Ageing: now less of an achievement and more of a challenge to budgets

By Daniel Gros and Nancy LeaMond

Date: 04/03/04

LIVING longer, healthier lives is one of the great achievements of the twentieth century. In most developed countries, life expectancy is still rising by around one year per decade and this will continue, albeit at a decelerating rate.

But ageing is emerging as a social and economic issue in a number of countries, which are increasingly faced with the sustainability of pension and health care systems.

In addition, they are braced for problems in ensuring the adequacy of old-age income maintenance.

Ageing, instead of being viewed as an achievement, has become a challenge for policymaking.

The main reason is that in nearly all developed countries, the age of withdrawal from the labour force has not increased in line with the rise in life expectancy. Furthermore, particularly in continental Europe, the average citizen expects more health care and income maintenance from the public sector than it can deliver.

This conflict is aggravated in those countries experiencing a decline in fertility to levels below the threshold of 2.1 children per woman required to keep a stable level of population.

Finally, whereas ageing is a global phenomenon, policies in the most affected nations - continental EU and the United States - are not emerging in a similar fashion.

• In Europe, the average retirement age has, due mainly to early-retirement schemes, declined.

The number of years in retirement has therefore more than doubled over just one generation. In contrast, in the US, the estimated average retirement age is close to 63. According to a study by consumer advocacy group AARP, 20% of Americans between 40-70 believe they will postpone retirement and work into their 70s, their 80s and even beyond;

• in continental Europe, as in the US, social security/public pensions are set to exert huge pressure on public finance over the coming decades. In other countries, pension systems are based mainly on funded occupational schemes. These may face serious financial problems as well, but are set to exert less pressure on public finance;
• fertility has fallen sharply in continental Europe (bar France). Persons aged 50 and above could, by 2050, account for up to 50% of the population - and of the electorate.

The ultimate response to an ageing of Europe may seem evident.

First, due to the decline in fertility, there will be less scope for distribution among generations.

The average level of pensions will consequently need to fall, relative to income while working.

Second, due to the rise in life expectancy, each person will need to work longer or save more for income maintenance.

However, these realities are excessively complex in a political climate where, in Europe, there is a high level of expectation for the state to provide income maintenance and health care, and in the US, elections are looming.

Policy decisions may well prove more difficult in Europe than in the US, although Alan Greenspan, the Federal Reserve chairman, recently caused an uproar by stating that one way to balance the budget would be by cutting future social security benefits and raising the age of retirement.

The fierce resistance to any modification of the status quo in a number of countries, notably France and Italy and, to some extent, Germany, indicates that it will require a difficult balancing act to achieve a compromise among conflicting interests and perceptions.

Both governments and individuals will need to adapt to ageing demographics, to integrate additional numbers of elderly into a country's social fabric.

This entails unlocking the potential of millions of capable and trainable employees. Using older workers more wisely can ease pressure on public pension, sustain or expand the tax base and enable senior citizens to save longer for a more comfortable old age.

Governments will need to foster longer work-life. This could include ending early retirement incentives, subsidizing training programmes and developing age discrimination laws.

Employers can also introduce policies and benefits that appeal to older workers - phased retirement, telecommuting, flexitime and more and better part-time jobs.

Providing career training and lifelong learning opportunities are a must if older workers are to have the skills that employers demand.

Some of the responsibility rests on the shoulders of older people themselves, who must come around to seeing the necessity of working and saving more, or making do with less.

Either EU countries will make decisions about adapting to their ageing societies, or these decisions will be made for them by the sheer force of demographics and economics.

It is a question of whether we will manage change, or whether change will manage us.

• Daniel Gros is director of the Centre for European Policy Studies (CEPS), Nancy LeaMond is director of the AARP's Global Ageing Programme. The issues presented in this analysis will be debated at a Brussels conference on 4 March.

Ageing is emerging as a social and economic issue in a number of countries, which are increasingly faced with the problem of sustaining pension and health care systems.