Apples for Health- Global Aging Threatens World's Economies

Global Aging Threatens World's Economies

    The coming mass departure of the baby boom generation from the global labor force threatens the fiscal health and economies of many nations, according to a recent report from the Center for Strategic and International Studies.

   Near-term action is needed to shore up the fiscal health of national pension and retirement-age health care systems in developed countries, and to prepare the baby boom generation for the potential harsh realities to come, writes Robert Stowe England, director of research at CSIS's Global Aging Initiative.

   In "The Fiscal Challenge of an Aging Industrial World," England examines official government budget forecasts for elderly spending, along with a wealth of academic and medical data, which all point to coming problems with implications not only for the economies of individual governments, but for the world economy.

   Specifically, England posits that the coming extreme imbalance between active workers and retirees has the potential to slingshot the economies of countries around the world into staggering deficits, resulting in a bleak outlook for governmental and economic fiscal soundness.

   Drastically increasing retirement benefit and healthcare spending for the elderly is a worldwide phenomenon, and there are lessons that can be drawn from current efforts in other countries to deal with the problem, he told United Press International.

   "Looking at all of the experiences can teach a lesson on the danger of delay and the difficulty of the challenge, as well as some in the directions a country might go," said England. "I just don't think that in the U.S., people are aware of this problem. It has been ignored -- this global aging problem -- and it will come to the U.S."

   England writes that the first large wave of baby boom retirees is expected to hit in 2008, when the first-year boomers reach age 62.

   The wave will continue steadily for the next 18 years in the United States and for briefer periods elsewhere in the world, except in Japan, where it will come at a slightly quicker pace.

   According to the study, by 2030, the population over 65 in Japan will increase from the current 17 percent to 30 percent; in Italy, from 18 percent to 29 percent; in Germany, from 16 percent to 28 percent; and in the U.S. from 13 percent to 22 percent.

   Between 2010 and 2030, England anticipates an 82 percent surge in the number of elderly people, while the working-age population grows by only 5 percent. The situation is reportedly far more dire in Japan, where population growth projections have plummeted and old age spending is projected to increase by enormous levels. According to England, the Japanese government also cannot afford to raise taxes, because past attempts to do so have plunged the country back into recession.

   This data lead to two basic scenarios: either payroll taxes must be increased to enable fewer people to provide funds for a greater number of retirees under the pay-as-you-go Social Security systems in the United States and other nations; or retirement benefits must be reduced.

   In addition, the CSIS data raises a multitude of issues when it comes to Medicare and similar government medical benefits programs. These include the possibility for the rationing of care--which is already occurring in subtler forms in the U.S. through decreased payments to doctors for various procedures, and standardized office visits--as costs continue to rise.

   In his book, England cited 2000 U.S. Social Security Administration forecasts that in 75 years payroll taxes will provide only two-thirds of the funds needed to pay for benefits.

   He also points out that most of the countries that have so far adopted reforms have not attempted to increase taxes to offset related spending increases, because it has become difficult to raise taxes on workers and still keep them competitive in the world economy. He also notes that the political risk of such a move also played into such judgment calls.

   "If you look at the reforms, they reduce member benefits, though they are usually phased in over a very long period of time," said England.

   Sweden, which has undertaken the most sweeping reforms of any country that has set out to address the issue, has reduced government benefits and established supplemental saving accounts for workers. The country has explicitly tied the benefit level one receives to one's projected longevity after retirement, based upon various factors.

   Germany has also reduced retirement benefits -- though on a much more moderate scale than Sweden -- and makes up for the loss to retirees somewhat through a supplemental system where workers can place up to four percent of their yearly pay into a funded account.

   This represents a significant new development for the country, as it previously had no substantial employer-sponsored pension plans, with retirees instead relying solely on a government provided pension.

   The establishment of supplemental accounts seems to be an emerging trend across Europe, with several countries investigating the option, or already involved creating such accounts, said England. The proposition, however, is much more difficult in countries like France, where opposing labor groups wield immense political power.

   Beyond the issue of the sheer number of future retirees, is the increase in lifespan due to medical breakthroughs that will result in increased medical costs. Medical technology has already increased the average lifespan, with some predictions holding that human life can be increased to 120 or even 150 years.

   There is, however, major disagreement in the medical community about the inherent aging limits of the human body, along with the ethical implications of using even more technology to alter those limits. Decreasing mortality rates have already increased healthcare costs for the elderly, and have the potential to raise those costs to as yet unseen levels.

   Declining birth rates coupled with increased longevity also raise the issue of depopulation and a shrinking work force that will need to provide tax-based funds to pay for the burgeoning numbers of retirees. The phenomenon is most pronounced in Japan, Italy, Spain and Germany.

   At a CSIS forum, American Enterprise Institute senior fellow Ben Wattenberg described the depopulation problem as having significant economic impact, including labor shortages and production shortfalls. He predicted that by 2010 the U.S. could have a labor shortage of as much as seven or eight percent.

   At the same forum, Sylvester Schieber, a vice president at the consulting firm Watson Wyatt Worldwide -- who wrote the foreword to England's book -- painted a dramatic picture of the difficult decisions ahead for the United States.

   "It will be challenging for us to let go of the dream of these retirement systems," said Schieber.

   Though the U.S. government should be responding to the large database of information that shows the coming financial crisis, England said that policymakers seem uninterested.

   "The wake-up call should have already been issued, and in some ways it has been, although it has been ignored," he told UPI. He cited a World Bank report from 1994 that stated that current retirement-related government plans were unsustainable, and a study from the Organisation for Economic Co-Operation and Development with similar findings.

   England says that although there has been some interest in the problem by Congress, the administration, and federal agencies, it has never really peaked public interest, which has pushing the issue to the sidelines of political discourse. England said part of the problem is that people are either ignorant of the issue, uninterested, or uninformed due to the lack of press coverage of the issue.

   In addition, he said that the current Social Security Trust Fund surplus due to the presence of baby boomers in the work force, the recent economic boom, and the relatively low number of retirees masks the coming problems, especially to those who are myopic about it.

   "Of course, these global macro-economic issues are fairly obtuse, and I am sure they are not of great interest to the general public to start with, yet they matter," he said. "The earlier this reality sets in and we deal with this, the less draconian the solution. Imagine if we have done nothing and all the baby boomers retire.