Business Offical and Organisation

Summary ( A slow burning fuse)

Introduction 1. Population ageing is on every agenda, from G8 economic conferences to NATO summits. The World Economic Forum plans to consider the future of pensions and health care at its prestigious Davos conference early next year. The media, including this newspaper, are giving the subject extensive coverage. 2. Governments in rich countries now accept that their pension and health-care promises will soon become unaffordable, and many of them have embarked on reforms.

Reasons for aging population 1. The first of the big causes is that
people everywhere are living far longer than they used to. a. In 1900 average life expectancy at birth for the world as a
whole was only around 30 years, and in rich countries under 50. The
figures now are 67 and 78 respectively, and still rising. b. The UN thinks that life expectancy at birth worldwide will go up from 68 years at present to 76 by 2050 and in rich countries from 77 to 83. (These are averages for both sexes; women generally live five or six years longer than men, for reasons yet to be fathomed).

2. people everywhere are having far fewer children, so the younger age groups are much too small to counterbalance the growing number of older people. c. In the early 1970s women across the world were still, on average, having 4.3 children each. The current global average is 2.6, and in rich countries only 1.6. The UN predicts that by 2050 the global figure will have dropped to just two, so by mid-century the world’s population will begin to level out. d. The reason why there are fewer babies is that women everywhere are marrying and having children much later in life. Between 1970 and 2000 the mean age at which women had their first child in a range of OECD countries rose by more than a year every decade, and many more women now have their families in their 30s. e. People have got used to smaller families, the number of children they say they want shrinks too. Demographers talk about a “low-fertility trap”. f. Postponing marriage and childbirth is part of a bigger change in the lives of many women in rich countries. Over the past few decades many more of them have been getting more highly educated and taking paid jobs. That changed their ideas about what they wanted out of life. For a while birth rates were lower in countries where lots of women worked outside the home g. In a modern society children are an economic liability, not an asset. They have to be fed, clothed, housed, looked after, educated and entertained. As a rule of thumb, economists reckon that a family with one child needs 30% more income than a childless couple to maintain the same living standard. The obvious way to keep the household financially afloat is for the mother to go out to work.

Negative Effects of Aging population 1. Developing country a. Since most poor countries have little or nothing in the way of a state-funded welfare net, those numbers will be hard to manage. b. Although China has seen stupendous economic growth in recent years, it is still some way off being rich, so it will have trouble absorbing the cost of this rapid ageing.

2. Fewer hands make heavy work c. Macroeconomic theory suggests that the economies of ageing populations are likely to grow more slowly than those of younger ones. d. In Japan, for instance, which currently has about three workers to every pensioner—already one of the lowest ratios anywhere—the number will halve by 2050. True, there will be fewer young people to maintain, but children cost less than old people and the overall burden will be much heavier than it is now. The OECD has estimated that over the next three decades the age-related decline in the labour force could cut growth in its member countries by a third compared with the previous three decades.

3. Ageing will affect financial markets e. According to Franco Modigliani’s and Richard Brumberg’s life-cycle theory of savings, put forward in the early 1950s, people try to smooth out their consumption over the course of their lives, spending more in their youth and old age and saving more in their middle years; so as populations age, savings in the economy as a whole will be run down and assets sold off. This has led to fears of an “asset meltdown” as everyone sells at the same time. But a number of academic studies have so far failed to find much evidence of this. Older people in America, for instance, do save less than those in their middle years, but as a group not much less.

4. the public finances f. In countries where public pensions make up the bulk of retirement income, these will either swallow up a much larger share of the budget or they will have to become a lot less generous, which will meet political resistance (and remember that older people are much more inclined to vote than younger ones). Spending on health, which in most rich countries has been going up relentlessly anyway, is likely to grow even faster as patients get older. And because of a huge increase in the number of over-80s, a lot more money, and careful thought, will be needed to provide long-term care for them as they become frailer. g. But even fairly fit older people need more health care than younger ones, not least because they often suffer from chronic diseases that are expensive to treat. In the EU, one estimate puts health-care spending on the elderly at about 30-40% of total health spending. So will the better health of an ageing population, good as it has been for so many, impose unaffordable costs on public-health budgets? h. Howard Oxley, a health-care expert at the OECD, reckons that increased spending on health and long-term care for the elderly could amount to an extra three-and-a-half percentage points of rich countries’ GDP by the middle of the century—and a lot more if spending on medical technology continues to go up at current rates. i. Measured by spending on health care as a share of GDP, America already tops the list, shelling out the equivalent of more than 15% of GDP (see chart 4). The American government’s health-care spending will be hugely affected by ageing because of Medicare, the state-funded health-care programme for the elderly and disabled, and Medicaid, the programme for the poor (and often also old, because it covers long-term care). j. More money does not always produce better results. People in America are less healthy and die sooner than in Britain, which proportionately spends little more than half as much on its health care. According to David Cutler, an economics professor at Harvard who has advised the president on the reform, even doctors believe that around 30% of money spent on health care in America is wasted. k. Across the OECD, spending on long-term care is already equivalent to around 15% of total health spending and is rising fast. The great bulk of that care—an estimated 80%—is still provided by family and friends, the traditional source of support for the elderly. But more women are going out to work, so fewer of them have time to look after old folk and formal help is becoming increasingly important. l. In most developed countries only a small minority of over-65s—between 3% and 6%—live in institutions. Keeping old people in nursing homes or hospitals is expensive, staff is hard to find, and in any case most people would much rather be looked after at home. Many countries are now providing grants to adapt homes, paying families for the care they provide and supplying helpers to give a hand with things like dressing and bathing. m. Unsustainable i. Many rich countries already spend around 8% of GDP on public pensions, and some—Germany,Italy, France—a lot more. Richard Jackson at the Centre for Strategic and International Studies (CSIS), a think-tank in Washington, DC, calculates that if nothing is done the cost of state pensions in developed countries will almost double, from an average of 7.7% of GDP now to about 15% by 2050. In Japan and some “old” western European countries it could rise to well above 20%.

5. people are simply not saving enough to maintain their living standards in retirement. n. McKinsey, a consultancy, recently looked at the finances of a large sample of baby-boomers, due to start drawing their pensions soon, and found that about two-thirds of them had failed to make enough financial provision for their retirement to maintain their previous standard of living o. That fits with the trend of a steady decline in American personal saving rates in the past 20 years. p. Last year’s stockmarket crash caused a huge drop in the value of most such plans. Many people who had planned to retire in the near future found they had to carry on working. Suddenly prudence did not seem such a good idea.

6. Retirement has been overdone( too long) q. The original idea was that people should enjoy a bit of a rest after a life at work, but nobody imagined that the rest would stretch to almost a quarter-centuRE.

7. serious security implications r. For example, the shortage of young adults is likely to make countries more reluctant to commit the few they have to military service. In the decades to 2050, America will find itself playing an ever-increasing role in the developed world’s defence effort.

Solutions to solve the aging population and related issues. 1. As the IMF puts it, “the fiscal impact of the [financial] crisis reinforces the urgency of entitlement reform.” a. People in rich countries will have to be weaned off the expectation that pensions will become ever more generous and health care ever more all-encompassing. Since they now live so much longer, and mostly in good health, they will have to accept that they must also work for longer and that their pensions will be smaller. 2. Being generous to pensioners was affordable in 1980, when in the rich world there were only about 20 people of retirement age for every 100 people of working age. But that ratio has already risen to 25% and by 2050 it will be around 45%, meaning that there will be only about two workers for every pensioner. In some countries things will be much worse: Japan is heading for a ratio of over 70%. Something has to be done. 3. The most urgent need for reform will be in public pensions, which in most developed countries are the biggest source of retirement income. 4. They usually make up most if not all of the pensions of low and medium earners. Most of these pensions work on the pay-as-you-go (PAYG) principle, whereby today’s workers pay for today’s pensioners, on the understanding that the next generation will do the same for them when their time comes. 5. Now that labour forces are starting to contract and the number of pensioners is rising, these schemes are rapidly becoming unsustainable. One theoretical answer is to move to funded schemes, in which pensions are paid out of a big pot of accumulated savings. Such schemes are common in the private sector, but a public PAYG scheme is very hard to turn into a funded one because one generation of workers would have to pay both for themselves and their parents’ generation.

6. Government Policy b. governments in a number of rich countries to believe that, with the right policies, they too could boost fertility to closer to replacement levels and help moderate the social burden of ageing c. In Japan , A special unit in the Cabinet Office is now working on measures to persuade young Japanese families to do their bit. It is considering things like bigger family allowances, more favourable tax treatment of families and many more nursery places to shorten the long waiting lists. d. high female employment rates and large government cash transfers to families, generous replacement pay during parental leave, the availability of plenty of part-time work and lots of formal child care. i. Where all these things are present, fertility rates tend to go up. France and most of the Nordic countries have embraced such policies and been rewarded with a rise in fertility close to replacement level. It does not come cheap: the OECD reckons that they spend 3-4% of GDP on direct benefits to families, far more than do Germany, Japan and southern Europe. ii. The odd ones out are America and Britain, which both have lots of women at work and fertility rates close to replacement level (with immigration making up the rest). Neither of them exactly spoils its families with financial inducements or state-provided child care, but their flexible labour markets make it easy for women to get back into work after childbirth, and public opinion approves of working mothers. They also have high levels of teenage pregnancy that help bump up the figures.

7. mandatory long-term-care insurance schemes e. With far more people reaching a great age, a lot more such care will be needed in future. How will it be paid for? A few far-sighted countries—including Germany, the Netherlands, Luxembourg and Japan—have already introduced mandatory long-term-care insurance schemes. Others may have to follow.

8. The most obvious thing that needed reconsidering was the retirement
age. f. When America introduced its Social Security (public pension)
scheme in 1935 to prevent poverty in old age, the retirement age
was 65 and life expectancy at birth was 62. In 1983 a decision was
made to raise the official retirement age to 67, but in steps so tiny
that the move will not be completed until 2027. Life expectancy at birth in America now averages about 78, so the promise of a pension is worth a great deal more than it was back in the 1930s. As it happens, America’s public pension system is among the rich world’s less generous (which means that financing it should remain manageable), but it still accounts for more than half the average pensioner’s income. g. In the past few decades a number of governments offered various carrots to encourage people to start drawing their pensions before the official retirement age. They often claimed that this would free up jobs for younger people. Any economist could have told them that this was a prime example of the “lump-of-labour” fallacy (the idea that there is only a fixed number of jobs in an economy at any one time) and would not work. It didn’t, but the workers were happy to go and their employers were happy to lose them. Private defined-benefit final-salary schemes (explained below), where they existed, also encouraged early retirement because they did not impose an actuarial penalty on people leaving before the due date. h. All this meant that the actual (“effective”) retirement age in many rich countries, particularly in Europe, dropped well below the official one. By 2004 in the OECD as a whole only 60% of people aged between 50 and 64 were working (compared with 76% for those aged 24 to 49). It was the opposite of what was needed to deal with rising life expectancy, so in recent years governments in many countries have started to dismantle some of the incentives to leave early, against fierce political resistance. This has halted, and in some cases reversed, the trend towards ever earlier retirement. i. getting people to work for a few
more years would solve many of the problems associated with ageing
populations. By carrying on, those workers will not only save the
public purse money by not drawing a pension but will also continue to pay taxes and social- security contributions, so those extra years are doubly valuable. j. though it seems an outlandish thought in the middle of a deep recession and rising unemployment—ageing populations are likely to cause labour shortages. In some countries and some sectors these are showing up already. In Germany, where the labour force is due to start shrinking from next year, a study by the Institute for the German Economy in Cologne identified a shortage of about 70,000 engineers in 2007, a rise of nearly half on the year before. The obvious place to look to fill such gaps is among well-qualified older people, and indeed the institute found that companies had stepped up their recruitment of engineers over 50. k. Many countries already have laws to prevent discrimination on age grounds. America led the way with its Age Discrimination in Employment act in 1967, designed to make sure that the over-40s (greybeards of their day) were given the same job chances as younger people. Among other things, it prohibited reference to age in job advertisements. The act has since been amended a couple of times and now rules out mandatory retirement on age grounds for most jobs. That have helped keep older workers in jobs. l. The European Union in 2000 issued a directive that obliges member countries to ban discrimination in employment on a number of grounds, including age. France imposes a tax called the Delalande contribution (now being phased out) on employers who sack older workers. Although this can be quite hefty—up to a year’s pay—it does not appear to have saved many jobs. Rather, it has discouraged employers from hiring older workers. m. pension spending is to give people the opportunity to work longer, because it increases tax revenues and reduces spending on pensions at the same time

9. increased the number of contribution years needed to qualify for a pension n. Italy, which had a particularly unaffordable public pension scheme, has not only raised the retirement age but also increased the number of contribution years needed to qualify for a pension and cut back on benefits for the highest earners

10. sustainable pension systems for the future is all
about spreading the load over several pillars. o. There should be a basic
state pension to meet basic needs in old age, perhaps with an
earnings-related element on top of it; a private occupational pillar, with employers and employees both making contributions; and a voluntary pillar, with private individuals saving for their retirement through a variety of instruments. Governments are expected to do their bit not only by providing the state-funded part, but also by offering tax incentives for the second and third pillars.

11. Immigration 12. In many countries immigrants have been filling such gaps in the labour force as have already emerged (and remember that the real crunch is still around ten years off). Immigration in the developed world is the highest it has ever been, and it is making a useful difference. In still- fertile America it currently accounts for about 40% of total population growth, and in fast-ageing western Europe for about 90%. p.

Opportunities for business to an aging populations 1. but businesses everywhere now realise that in future there will be a lot more older folk with money to spend. In most rich countries the baby-boomers born after the second world war were more numerous, better educated and better paid than any generation before them. When those boomers retire, they will want to do it in style, plastic surgery and all. 2. What else might they spend their money on? The glossy magazine published by America’s AARP, a powerful lobbying organisation for the over-50s that boasts 40m members, is bursting with ads. If those advertisers have got their market right—and they are paying big money for the older eyeballs—this group of customers can be persuaded to buy a plethora of products, from travel and financial services to mobile phones, medicines and comfy beds. 3. Elderly friendly deisgned products a. Some businesses are already adjusting their ranges to cater for the grey market. Volkswagen, for example, has developed a car called the Golf Plus that has higher seats and more space than the standard model. A number of consumer-goods makers have started making smaller pack sizes for older, smaller households. 4. Ingenious new products for elderly b. Japan, which has already had lots of practice with older consumers, has developed some ingenious new products for the grandparent generation. They include a furry robot seal, sold as a pet substitute, that has proved a hit with lonely old folk. And makers of personal-care products recently put on a Tokyo fashion show for incontinence pads, featuring pink and frilly varieties instead of the dull old white sort. 5. More need for institutional care for elderly people in future, c. For the past three decades China has been operating a strict population-control policy, so there are now far fewer young people around to take care of the elderly. This state of affairs is usually referred to by the nifty formula “4-2-1”, meaning that the typical only child today will have two parents and four grandparents to look after—a bit of an exaggeration, but not that far off. 6.