Commentary

An age wave of immense proportions is about to sweep over America and the rest of the developed world. For nearly all of history, the elderly never amounted to more than 2 percent or 3 percent of the population. With the industrial revolution, the share started to rise. Today in the developed world, the elderly amount to 14 percent. By 2030, they will reach 25 percent and in some countries, they may be closing in on 30 percent. This phenomenon, combined with the equally unprecedented decline in birth rates and the number of younger people, defines the demographic parameters of global aging. An aging population promises to usher in a social transformation even a revolution with few parallels in humanity’s past. It will subject the developed countries and their economies to enormous stresses, reshaping the family, redefining politics and cultures, and even rearranging the geopolitical order. The benefit programs for the elderly in the developed countries are largely pay-as-you-go systems or, more bluntly, hand-to-mouth financing, and they have generated huge unfunded liabilities of about $70 trillion. That is, those benefits already are “earned” by today’s workers for which nothing has been saved. Over the next quarter-century, the number of retirees (beneficiaries) in the Organization for Economic Cooperation and Development countries is projected to grow 14 times faster than the number of workers (taxpayers). And the ratio of taxpaying workers to non-working pensioners in the developed world is due to fall to 1.5-to-1 and in a few European countries it will drop to 1-to-1 or even lower. As it does, the economic and fiscal burden of pay-as-you-go retirement systems will soar. All told, the cost of public benefits to the elderly is on track to grow by between 9 percent and 16 percent of gross domestic product in most of the developed countries. This vast increase would be three to five times what the United States now spends on national defense. It also would represent an extra, and unthinkable, 25 percent to 40 percent taken out of every worker’s taxable wages in countries where total payroll tax rates often exceed 40 percent already. The time will come when the developed countries must confront the truth: that their universal pay-as-you-go retirement systems cannot sustain the coming age wave, and that their generosity must be greatly reduced. Will they change course in time to avoid massive deficits, sudden draconian cuts in benefits, or huge tax hikes that wreck their economies, along with the living-standard prospects of younger generations? The answer to the daunting questions of how and when the social contract will be renegotiated will depend in part on how tomorrow’s elderly use their growing political clout. By 2030, nearly half of all adults in developed countries and perhaps two-thirds of all voters will be at or beyond today’s eligibility threshold age for publicly subsidized retirement benefits. Beyond the fiscal and social burdens, global aging poses even more fundamental economic challenges. Earlier in life, most people are net savers, whereas after retirement they become net spenders. As the latter group grows as a share of the population in the developed countries, households (together with the private pension plans they belong to and the businesses they own) will tend to save less of their aggregate income. The Organization for Economic Cooperation and Development projects that the private saving rate in the developed world could fall by more than half over the next three decades. If the decline is anywhere near this large and especially if it is accompanied by the mounting fiscal inability to pay these senior benefits the result could be a global capital shortage, compounded by dangerously fluctuating interest rates, exchange rates and cross-border capital flows. Whatever happens to savings, tomorrow’s economies will look very different from today’s. Older people tend to consume more personal services and fewer manufactured goods. On the plus side, this could open many new opportunities for business and economic growth. On the minus side, by accelerating the ongoing global trend toward services where gains in output per worker are more difficult to achieve it could act as a further brake on the developed world’s already slowing productivity growth trend. On this score, we have not yet started to ask the right questions about what public policy can do to help raise productivity, and thus living standards, in an era when the economy will depend more on deploying at-home nurses rather than stamping out auto bodies. Much hangs in the balance. By 2010, the number of workers in Japan younger than 30 will shrink by a stunning 25 percent. In most of Europe, workforces will be shrinking by roughly 1 percent per year, meaning that unless productivity increases at high levels, the real economies of some countries may begin shrinking as well. For at least a half-century, legislators and business managers have used expressions like “fiscal dividend” and “market growth” to refer to the natural tendency of tax revenues and sales to rise in a normal year. What happens in this new environment when everyone expects them to decline in a normal year? And if economies become a negative or zero-sum game, will the positive trends associated with globalization be rolled back amid calls for greater protectionism? Global aging is sure to breathe new life into the old debate over the pros and cons of population growth. Some economists stress that natural resources are finite and that less growth helps living standards and quality. Others note that fixed-cost undertakings become more affordable when that cost can be spread over a larger population and a growing economy. The classic examples are basic research and infrastructure investment. There will be new important examples of fixed-cost challenges. For example, in a world of escalating and varied national-security challenges, will countries with shrinking populations and economic growth conclude they cannot fund these international challenges, not to mention other public investments like education? The time to act is now. In the years ahead, developed countries will look for ways to meet the needs of a growing number of elderly without overburdening the economy or overtaxing the young. My personal preferences are encouraging longer work lives, targeting benefits according to need, and transitioning from pay-as-you-go retirement systems to funded systems of personally owned savings accounts. This last strategy does most to overcome one of the biggest economic challenges of global aging namely, how to sustain adequate rates of savings and investment. Along with raising retirement ages, it also is the only strategy that allows elders to enjoy an undiminished living standard without imposing direct (tax) or indirect (familial) burdens on future generations. Only one thing is certain: No country can afford to delay in addressing this issue much longer at least if it intends to prosper in the next century. Peter G. Peterson is founding president of the Concord Coalition and served as a Commerce secretary to former President Richard M. Nixon. He is also an author.