G L O B A L A G I N GT H E C H A L L E N G E O F T H E N E W M I L L E N N I U M

CENTER FOR STRATEGIC AND

INTERNATIONAL STUDIESAND WATSON WYATT

WORLDWIDE

THE COMMISSION ON GLOBAL AGING

December 10, 1999

Dear Friends:

Among the many trends that compete for the attention of policy makers these days, noneis more likely to shape economic, social, and political developments in the early twenty-first century than the simultaneous aging of Japan, Europe, and the United States. TheCommission on Global Aging has come together under the aegis of the Center for Strategicand International Studies (CSIS) in the belief that global prosperity depends on a wisebalancing of the needs of older populations with those of economic growth in nationsthat today account for almost two-thirds of world output.

In the following pages, CSIS and Watson Wyatt Worldwide outline the historic challengeposed by shifts in the ways developed world populations form families, work, save, retire,and care for their aged. The human life cycle is undergoing unprecedented change. Topreserve economic security, we must adapt the social institutions built around it to thesenew realities. And yet attempts to do so inevitably encounter political expectations thatare difficult to change.

The Commission has undertaken a two-year effort to understand and communicate theeconomic, political, social, and strategic exigencies of population trends in the majorindustrial nations. As honorary co-chairmen, we are pleased to commend this documentto your attention. We urge you to join with us in examining the urgent responsibilitiesthrust upon us by global aging.

Sincerely,

Walter Mondale Ryutaro Hashimoto Karl Otto PöhlFormer Vice President Diet member and Former President,Of the United States Former Prime Minister Deutsche Bundesbank

of Japan

COMMISSION ON GLOBAL AGINGHONORARY CO-CHAIRS

Ryutaro Hashimoto, former Prime Minister of JapanWalter F. Mondale, former Vice President of the United States, U.S. Ambassador to JapanKarl Otto Pöhl, former President, Deutsche Bundesbank

COMMISSION MEMBERS

Bradley D. Belt, Vice President for International Finance and Economic Policy, CSISAxel Börsch-Supan, Professor of Economics, University of MannheimJohn Breaux, United States Senator (D-LA)Maria L. Cattaui, Secretary General, International Chamber of CommerceCarlo De Benedetti, Honorary Chairman, Olivetti and CompanyRobert H. Dugger, Managing Director, Tudor Investment CorporationPatricia Dunn, Chairman, Barclays Global InvestorsNicholas N. Eberstadt, Henry Wendt Chair in Political Economy, American Enterprise InstituteD. Don Ezra, Director of European Consulting, The Frank Russell CompanyDouglas Fore, Manager of Pension and Economic Research, TIAA-CREFHiroaki Fujii, President, The Japan FoundationShinji Fukukawa, CEO, Dentsu Institute for Human StudiesOrio Giarini, Secretary General, The Geneva AssociationCharles Grassley, United States Senator (R-IA)Judd Gregg, United States Senator (R-NH)David D. Hale, Global Chief Economist, Zurich Insurance GroupJohn J. Haley, President and CEO, Watson Wyatt WorldwideWilliam Haseltine, Chairman and CEO, Human Genome Sciences, Inc.Noboru Hatakeyama, Chairman and CEO, Japanese External Trade OrganizationPeter S. Heller, Deputy Director of Fiscal Affairs, IMFPaul S. Hewitt, Project Director and Research Fellow, CSISRobert Holzmann, Director, Social Protection, The World BankRobert D. Hormats, Vice Chairman, Goldman Sachs (International)Nobuyuki Idei, President and CEO, Sony CorporationWalter B. Kielholz, Chief Executive Officer, Swiss Reinsurance CompanyJames A. Klein, President, Association of Private Pension and Welfare PlansRichard J. Kogan, President and CEO, Shering-Plough CorporationTakeshi Komura, Special Advisor, Institute for Fiscal and Monetary Policy Kiyoshi Kurokawa, Dean and Professor of Medicine, Tokai University School of MedicineGöran Lindahl, President and CEO, ABBRobert T. Matsui, Member of Congress (D-CA)Meinhard Miegel, Director, Bonn Institute for Economic and Social ResearchRitsuko Nagao, President, Japanese Council of Social WelfareR. Kendall Nottingham, Chairman, AIG Life Companies (U.S.)Giampiero Pesenti, CEO and Managing Director, Italcementi GroupPeter G. Peterson, Chairman, The Blackstone Group and Chairman, New York Federal Reserve Bank Charles A. Sanders, retired Chairman and CEO, Glaxo, Inc.Mineko Sasaki-Smith, Associate, Program on U.S.-Japan Relations, Columbia UniversitySylvester J. Schieber, Director, Watson Wyatt Research and Information CenterAtsushi Seike, Professor of Labor Economics, Keio UniversityHeizo Takenaka, Executive Director, The Tokyo FoundationMichael S.Teitelbaum, Demographer, Sloan FoundationVincent J. Truglia, Managing Director of Sovereigns, Moody’s Investors ServiceYuji Tsushima, Member of Japanese Diet and former Minister for Health and WelfareMakoto Utsumi, Professor, Faculty of Business, Keio UniversityJames W. Vaupel, Executive Director, Max Planck Institute for Demographic ResearchIgnazio Visco, Chief Economist, Organization for Economic Cooperation and DevelopmentNorbert Walter, Chief Economist, DeutscheBank GroupBen J. Wattenberg, Senior Fellow, American Enterprise Institute Curtin Winsor, Jr., Chairman, American Chemical Services CompanyCurtin Winsor III, Principal, Columbia Partners Investment ManagementYoshio Yazaki, Director, University of Tokyo Medical Center

The world stands on the threshold of asocial transformation — even a revolution— with few parallels in humanity’s past.It’s called global aging, and in the comingdecades, it will subject the developedcountries to extraordinary economic,social and political stress.

For nearly all of history, the elderly (peopleaged 65 and over) never amounted to morethan 2 or 3 percent of the population.Roughly 150 years ago, that share startedto rise. Today, in the developed world, itamounts to almost 15 percent. By the year2030, it will be nearing 25 percent and maybe closing in on 30 percent in some of thefast-aging countries of continental Europe.

As a whole, the developing world willremain much younger for the foreseeablefuture. Yet, it too is aging. Several majorcountries in East Asia — including China,Taiwan, Singapore and both Koreas —are projected to approach developed-worldlevels of old-age dependency by the middleof the next century.

Global aging will place new burdens onworkers and employers and pose difficultchoices to voters and government leaders.

There is the staggering fiscal cost. In everymajor developed country, the unfundedliability for public pensions alone amountsto 100 to 250 percent of GDP — an

amount far greater, in each country, thanits official public debt. The burden ofhealth benefits to tomorrow’s elderly maybe even larger.

But the challenge of global aging transcendsits impact on government budgets. It promisesto restructure the economy, reshape thefamily, redefine politics and even rearrangethe geopolitical order of the next century.Unlike many predictions about the future,global aging is no mere hypothesis. Itsapproximate timing and magnitude arealready locked in. It is a revolution sure tohappen — and when it has run its course,nothing will be the same.

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WHAT IS GLOBAL AGING?

T W O - T H I R D S O F A L L T H E E L D E R LY W H O H AV E E V E R L I V E D A R E A L I V E T O D AY.

1960

1990

2000

2010

2020

2030

F I G U R E 1 : Th i r t y years f r om now, a lmostone in four peop le in the deve loped wor ldw i l l be aged 65 or o lder.

13.3%

14.7%

9.2%

16.7%

20.2%

23.8%

Number of elderly (aged 65 and over) as a percentage of thedeveloped world population

Source: O

ECD

(1996)

For GOVERNMENTS , g loba l ag ing w i l l :

❙ Vastly increase the cost of pension and health-benefit programs.

❙ Cause some countries to run large, destabilizing budget deficits.

❙ Generate enormous pressure to reduce benefits, raise taxes — or crowd out

spending for defense, infrastructure, education and other vital public services.

❙ Reorder political agendas and trigger generational tensions between those who pay

and those who benefit.

Fo r BUSINESSES , g loba l ag ing w i l l :

❙ Mean higher taxes, rising capital costs, shrinking consumer markets and perhaps

falling tangible asset and equity valuations.

❙ Tighten labor markets, make it difficult to retain top-quality personnel and create

incentives to recruit foreigners or move production abroad.

❙ Lead to overcapacity in real estate, construction, retailing and other key sectors.

❙ Intensify competition over shrinking sales — reducing returns on investment

and perhaps generating new pressures for capital controls, nontariff barriers and

outright protectionism.

For INDIVIDUALS , g loba l ag ing w i l l :

❙ Make today’s revocable government pension promises a risky personal retirement

strategy and create a new urgency about saving.

❙ Lead to cuts in promised old-age benefits, delayed retirement and a larger family

role in long-term care.

❙ Undermine the value of residential real estate and possibly equity portfolios.

❙ Lead to changing work patterns, including midlife retraining and later retirement.

WHY GLOBAL AGING MATTERS

For t y - two per cent o f U.S. RETIREES say Social Security is their biggest source of income.

Only 3 percent of U.S. workers under age 35

expect the same when they retire.

Fo r t y - four per cent o f the WORLD’S POPULATION now live in countries where fertility is beneath the 2.1 replacement rate.

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Global aging is the result of two fundamental demo-graphic forces: falling fertility and rising longevity.The first reduces the relative number of the young,while the second increases the relative number of the old. The fiscal and societal implications of thesedemographic trends are compounded by other forces:earlier retirement, pay-as-you-go (unfunded) publicpension systems and the growing cost of health care.

Fa l l ing Fer t i l i t y

Worldwide, the fertility rate has fallen from 5.0 to2.7 over the past 30 years. In the developed countries,it has fallen to 1.6. As recently as the early 1960s,almost every developed country was at or above the2.1 replacement rate needed to maintain a stationarypopulation. Today, every developed country is belowit — some far below it. In Japan, the fertility rate is1.5; in Germany, 1.3; in Italy, 1.2.

The decline in fertility is turning the traditional population pyramid on its head. It also means that, absent massive immigration from developingcountries, the population of the developed world willsoon peak and begin to decline. By the early 2020s,the working-age population (aged 15 to 64) will beshrinking in every developed country, with the possi-ble exception of the United States. By the late 2020s,the total population of the developed world is due tobegin shrinking as well.

F I G U R E 3 A : Japanese populat ion st r ucture, 1950

F I G U R E 3 B : Japanese populat ion st r ucture, 2030

Percentage of population by sex and age

1 Sex and age quinquennial 1950–2050 (The 1998 Revision):

United Nations Population Division, New York, United States

Male Female

Source: U

.N.

80–84

75–7970–74

65–6960–64

55–5950–54

45–4940–44

35–3930–34

25–2920–24

15–1910–14

5–90–4

100+

95–9990–94

85–8980–84

75–7970–74

65–6960–64

55–5950–54

45–4940–44

35–3930–34

25–2920–24

15–1910–14

5–90–4

U.S.

U.K.

France

Canada

Japan

Germany

Italy

2.0

F I G U R E 2 : Fer t i l i t y in ever y deve lopedcount r y has fa l len beneath the rep lacementrate of 2.1.

Total fertility rate, by country

1960–1965

1995–2000

3.3

1.72.8

1.62.9

1.63.6

1.52.0

1.32.5

1.22.6

Source: U

.N. (1

997)

THE FORCES BEHIND GLOBAL AGING

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The official “medium variant” U.N. pop-ulation projection assumes that fertility in the developed world will climb back tothe replacement level, even though all thetrends that have suppressed fertility —from growing affluence to more workingwomen to the availability of effectivebirth control and abortion — continueunabated.

What happens if fertility doesn’t rebound?According to the official U.N. projection,the median age of the developed world

will rise from 37.5 today to 45.6 by 2050.According to its “low variant” projection,which assumes that fertility will stabilizeat about its current level, the median agewill rise all the way to 51.1 by 2050. Andthis is just the average. In Germany, themedian age will reach 53; in Japan, 54;and in Italy, 57. The population of theentire developed world would beginshrinking by 2013 — and Europe andJapan would lose roughly two-thirds oftheir current population by the end of the21st century.

WHAT IF FERTILITY DOESN’T REBOUND?

950

900

850

800

750

700

650

600

550

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

F I G U R E 4 : The popu la t ion o f the deve lopedwor ld w i l l peak and beg in to dec l ine .

Population of the developed world, in m

illions

“Medium” U.N. projection (peaks in 2026)

“Low variant” U.N. projection (peaks in 2013)

Source: U

.N.(1

997)

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Ris ing Longev i t y

Since World War II, global life expectancyhas risen from around age 45 to age 65,for a greater gain over the past 50 yearsthan over the previous 5,000. Meanwhile,life expectancy in the developed worldhas risen to age 75. And in Japan, theworld’s longevity leader, it has reachedage 80.

All experts agree that longevity will con-tinue to rise in the next century. Pointingto recent progress on the genetic originsof illness and the biochemistry of humanaging — as well as to healthier lifestyles

— some even conclude that a lifeexpectancy of 100 years or more isattainable within a few decades. Althoughthe official projections are much moreconservative, their implications are stag-gering. To spend the same number ofyears collecting benefits as the typicalU.S. worker retiring at age 65 in 1935,the U.S. Social Security Administrationprojects that the typical worker in 2050would have to wait until age 76 beforeretiring — a number that assumes onlymodest gains in longevity. The reality, ofcourse, is that retirement ages have gonedown, not up.

20

15

10

1950 1960 1970 1980 1990 1995–6

F I G U R E 5 : The l i fe expectancy of the e lder l yis r is ing rap id ly in deve loped count r ies.

Life expectancy at age 65, by country

U.S.

Sweden

France

Japan

Source: U

.C. B

erkeley (1997)

Years of life expectancy over age 65

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F I G U R E 6 : Ret i r ement ages have beenstead i l y fa l l ing .

Ear l ie r Ret i r ement

In the United States, the average SocialSecurity retirement age has fallen from 69 to 63 since 1950. In Western Europe,workers are generally eligible for unreducedretirement benefits at age 60 — and evensooner for special disability benefits thatoften substitute for retirement pensions.In France, Germany and Italy, a mere 5percent of men aged 65 and over are nowemployed. And it is not just the elderlywho have been leaving the labor force inlarge numbers. In most countries, onlyone-quarter to one-third of men aged 60to 64 still work.

What this means is that the ratio of tax-paying workers to nonworking pensioners

in the developed world is due to fallmuch further than demographics alonesuggest. Today, that ratio is 3 to 1. By2030, it is projected to fall to 1.5 to 1 —and in a few European countries it willdrop to 1 to 1 or even lower.

Growing Hea l th Costs

Accelerating advances in medical technol-ogy, together with rising social expecta-tions about care and cure, guarantee thathealth-care spending for all age groupswill continue to grow faster than theeconomy in most developed countries.This cost trend is especially explosivebecause the elderly consume three to fivetimes more health-care services per capitathan younger people.

France

Germany

Italy

Canada

U.K.

U.S.

Japan

59.2

Average retirement age* for men, by country

* Defined as age of total withdrawal from the labor force.

1960

1995

64.5

60.565.2

60.664.5

62.366.2

62.766.2

63.666.5

66.567.2

Source: O

ECD

(1998)

B y 2050 , there may be more Italians, Germans and Japanese

over 80 than under 20.

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Moreover, the older the elderly are, themore health care they consume. And it isthe population of the oldest old that willbe growing the fastest. Worldwide, thenumber of elderly aged 65 to 84 is pro-jected to grow threefold by the year 2050.But the number aged 85 and over is pro-jected to grow sixfold — and the numberaged 100 and over is projected to growsixteenfold. This “aging of the aged” adds an extra multiplier to the burden ofglobal aging. In the United States, theratio of per capita health spending on theoldest segment of the population — aged85 and over — to spending on elders aged65 to 74 is 3 to 1; for nursing homesalone, it is more than 20 to 1.

U.S.

U.K.

Canada

Japan

France

Germany

Italy

2.3

F I G U R E 7 : There w i l l be fewer taxpayers tosuppor t each re t i r ed pens ioner.

Ratio of contributors to retired pensioners in public pension systems, by country

1995

2050

4.2

2.12.7

1.63.6

1.52.6

1.42.5

1.22.3

0.71.3

Source: IM

F(1

996)

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22.5%12.6%

28.8%17.3%

Global aging will bring profound changesto every dimension of public and privatelife in the developed countries — not justgovernment budgets, but the economy,the family, politics and even the next century’s geopolitical order.

Globa l Ag ing and F isca l Po l i cy

The OECD projects that the average billfor public pensions in the developed worldwill grow by over 4 percent of GDP overthe next three decades. In Japan and manycountries of continental Europe, it willgrow by over 6 percent of GDP. Add inhealth-care spending, and the total bill forpublic retirement benefits is due to rise bybetween 9 and 16 percent of GDP in mostof the developed countries. This amountsto an extra 25 to 40 percent of workers’taxable wages — on top of payroll taxrates that often exceed 40 percent already.

Even key developing countries may be fac-ing severe fiscal stress. In China, pensioncosts are expected to exceed 40 percent ofpayroll by the early 2030s. In an economyin which most workers live near subsis-tence, this could be a crushing burden.

The fiscal cost of global aging leaves thedeveloped countries no easy choices:

❙ Some countries may run widening bud-get deficits — possibly wrecking theireconomies before collapsing domesticinvestment or spiraling debt-servicepayments to foreigners compel them tochange course. For the developed worldas a whole, however, deficit financing isnot an option. By the 2030s, the com-bined public pension deficit of the G-7nations would exhaust the net nationalsavings of all the developed countries.

THE DIMENSIONS OF THE GLOBAL AGING CHALLENGE

U.K.

U.S.

Canada

Japan

France

Germany

Italy

15.5%

F I G U R E 8 : Gray ing means pay ingmore fo r pens ions and hea l th care .

1995

2030 (Official Projection)

By comparison, total G-7 public spending on defense, education and R&D was 8.1% of GDP in 1995.

17.0%

23.1%

25.8%17.6%

33.3%19.7%

Source: O

ECD

(1996, 1

997) and C

ensus (1997)

Public spending on pensions and health benefits, as a percentageof GDP, by country

10.5%

10.5%

11.5%

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WHAT IF LONGEVITY GROWS FASTER?

Most demographers agree that the official longevity projectionsfor the American population are near the low end of possibleoutcomes. The U.S. Social Security Administration (SSA), forinstance, assumes that longevity at age 65 will in the future growat less than half its pace over the past quarter-century. If true,this means that U.S. life expectancy in the year 2050 will be nogreater than Japanese life expectancy already is today.

At a time of stunning breakthroughs in biomedicine, manydemographers expect that longevity gains will accelerate — not slow. Their forecasts point to much larger increases in thecost of pensions and health care for the exploding number ofthe oldest segment of the population.

Projection by SSA

Projection by Census

Projection by Ronald Lee*

Projection by James Vaupel*

Projection by Kenneth Manton*

F I G U R E 9 : The number o f the o ldest segment o f thepopulat ion cou ld far exceed the of f ic ia l p ro ject ions.

18.2

21.4

14.6

39.0

48.7

Millions of Americans aged 85 and over in 2050,according to alternative projections

* Research funded by the National Institute on Aging (NIA).

Source: S

SA (1

996), C

ensus (1996)

and NIA

(1996)

A ccord ing to one CHINESE JOURNALIST ,

China is on track to become “the first society to get old before it gets rich.”9

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❙ Some countries will try to make roomfor retirement benefits by cutting otherspending. But this response, too, has itslimits. The cost of global aging is sogreat that many countries could cut allnonbenefit spending and still find them-selves unable to balance their budgetsby the 2020s.

❙ Raising taxes is a dubious option sincefew countries have room to raise themmuch. In the European Community, thetotal tax burden already averages 46percent of GDP. Collecting an extra 9to 16 percent of GDP might prove eco-nomically impossible. At some point,the revenue gain from higher tax rateswill be entirely negated by the revenueloss due to slower economic growth —or a larger gray economy.

In the end, most countries will probablytry all of the above — and still find thatthey have no choice but to cut retirementbenefits. The real question is whetherthey will undertake reform sooner, whilethere is time to adjust and prepare, orlater, when reform is forced upon themby economic or political crisis.

Globa l Ag ing and the Economy

Beyond the fiscal challenge, global agingposes even more fundamental economicchallenges. As populations decline in thecoming decades, so too will the numberof consumers and producers. For example,by 2010, the European Union will expe-rience a 13 percent decline in populationsaged 20–39. Because this age group is inits household-forming years, a time oflife when home-buying propels demandfor everything from washing machines

2000

2005

2010

2015

2020

2025

2030

2035

2040

F I G U R E 1 0 : Pub l i c pens ion def ic i ts a re on t rackto consume the sav ings o f the deve loped wor ld .

-0.2%

-0.9%

0.1%

-1.9%

-3.3%

-9.9%

-12.1%

-5.1%

Change from 1995 in the Combined G-7 budget balance attributable to projected public pension deficits*, as a percentage of G-7 GDP, 2000–2040

A deficit swing of 8.6% of GDP would consume entire G-7 net national savings**

* Assumes no change in taxes and other spending; includes interest on prior-year pension deficits.

** Assumes all other savings continues at 1985–94 annual rate.

Source: O

ECD

(1996)

-7.4%

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to baby carriages, its decline could leadto overcapacity and falling returns oninvestment in such key sectors as con-struction, real estate and durable goods.Many products will see decliningdomestic unit sales for as far into thefuture as it is possible to project. Banks,pension funds and other institutionsthat hold mortgage-backed securitiescould likewise experience deterioratingbalance sheets.

Moreover, as a larger share of the popu-lation enters its harvest years, the OECDprojects that the private saving rate inthe developed world will fall by morethan half (a trend that would be acceler-ated by reductions in pension benefits or increases in taxes). Some economistssay that this isn’t a problem since soci-eties with slowly growing (or shrinking)workforces won’t need to invest as much to maintain the same rate ofgrowth in output per worker. Others disagree. The pace of technologicalprogress may depend crucially on thevolume of investment a society under-takes. An optimistic outlook for nationalsavings, moreover, assumes that growingfiscal deficits won’t crowd out private savings and productive investment.

Whatever happens to savings, tomorrow’seconomies will look very different fromtoday’s. By the 2010s, the workforce inJapan and much of continental Europe isprojected to be contracting by roughly 1 percent per year — which means that,unless productivity growth speeds up, thereal economies of some countries maybegin contracting as well. How will gov-ernment leaders react when the tax base isscheduled to decline from one decade tothe next? How will business leaders reactwhen the size of their markets is expectedto shrink from one decade to the next?

Global aging will breathe new life into theold debate over the desirability of zero ornegative population growth. On the plusside, some economists stress that naturalresources are finite, and that less growththerefore helps living standards. On theminus side, others argue that fixed-costundertakings become more affordablewhen their cost can be spread over alarger population. The classic examplesare basic research and infrastructureinvestment. There are also importantexamples of fixed-cost challenges — ageopolitical threat, for instance — wheresheer demographic and economic size candetermine the fate of nations.

In JAPAN, the number of workers under age 30 is expected to fall by 25 percent between 2000 and 2010.

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A RECIPE FOR FINANCIAL CHAOS

Japan is now the world’s largest capital exporter. If it fails tochange its fiscal course, it will have to become a net capitalimporter within a decade simply to maintain its current level ofdomestic investment. Over the next 10 years, the growth inJapan’s public pension deficit is projected to be three timeslarger than its current capital exports to the United States. Overthe next 30 years, it is projected to be 30 times larger.

Growth in Japan’s Public Pension Deficit* as a Percentage of GDP:

2000 to 2010 2000 to 2020 2000 to 20303.1% 8.8% 14.6%

Global Aging and Financial Markets

Global aging will also threaten the stabil-ity of world financial markets. One dan-ger is that some of today’s large capitalexporting nations will fail to enact timelyfiscal reform and begin running massivebudget deficits early in the next century.This in turn could lead to large and de-stabilizing shifts in the direction of globalcapital flows — perhaps triggering aworld financial crisis. Another danger isthe possibility of global capital shortages(Fig. 9). Japan and Europe heretoforehave supplied the lion’s share of capital to global financial markets. But by 2020,they could be net capital importers. Theeffect may be to shift the role of interna-tional lender to the emerging economiesof Asia and Latin America. In that case,global financial stability might depend onthe leadership of the developing world.

Meanwhile, divergent fiscal policies willstrain regional economic unions like theEMU. Currently, there are few effectivecircuit-breakers in place. The official debtand deficit criteria for membership in the

EMU do not take into account unfundedpension liabilities. As these come due,countries that fail to reform their publicretirement systems will find it difficult tomeet the EMU’s deficit ceiling. Will theceiling be retained at the insistence ofcountries that have put their fiscal housein order? Or will it be eased? Either way,the EMU could unravel.

In the English-speaking world, countrieswill have to cope with the financial stresstriggered by the retirement of the large BabyBoom generation a decade from now.Many economists expect that as Boomersstart selling their financial assets en masseto the smaller “Buster” cohorts followingthem, the financial markets will experiencea “great depreciation.” If so, the retirementplans of millions of individuals could beruined — leading to pressure to increasethe generosity of public benefit systems justas they are due to become unaffordable.Much will depend upon the demand in thedeveloping world for investments denomi-nated in yen, euros or dollars.

* Includes interest on prior-year deficits. Source: OECD (1997)

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Globa l Ag ing and Labor Markets

Global aging will usher in an era oftight labor markets in the developedcountries. Governments may respondwith policies designed to expand thelabor supply, either by encouragingmore citizens to work or by encouragingthose who are already employed towork more. In most countries, however,such policies will have to overcomedeep-rooted social expectations —about early retirement or the role of women or shorter work weeks.Moreover, they are unlikely to be effec-tive unless governments first reformpublic retirement systems, whose risingcost is one important reason the laborsupply isn’t bigger to begin with.

Aging developed countries will alsodebate whether to welcome more immi-gration from a younger developing world.In the EU, under current retirement prac-tices, immigration would have to average4 million annually in order to compensatefor projected declines in native-bornworkers. Whether or not quotas areraised, businesses will seek new ways tohire inexpensive foreign labor. Already, agrowing number of U.S. firms are export-ing work (such as data entry) rather thanimporting the workers. Meanwhile, sev-eral European governments are issuingseasonal visas for domestic workers. Asnative labor becomes scarcer, however,the pressure to step up immigration willgrow — both from those seeking jobs andfrom those offering them.

Accord ing to ONE ESTIMATE ,

the payroll tax hikes needed to cover the rising

costs of public pensions in Europe will add a

cumulative $5 per hour to real manufacturing

costs by the mid-2020s.

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Globa l Ag ing and the Fami l y

Governments everywhere are counting onfamilies to assume most of the burden oflong-term care for the frail elderly, espe-cially the rapidly growing number of theoldest segment of the population. Thisburden will grow heavier. Today’s elderstypically have two or more children,increasing the odds that at least one willbe able and willing to help out. But whentoday’s working-age adults grow old intheir turn, they will be much more likelyto have only one child or no child — or to be never-married, widowed ordivorced. When the need for long-termcare arises, a growing share will have no alternative to public programs.

This is part of a bigger problem: theunprecedented transformation in the sizeand shape of the extended family. In someof today’s developed countries, at least one child in two is an only child. Fast-forward another generation, and at leastone in four will have neither brothers norsisters, nor aunts nor uncles, nor cousins.Even as families shrink in size, rising lifeexpectancy is multiplying the number ofgenerational tiers alive at one time — notjust more grandparents, but more great-grandparents and great-great-grandparents.

In recent years, the expansion of publicretirement benefits, the entrance ofwomen into the labor market and the rise of a new ethic of “independent liv-ing” have weakened the traditional roleof the family as a support network fordependents of all ages. Now global agingthreatens to heap vast new burdens uponit. Will it be up to the task? And if it isnot, can government take up the slack?

Japan

France

U.K.

U.S.

65%, 1985

F I G U R E 1 1 : Japan is the on l y deve loped count r y where most e ldersl i ve w i th the i r ch i ld ren .

17%, 1990

16%, 1980

15%, 198733%, 1952

Source: O

ECD

(1996)

Percentage of the elderly living with their children, by country

80%, 1953

24%, 1975

33%, 1962

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Globa l Ag ing and Po l i t i cs

Despite the mounting evidence thattoday’s public retirement systems areunsustainable, politicians and votersremain in denial. In Europe, generousunfunded pensions are considered theindispensable linchpin of “social solidar-ity” — and talk of benefit cuts instantlyraises class hackles. In the United States,they are defended as “earned” entitle-ments, tantamount to personal property.

In the years to come, the growing politicalpower of older voters could make reformeven more difficult. By 2030, nearly halfof all adults in developed countries andperhaps two-thirds of all voters will be ator beyond today’s retirement age.

Indeed, the power of the elderly isalready on the rise. Until recently, orga-nized senior lobbies were largely a U.S.phenomenon. But the electoral clout ofthe elderly is also growing in Europe,where it operates through labor unionsand labor-affiliated political parties. In the Netherlands, a newly formed“Pension Party” has scored successes at the voting booth. And in most ofEastern Europe, the Communist Partyhas emerged as the de facto party ofpensioners. Paradoxically, the cause ofbig government is becoming associatedwith the political and economic interestsof the old, not the young — a reversalof the customary stereotype.

By the YEAR 2030 ,

over half of all U.S. adults will be over age 50 —

and thus be eligible to join the American Association of Retired Persons.

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Globa l Ag ing and the Wor ld Order

Ever since Thucydides, historians haveobserved that the rise and fall of civiliza-tions is closely linked to demographictrends. Throughout history, contractingpopulations have given way militarily, economically and culturally to expandingones. While today’s older developed coun-tries are not predestined to pass their leadership to younger developing countries,they cannot ignore the geopolitical implica-tions of diverging fertility and age trends.

A demographically expanding develop-ing world may be a politically unstableone. Many of the countries that havethe youngest and fastest-growing popu-lations — in the Mideast, in Africa andin Central Asia — also have the highest

poverty rates, the most rapid urbaniza-tion and the weakest traditions ofdemocratic government. Many strategicplanners anticipate a proliferation oflocal and regional conflicts early in thenext century — leading to more fre-quent intervention by the developedcountries. The localities with the biggest“youth bulges” are assumed to be thebiggest potential trouble spots.

At the same time, an aging developedworld will find it harder to meet its security commitments.

❙ Defense and international affairs budgets will be under constant pressure from rising pension andhealth-care expenditures.

25

20

15

10

5

1950 1970 1990 2010 2030 2050

F I G U R E 1 2 : The deve loped count r ies w i l l make up a shr ink ing share o f the wor ld popu la t ion .

Developed world population as a percentage of total world population

Source: U

.N. (1

997)

In 1950: 23.5%

In 2000: 14.5%

In 2050: 9.7%

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❙ Armed forces may experience chronicmanpower shortages — both becausethe number of youth will be decliningand because tight civilian labor marketswill make military careers less attractive.If so, the substitution of military capitalfor labor could lead further in the direc-tion of high-tech “cruise-missile” interven-tion designed to minimize loss of life.

❙ Elder-dominated electorates may also be more risk averse, shunning decisiveconfrontations abroad in favor of ad hoc settlements.

❙ The changing structure of families couldpose a serious issue if parents remainunwilling (as traditionally they havebeen) to risk their only male children incombat situations.

It is also possible that many of today’sdeveloped countries will someday becomedependent on capital imports from higher-saving, faster-growing developing coun-tries to finance domestic investment —and, indeed, national defense. How willthe international balance of power changeif China is a large lender and Japan,Germany and the United States are alllarge borrowers?

In 1950, seven of the world’s most popu-lous nations were developed countries. By 2050, only one developed country will remain on that list: the United States.As the developed world’s population (andultimately its economic output) shrinks as a share of the world total, other greatpowers will arise. The challenge facing anaging developed world is how to ensurethat the emerging newer order is compati-ble with its values, interests and long-termsecurity.

SAUDI ARABIA a l ready impor ts food

and has severe water shortages.

Yet its population will double by 2020.

GUNS VERSUS GERITOL

Source: O

ECD

(1997)

1960 1995 2030

Pension benefits 4.8% 7.9% 12.1%

Health benefits 2.5% 6.3% 11.6%

National defense 5.0% 2.3% ?

F I G U R E 1 3 : G-7 gover nment spend ing on pens ions, hea l th benef i ts and defense, asa per centage o f GDP.

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The challenge of global aging is beginningto find its way onto the political agendasof the developed countries. Over the past few years, many governments havedebated trimming pension-benefit formu-las. Five of the G-7 nations have alreadyscheduled modest future hikes in the full-benefit retirement age. And two countries— Britain and Australia — are evenreplacing unfunded public retirement systems with funded systems based onpersonally owned savings.

Yet almost everywhere, the cost projec-tions remain unsustainable. Sooner orlater, most countries will have to makemuch deeper reductions in public retire-ment benefits than politicians or votersare now ready to contemplate. At thesame time, they will have to grapple witha bigger question: What will replace thebenefits that are cut? Many householdshave nothing to count on in retirementexcept a government check. Outside ofthe English-speaking world, only a fewsmall countries have funded private pen-sion systems covering half or more of theworkforce. And household savings rateseverywhere are highly skewed by income.

In the years ahead, the developed coun-tries will be looking for ways to meet the needs of tomorrow’s elderly withoutoverburdening the economy or overtaxingthe young. Many different strategies willbe on the table:

❙ St rengthen foundat ions fo r

economic g rowth . With benefitsoutlays rising rapidly, the industrialnations must have sustained, robust eco-nomic growth in order to avoid fiscalcrisis. Reforms to a range of policies thatinhibit capital and labor productivity —from taxes to pensions to employment to financial markets — are increasinglyessential to the maintenance of socialguarantees in the 21st century.

❙ Encourage longer work l i ves .

The most direct way to achieve largefiscal and economic savings withouthurting the living standards of the elderlyis to encourage longer worklives. Movingbeyond the traditional three-box life-cycle of education, work and retirementwould also have enormous benefits forthe economy — and, many gerontologistsbelieve, for the elderly themselves.

NEW STRATEGIES FOR AN AGING WORLD

U.S.

U.K.

Japan

Canada

Germany

Italy

France

Rest of the world

F I G U R E 1 4 : Just th ree count r ies — the U.K. , theU.S. , and Japan — possess th ree -quar te rs o f theent i r e wor ld ’s funded pens ion assets .

$5,400

$1,100

$1,100

$320

$120

$60

$1,530

Funded pension plan assets (public and private) in 1997, G-7 countries andrest of the world, in billions of dollars

Source: InterS

ec (1998)

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$70

❙ Encourage more work f r om the

none lder l y — either by persuadingworking-age citizens to work more orby expanding immigration. Like longerworklives, this strategy would increasethe size of the economy and tax base.Societies with low rates of immigration(like Japan) or with high labor costsand high unemployment (like Germany)will find themselves engaged in a heateddebate over the costs and benefits ofthis “American” strategy.

❙ Raise more numerous and more

product i ve ch i ld ren . This strategywould spread the elder dependency bur-den over a larger and more affluent ris-ing generation. A number of developedcountries — notably the Scandinaviannations and France — have a long tra-dition of generous public funding forpronatal incentives and investment inchildren. This tradition might spread toother countries, partly in response toworries about population decline.

❙ St rengthen fami l y bonds.

Societies like the United States in whichthe extended family is weak, elderpoverty is high and long-term care costsare rising fast have much to learn from“Confucian” societies like Japan. Whileno Western country is likely to importthis ethic wholesale, many will be look-ing at policies that encourage and helpfamily members to care for each other.

❙ Tar get benef i ts accord ing to

need. Public retirement systems generally disburse benefits to all retirees regardless of income or wealth.Although Australia is now the onlydeveloped country where all public pension benefits are means tested, othercountries may turn to this “floor of protection” strategy.

❙ Requ i re peop le to save more

th roughout the i r work l i ves .

Britain and Australia (along with Chileand Singapore) are showing the worldhow to move toward funded retirementsavings. This strategy does most to over-come one of the biggest challenges ofglobal aging — namely, how to sustainadequate rates of savings and invest-ment. Besides longer worklives, it is alsothe only strategy that does not impose adirect tax or indirect economic andfamilial burden on future generations.

While all of these strategies promiselarge fiscal and economic payoffs, allwill be difficult to implement. Some, likelater retirement and targeting benefitsaccording to need, will challenge settledexpectations — in this case, that govern-ment should subsidize early retirementfor everyone. Some, like pronatal poli-cies and stepped-up immigration, aresure to trigger cultural and social con-troversy. Some, like investing more inchildren, may require more patience andwisdom than most governments nowpossess. And practically all will be moreacceptable in some countries than in others. Strengthening family bonds, for example, will be easier in Asia thanin North America, while mandatory savings will appeal more to NorthAmericans than to continentalEuropeans.

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In our personal lives, everyone under-stands the importance of age. At 50, wedo not expect to act or behave or feel aswe did at 20 — nor at 80 as we did at50. The same is true for entire societies.Demographic aging brings with it a sys-temic transformation of all spheres ofsocial life — a transformation so pro-found that it may, in key respects, tran-scend cultural boundaries. From Tokyo to Paris to Warsaw to Washington, it isalready generating similar newspaperheadlines on roughly the same fiscal, family and health issues.

Beneath these headlines, and beneatheven the daunting fiscal projections, lies alonger-term economic, social and culturaldynamic whose workings we are only justbeginning to understand. What will it belike to live in societies that are mucholder than any we have ever known orimagined? Does the developed worldunderstand all the challenges and oppor-tunities this transition may present? Is itready to mobilize policies accordingly?With societies as with people, those thatplan ahead are the ones that succeed inaging gracefully — and wisely.

Bradley D. Belt, CSIS Senior Vice Presidentfor Policy Development, oversaw thedevelopment and design of this report.Paul S. Hewitt, CSIS Research Fellow and Project Director of the Global AgingInitiative, and Sylvester J. Schieber,Director of the Watson Wyatt Researchand Information Center, provided editorialdirection and content. The team ofRichard Jackson and Neil Howe led theresearch and drafting.

AGING GRACEFULLY, AGING WISELY

ACKNOWLEDGEMENTS

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