Can rich countries afford to grow old?

This paper focuses on the rich industrialisd countries that are facing some of the biggest future increases in old-age dependency. Among the industrial countries, Japan and southern European countries are particularly affected. These countries’ birth rates are below the industrial-country average. In addition, they have enjoyed unusually rapid improvements in expected life spans, and the population shortfall caused by low birth rates has not been offset by population inflows from immigration. Within the next three decades these countries will have some of the oldest populations in the industrialised world.

The authors suggests that countries face three basic options in managing the future costs of old-age support programmes:

• they can increase the contributions of active workers or boost general taxes in order to pay for higher benefit payments
• they can reduce monthly pensions and health insurance benefits below the levels promised in current law. One variant of this policy is to increase the earliest age at which benefits can be claimed, reducing to zero the pensions paid to the “young elderly”
• governments can encourage higher employment rates among groups that currently have low or moderate participation rates. One population with a low employment rate is the aged. In most of southern Europe, adult women also have relatively low participation rates

This paper considers the extent of burdens on future workers to pay for pensions and aims to correct the widespread impression that these burdens are unsupportable. It argues that whilst population ageing means that contributions needed to support the retired elderly must rise, it suggests that this extra burden will be at least partly offset by a reduced need to support the dependent young, who will become relatively less numerous. The extra burden of an ageing population would be smaller still if labour force participation rates among the working-age and elderly populations increased. It states that employment rates among the non-aged have risen in nearly all the industrialised countries as a growing percentage of women has entered the work force. Many countries have adopted policies to encourage work among people past the traditional retirement age.

The paper concludes that workers in many rich countries oppose changes in the retirement system that would push them to retire at a later age. Many voters resist the idea that a higher retirement age is needed to protect public retirement programmes. If given a choice, many workers would prefer to make bigger contributions to the retirement system rather than accept a higher entitlement age for retirement benefits.

Contrary to a widespread view among economists and public policy analysts, this choice is neither irrational nor short-sighted. Nearly all of the OECD countries are very wealthy, and they have become steadily wealthier in recent decades. If part of their added wealth is used to permit workers to continue retiring at the current retirement age, no economic catastrophe will follow. However, workers will have to pay a price for this choice. [adapted from author]