The problems posed by ageing are manageable, says Adair Turner. Far more worrying is the population explosion that threatens to overwhelm economic and social progress in developing countries
The challenges created by an ageing society are major political issues in many developed countries and will increasingly be on the agenda in some developing countries, China in particular. It is important, however, to keep these challenges in perspective. For most countries, they create manageable problems of pension system reform, not insurmountable and wide-ranging social crises. The biggest problems created by demography will be in countries with rapidly-expanding populations and, in some cases, tragically-low life expectancy, not in those with static populations and rising longevity.
Behind the pensions problems
Three separate drivers of the demographic challenge facing rich developed countries need to be distinguished. The first is rising life expectancy and, in particular, greater longevity after what in the past had been typical retirement ages, such as 65. The second is the shift to lower birth rates that occurred during the 20th century. The third is the fact that the fall in the birth rate was temporarily and partially reversed in the mid-20th century. This generated a short-lived “baby boom”, which produced a generation that is larger in number than both its parents and its children, and one which will retire over the next 20 to 30 years.
The effects of the first two drivers are fundamental. They create populations in which the average age is higher, with a higher proportion of the population older than traditional retirement ages. The effect of the third factor is transitional. It makes the rise in the dependency ratio particularly severe over the next 20 to 30 years. In most European countries, for instance, the ratio of people aged over 65 to those aged between 18 and 65 will double or more between now and 2035. That rapid rise creates big problems for pension systems, particularly in countries where governments have made generous pension promises to be paid out of future tax and contribution revenues. In most countries, however, these problems are manageable, provided sensible adjustments are made.
The most crucial and obvious adjustment is to accept that average retirement ages and average ages for receipt of pensions must rise as life expectancy rises. That is needed to keep stable the proportions of adult life spent working and in retirement. This is possible because rising life expectancy primarily means more years of active healthy life, not more years of frailty and dependency. Moreover, fears that an older population will be less productive or less innovative are hugely overblown, reflecting outdated conventional thinking. People are living longer, but in terms of physical and mental agility they are also young longer. A vital first step in responding to an ageing population is to stop talking of ageing itself as a problem.
Indeed, if the only demographic change were rising longevity, a proportional rise in retirement and pension ages would be a sufficient and fairly easy solution to problems of pension system affordability. Significant difficulties for pension systems have been created not by rising longevity, but by the fall in fertility and by the fact that the retirement of the baby boom generation concentrates the impact of falling fertility in the next 30 years. As a result, over this period proportional increases in pension ages are insufficient to stabilize pension system finances. Either higher taxes and/or social security contributions to support retirees, or lower retiree benefits, or higher private savings are needed in addition.
In many developed countries, however, the required adjustments are clearly manageable. The United Kingdom could cope quite effectively with its pension challenge if it increased private saving moderately and accepted that the proportion of national income devoted to pensions had to rise from 6.2% today to 7.7% in 2050, with no increase in that proportion thereafter.
In countries like the UK there is, therefore, no insoluble pension crisis, nor huge and wide-ranging challenges arising from an ageing society, nor a need for increased immigration to provide sufficient numbers of future workers. The United States, France, Scandinavia and the Netherlands are similarly well-placed. But in some other developed countries – Italy, Germany and Japan, for instance – the problems are far more severe. The difference is the precise level of the birth rate.
Falling birth rates
Demographers are wary of asserting universal rules, but when societies achieve three conditions – a reasonable level of female literacy, a legal, openly-available and affordable supply of contraceptives, and at least some degree of economic growth – birth rates seem to fall to or below the replacement rate of just over two children per woman. This has occurred in all European countries, in the US and in all successful East Asian countries. The United Nations’ median projection suggests that it could occur within 15 years in countries as diverse as Turkey, Iran and Brazil.
Overall, this development is thoroughly beneficial – to economic growth per capita, to environmental sustainability at a local and global level, and to quality of life. Provided the long-term fertility rate stabilizes at about the replacement rate or only moderately below (for instance in a range of 1.7 to 2.0), pension system problems can be overcome. Human societies could cope perfectly well with stable or even slowly-declining populations as well as with gradually-ageing ones. But if fertility rates fall far below 2.0, for instance to the 1.2 to 1.4 range seen in Japan, South Korea, Germany and Italy, and if they were to stay at those low levels over the long term, it is difficult to imagine sustainable pension systems without significantly-increased immigration.
In some rich developed countries and, perhaps, in the near future in China too, there is, therefore, a danger of too much of a good thing – birth rates that have fallen too far. In these countries, however, feasible solutions can at least be described. Increased immigration is an option for any rich country; there is no shortage of poor people who would like to migrate to richer countries if immigration policies were more open.
Fertility rates might well, in the long term, rise closer to replacement rates if, for instance, the one-child policy were relaxed in China, or if Italian social and employment policies made it easier for women to combine work and children. Indeed, Italian fertility rates already appear to be increasing.
The largest and most intractable demographic challenges do not, therefore, lie in these countries with “too-low” birth rates. Instead, they continue to lie in countries where fertility rates are still far above replacement levels and where population explosion threatens to overwhelm economic and social progress. The UN’s medium projection suggests that in the next 50 years the population of Niger, which was only 3 million in 1950, could grow from today’s 14 million to 50 million. For a country facing a famine today that is a daunting prospect. Ethiopia’s population could grow from 77 million to 170 million; Pakistan’s from 158 million today to 305 million in 2050, even if, as the medium projection suggests, Pakistan will by then have joined the ranks of countries with only replacement-rate fertility. Compared with the economic, social and political problems that these population explosions could create, the challenges of pensions-system reform in rich developed countries are relatively minor.
CV Adair Turner
Lord Turner is chairman of the UK Pensions Commission. A former director of McKinsey, he is also vice-chairman of Merrill Lynch Europe and chair of the UK Low Pay Commission.