beginning in , each country moves to adebt-neutral fiscal balance in its rest of government budget.

Spain

Brazil

Switzerland

Japan

Italy

Netherlands

Germany

Korea

France

US

Australia

UK

China

Canada

Sweden

Poland

Chile

Russia

Mexico

India


30/76


urope, would have a total tax burden o ore

than 50 percent o GDP.

oe uropean countries a literall nd it

ipossible to raise taxes enough to pa or the ull

cost o their age waves. t soe point, rather than

generate new revenue, higher tax rates a sipl

slow the econo, exacerbate uneploent, and

push ore workers into a growing gra econo.

The tax option a also prove unsustainable insoe eerging arkets with ast-growing old-age

dependenc burdens. most eerging arkets start

with relativel sall public sectors and so would

see to have an advantage. This advantage a be

ore apparent than real, however, since an also

have large inoral sectors which b denition can-

not be taxed. While the developed countries a

have dicult pushing total taxation above 50 per-

cent o GDP, eerging arkets like Korea and Bra-

zil a have dicult pushing it above 40 percent.

To the extent that taxes cannot be raised, coun-

tries a be able to accoodate the growing

burden o old-age benet spending b reducing

other categories o governent spending. Thebudget roo indicator looks at what would hap-

pen i, instead o raising taxes, governents si-

pl allowed old-age benets to crowd out other

spending dollar or dollar. B 040, benets to

the elderl would account or over 40 percent o

et Public Debt as a Percent o GDP,Assuming that Borrowing Pays or All

Growth in Public Benefts, 20072040*

TABLE 5


2007 2010 2015 2040

1 Ce -13.7 -14.5 -26.0 31.1

2 See -25.0 -12.9 -14.1 1.

3 ss 0.0 1.6 -6.2 32.

C 1.7 -1.5 -1.1 3.

Meco 31.4 44.4 43.0 .

o 17.0 32.4 41.7 .1

str -6.6 -1.1 1.3 3.

Kore -35.8 -33.4 -36.8 .

Stzer 11.0 9.3 5.8 .

1 C 23.1 32.6 32.7 1.

Note Cotres re rke ro best to orst ccorto te projecto rests or 2040.

* e projectos sse tt, be 2015, ec cotr oesto ebt-etr sc bce ts rest o oeret bet.

t or I reer to ross ebt.


2007 2010 2015 2040

11 I 78.3 84.6 80.0 1.

12 Ger 42.9 54.7 56.7 12.2

13 Jp 80.4 104.6 114.9 133.

1 Frce 34.0 60.7 73.5 1.2

1 UK 28.8 58.3 76.9 12.

1 It 87.1 100.8 103.6 1.2

1 Neters 28.0 36.5 41.3 1.1

1 Sp 18.7 41.6 49.2 1.1

1 rz 42.0 37.3 37.2 1.2

2 US 42.3 65.0 76.2 1.


31/76


total spending in twelve o the twent ndex coun-tries, over 50 percent in six o the, and over 60

percent in one: pain. n the countr with the

largest share todaJapanthe account or just

39 percent. (ee igure 3, on page 9.)

The budget roo indicator points to soeuseul polic lessons. ountries with large public

sectors but relativel sall old-age dependenc

burdens tend to have uch ore budget roo

than tax roo, weden being the ost striking in-

stance. t ranks last on tax roo, but sixth on bud-

Fiscal Room Category

TABLE 6

Category Ranking and Score Tax RoomIndicator (%)* Budget RoomIndicator (%)* Borrowing RoomIndicator (%)*

Chile I . I . Ce -.

India Meco . Meco . See .

Mexico Ce . ss . ss .

China C . Ce . C .

Russia Jp . o . Meco .

Poland o . See . o .

Australia ss . C . str .

Sweden Stzer . C . Kore .

Canada str . UK . Stzer .

Korea US . str . C . Switzerland Kore . US . I .

Japan C . Frce . Ger .

UK UK . Kore . Jp .

US rz . Ger . Frce .

Germany Ger . Neters . UK .

France Sp . It . It .

Italy It . Jp . Neters .

Brazil Neters . Stzer . Sp .

Netherlands Frce . rz . rz .

Spain See . Sp . US .

INDICATOR KEYTax Room Indicator = ot oeret reee 2040 s percet o G, ss tes re rse to p or rot pbc beetsBudget Room Indicator = ot pbc beets to te eer s percet o oeret ots 2040, ss cts oter spep or rot pbc beetsBorrowing Room Indicator = Net pbc ebt 2040 s percet o G, ss borro ps or rot pbc beets


* e projectos sse tt, be 2015, ec cotr oes to ebt-etr sc bce ts rest o oeret bet.


32/76


get rooahead o an other developed countr.

anada and rance also score considerabl better

on budget roo than tax roo. The iplication is

that such countries a be able to carve out a lot

o extra space in their budgets or old-age benet

progras, since presuabl the can nd a lot o

lower-priorit governent spending that can be cut

without uch cost to societ. n the other hand,

countries with relativel sall public sectors like

Japan and the nited tates a be able to acco-

odate relativel little growth in old-age spending

without crowding out vital public services.

The nal option, at least in theor, is to cover

rising old-age benet costs b borrowing. Whether

this option is easible in practice, o course, de-

pends both on a countrs initial debt level and

the projected growth in its old-age dependenc

burden. or countries like hile, weden, ussia,

and hina, which have a sall net public debt (in-

deed, in the case o hile and weden, a negative

net public debt, eaning that the governents

assets exceed its liabilities), it a well be easible.

or ost countries, however, it is not. govern-

ents sipl borrowed to cover the projected

ear-to-ear growth in old-age benet spending,

eleven o the twent ndex countries would have

a net debt exceeding 00 percent o GDP b 040

and six would have a net debt exceeding 50 per-

cent o GDP. (ee Table 5, on page 0.) This last

high-debt group includes not just high benet-

growth countries like Brazil and pain, but also

the K and the nited tates, which have alread

used up ost o whatever borrowing roo the

had during the econoic crisis.

t is worth recalling that the borrowing roo

indicator, like the other scal roo indicators, is

designed to isolate the budgetar ipact o rising

old-age benet costs. part ro what countries

borrow to pa or the growth in old-age benets,

the are still assued, beginning in 05, to run adebt-neutral scal polic in the rest o the budget.

Without this constraint, the public debt in countries

that are now running large decits would reach ec-

onoicall unsustainable levels long beore 040.

Table 6 (on page ) suarizes the results or

the scal roo categor. hile, which ranks in the

top our countries on all three indicators, scores

best overall. pain, which ranks in the botto ve

countries on all three, scores worst. n calculat-

ing the categor results, all three indicators were

weighted equall.

Cteor ree:eeft epeece

How big is the risk that countries with large and

growing old-age benet burdens wont be able to

ake the necessar adjustents until the hit a

scal wallat which point the will have to ake

the adjustents suddenl and without giving peo-

ple tie to adjust and prepare? Just as iportant,

how big is the risk that countries which have ade

signicant progress in curbing uture cost growth

will have to roll back the reors once the begin

to cut deepl into benet paentsand elderl

living standards?

learl, one actor that a help or hinder re-

or is the degree to which the elderl in dierent

countries are dependent on public benets. The

larger public benets loo as a coponent o to-

tal elderl incoe, the ore dicult it a be to

reduce those benets. The less iportant public

benets are, the less political resistance there is

likel to be to reor. nother actor that a

help or hinder reor is the extent to which re-

ductions in public benets would push elders into

povert, a concern to which ost societies are

quite sensitive. ccordingl, the benet depen-

dence categor includes two indicators:

j BENEFIT SHARE: Total public benefts as a per-cent o elderly income: Average or 2007 to 2040

j BENEFIT CUT: The percent o elderly house-holds that would be pushed into povertytoday by a 10 percent cut in public benefts

ot surprisingl, the degree o elderl depen-

dence on public benets, like the size o the old-


33/76


age benet burden, varies treendousl across

the twent ndex countries. ong the developed

countries, the nited tates, anada, witzer-land, and ustralia, where public benets now

constitute one-third or less o elderl cash incoe,

are at the low end o the spectru. Benet depen-

dence is a bit higher in Japan, the etherlands, the

K, and wedenand uch higher in the other

continental uropean countries. n eran,

public benets now constitute nearl 50 percent

o total elderl cash incoe, while in tal, pain,and rance the constitute between 55 and 60

percent. ong the eerging arkets, mexico,

Korea, ndia, and hile all have ver low depen-

dence, with public benets now ranging between

roughl 0 and 30 percent o elderl cash incoe.

Public Benefts, as a Percento Elderly Income, 20072040

TABLE 7

Country Ranking

Excluding PublicHealth Benefts Country Ranking

Including PublicHealth Benefts

2007 2020 2030 2040 2007 2020 2030 2040

Meco 19.0 17.4 14.9 13. Ce 34.8 30.6 26.9 2.3

Ce 30.5 24.4 19.0 1. I 27.4 32.2 34.5 2.

I 25.2 29.3 31.0 21. Meco 25.3 26.6 26.0 2.

US 22.2 22.7 22.9 22. US 35.1 37.2 38.8 .3

C 30.8 30.0 30.2 2. str 43.1 39.5 40.3 1.2

str 34.4 29.2 29.0 2.3 Jp 46.9 44.5 42.2 2.

Jp 38.7 34.7 31.2 31. Kore 29.9 40.9 44.0 .

Stzer 31.5 31.8 32.6 33. C 43.8 43.3 44.8 .

Kore 21.1 30.4 32.8 3. Ger 54.5 47.8 45.2 .1

Ger 47.0 39.2 36.1 3.1 Stzer 41.5 43.6 44.9 .1

Neters 40.0 39.1 39.3 . Neters 49.6 48.9 49.6 1.

UK 41.6 41.5 40.3 1. See 53.6 52.6 51.2 2.

See 44.4 43.5 41.3 2.1 C 48.0 52.5 51.0 .

ss 49.7 48.0 48.5 . ss 57.4 55.9 57.4 .

C 42.0 45.8 42.7 .2 UK 51.5 52.5 52.2 .1

It 55.4 51.9 48.7 .1 It 60.5 58.1 55.8 .

o 73.7 63.6 57.1 .1 o 77.1 68.6 63.0 .

rz 60.1 56.5 55.4 . rz 64.2 62.6 62.3 2.2

Frce 59.4 56.7 55.8 . Sp 63.1 63.3 63.0 .2

Sp 57.1 56.9 55.8 . Frce 66.7 65.8 66.2 .

Note Cotres re rke ro best to orst ccor to te projecto rests or 2040.


34/76


Benet dependence is considerabl higher in the

others4 percent in hina, 50 percent in us-

sia, 60 percent in Brazil, and an astonishing 74

percent in oland. The gure or hina, however,

a be isleading, since it is a weighted aver-

age or urban and rural elders. n hinas cities,

where the ajorit o the elderl collect a public

pension, benet dependence is indeed relativel

high. n the countrside it is ver low, with public

benets aking up just 0 percent o elderl cash

incoe, about what the do in mexico and Korea.

aturall, all o these shares are largerand in

ost developed countries considerabl largeri

we include health benets as part o incoe. (ee

Table 7, on page 3.)

t is worth noting that the absolute level o de-

pendence o ost elders on public benets is even

higher than these averages suggest. ublic benets

in ever countr except hina ake up a larger

share, and usuall a uch larger share, o the in-

coe o the tpical elder in the third quintile o

the incoe distribution than the do or the aver-

age elder. ven in countries with relativel low lev-

els o benet dependence like the nited tates,

Japan, and the K, the dierences are striking. n

the nited tates, public benets ake up per-

cent o cash incoe or the average elder but 38

percent or the tpical elder. n Japan the shares

are 39 versus 6 percent and in the K the are 4

versus 69 percent. n rance, eran, tal, and

pain, ore than 70 percent o the cash incoe

o the tpical elder arrives in the or o a govern-

ent check, suggesting that soe o the countries

that ost need to cut benets a have the ost

dicult doing so.

high level o public benet dependence o

course eans a low level o reliance on private

incoe sources, and vice versa. ll o the low-

dependence countries in the ndex either have rel-

ativel high elderl labor-orce participation rates,relativel large unded pension sstes, or both.

The high-dependence countries tend to have ew

working elders and little unded retireent sav-

ings. n rance, the overall elderl labor-orce par-

ticipation rate is just 5 percent and unded pension

FIGURE 4

Funded Pension Benets,as a Percent o GDP

in 2007 and 2040.

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Note: Countries are ranked from best to worstaccording to the projection results for .

France

Korea

India

China

Mexico

Russia

Spain

Italy

Japan

Germany

Poland

Brazil

Chile

UK

Sweden

Switzerland

Canada

US

Australia

Netherlands


35/76


benets account or a ere percent o elderl

cash incoe. n the nited tates, 6 percent o

the elderl still work, at least part tie, and unded

pension benets account or 0 percent o incoe.

n soe ediu- and high-dependence coun-

tries, however, the balance a be shiting. ver

the past decade, elderl labor-orce participation

rates have begun to rise rapidl in eran and

the etherlandsand the are projected to rise

rapidl over the next decade in oland. unded

pension benets are also on track to grow sub-

stantiall in an ediu- and high-dependence

countries, including Brazil, eran, tal, o-

land, ussia, and weden. (ee igure 4, on page

4.) The relative iportance o unded pension

benets in elderl incoe will thus increase in

all o these countries. ince the growth is ro a

sall base, however, the will still be a relativel

sall share o elderl incoe in 040. The onl

countries where unded pensions will exceed 0

percent o elderl cash incoe in 040ustra-

lia, anada, the etherlands, witzerland, and

the nited tatesare countries where unded

retireent provision is alread iportant toda.

(etailed projections o elderl incoe b tpe

are available at gapindex.csis.org.)

lthough the overall level o benet depen-

dence is probabl the single best indicator o po-

tential political resistance to cost-cutting reor,

the reliance o the low-incoe elderl on public

benets a also be an iportant actor. The

benet cut indicator easures the percentage

o elderl households that would be pushed into

povert b an iediate 0 percent cut in pub-

lic benets. poor elderl household is dened

as a household having an incoe o less than 50

percent o the edian incoe or all households

in each countr, a standard denition in cross-

countr coparisons o incoe distribution. How

countries peror on this indicator is deterined,rst, b the distribution o elderl incoe around

the povert threshold and, second, b the degree

o dependence on public benets aong elderl

households around the povert threshold.

FIGURE

Percent o Elderly HouseholdsThat Would Be Pushed into

Poverty Today by a 10 PercentCut in Public Benets*

Note: Countries are ranked from best to worst.

* Data refer to various years between and and exclude publichealth benefits. Poor households are households with incomes beneath percent of the median income for all households.

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Netherlands

Switzerland

Germany

Australia

UK

Canada

Sweden

Russia

Spain

Italy

US

Japan

France

Chile

Poland

China

Brazil

Korea

Mexico

India


36/76


The countries that do best on this indicator are

generall those in which overall benet dependence

is low. (ee igure 5, on page 5.) n ndia, mexico,

or Korea, it would be possible to zero out nearl

all public benets without signicantl increasing

elderl povert. The countries that do worst gener-

all have expansive welare states. n weden, er-

an, or the etherlands, with their higher degree

o benet dependence, an given percentage cut in

benets translates into a larger percentage cut in

total household incoe. There are, however, soe

iportant exceptions. rance scores relativel well,

even though it is the ndex countr with the highest

level o benet dependence. pparentl, its public

benets are generous enough to lit ost elders

ar enough above the povert threshold that a 0

percent cut in benets tubles relativel ew back

into povert. Low-dependence anada, the K,

and witzerland, on the other hand, score poorl.

pparentl, their odest public benets leave a

large share o elders clustered just above the pov-

ert thresholdand vulnerable to an reduction at

all in public incoe support.

ustralias low ranking erits a special expla-

nation. nlike other developed countries, its onl

public pension benet is eans-tested. t 50 per-

cent o the all-household edian incoe, a large

share o elders eet the eans test and are highl

dependent on public benets. the ndexs pov-

ert threshold were set a bit higher at 60 percent o

the all-household edian, ustralia would score

uch better.

Table 8 (on page 7) suarizes the results

or the benet dependence categor. ndia, with a

third-place ranking on the benet share indicator

and a rst-place ranking on the benet cut indica-

tor, scores best overall. pain, with an eighteenth-

place ranking on the benet share indicator and

a twelth-place ranking on the benet cut indica-

tor, scores worst. n calculating the categor re-sults, the ore iportant benet share indicator

received a two-thirds weight and the benet cut

indicator a one-third weight. ote that because

benet dependence is projected to rise in soe

countries and all in others, we calculate the ben-

et share indicator based on the average level o

dependence on public benets between 007 and

040. To capture the ull dependence o the el-

derl, the indicator also includes health benets.

Oer FscSstbt estsThe GAP scal sustainabilit index cobines the

results or the three indicator categories into a sin-

gle overall score and ranking or each countr. The

central public burden categor receives a weight o

40 percent, while the scal roo and benet de-

pendence categories receive weights o 30 percent

each. Table 9 (on page 8) presents the results

and oers soe interesting additional insights.

glance at the results reveals that there is a airl

sooth progression in overall index scores as we

ove down through the countr rankingsexcept

at the ver top and botto, where a ew countries

are obvious outliers. t the top, there is a ver large

gap in scores between ndia, mexico, and hile

and the next highest-ranking countr, hina. To-

gether, these three countries constitute a high-

scal preparednessor perhaps better, low-scal

vulnerabilit group. The not onl earn the top

three rankings overall in the scal sustainabilit in-

dex, but also earn the top three rankings in each o

the three indicator categories. t the botto o the

scal sustainabilit index, tal, rance, Brazil, the

etherlands, and pain constitute a low-scal pre-

paredness or high-scal vulnerabilit group. ll ve

countries not onl rank in the botto ve coun-

tries overall, but also rank in the botto ve in the

public burden and scal roo categories and in the

botto eight in the benet dependence categor.

lthough the gap in scores that separates the

ro the next-highest ranking countr, the K, is

not as large as the gap separating hile and hina,the clearl ace an especiall daunting challenge.

t is iportant to note that the general location

o countries in the scal sustainabilit index is

ore eaningul than the precise countr rank-

ings. Large changes in several indicators would be


37/76


required to ove a countr ro the iddle to the

top or the botto o the rankingsand a policrevolution would be required to ove a countr

ro the botto to the top or vice versa. ven i-

nor changes in assuptions, however, could ip

soe o the individual countr rankings. mexico

and hile could easil change places, since their

scores are virtuall identical. The sae is true o

ustralia and Japan, anada and weden, anderan and the K.

While ost o the results coport with con-

ventional wisdo, there are a ew instructive

surprises. Japan ranks ar higher than one ight

expect, while the K and the etherlands rank

Beneft Dependence Category

TABLE 8

Category Ranking and Score Beneft Share Indicator (%) Beneft Cut Indicator (%)* India 13 Meco 27.1 I .

Mexico 133 Ce 30.8 Meco .

Chile 122 I 31.6 Kore .

Korea US 38.1 rz .

US str 40.5 C .

Japan Kore 41.3 o .

Australia 3 Jp 43.9 Ce .

China C 44.2 Frce .

Canada Stzer 44.3 Jp .

Poland 3 Ger 48.4 US .

Germany 3 Neters 49.8 It .

Switzerland 33 C 52.1 Sp .

Italy 3 See 52.5 ss .

Brazil 2 UK 52.8 See .

Sweden 2 ss 56.5 C .

Russia 2 It 57.6 UK .

UK 1 rz 62.8 str .

Netherlands 1 Sp 64.0 Ger .

France 2 Frce 66.3 Stzer .

Spain 1 o 66.8 Neters .

INDICATOR KEYBeneft Share Indicator = ot

Documents

101014 Global Aging Index DL Jackson LR