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LeadingAge magazine September/October 2011

Global Aging Preparedness: Who Is Ready, Who Is Not?

by Gene Mitchell
LeadingAge Sept-Oct 2011 Intl Richard Jackson 226

Richard Jackson

As the world prepares for a dramatic “graying” transformation, fed by falling fertility rates and rising life expectancies, understanding demographics becomes a crucial survival tool for governments and aging-services providers worldwide.

Richard Jackson, director and senior fellow with the Global Aging Initiative at the Center for Strategic and International Studies, Washington, D.C., is an expert in the demographics and economics of population aging whose insights into global aging can help policymakers and providers better understand the pressures they and aging societies will face in the decades to come. Jackson will speak at a Global Plenary Session hosted by the International Association of Homes and Services for the Ageing (IAHSA) on Sunday, Oct. 16, part of the 2011 LeadingAge Annual Meeting and IAHSA Global Aging Conference in Washington, D.C.

LeadingAge talked with Jackson about the coming age wave, why understanding demographics is important, and what providers need to understand about the future of serving seniors.

LeadingAge: Last year, you and two colleagues produced the Global Aging Preparedness Index, a unique measure of the progress that countries worldwide are making in meeting the aging challenge. What is the story behind it?

Richard Jackson: It’s widely acknowledged that the aging of the population poses a number of challenges, and that among these is how to maintain a decent standard of living for the elderly without putting too heavy a burden on the young. Surprisingly, given all the attention it’s received, and despite the fact that many countries from Japan to Germany have already undertaken major reforms of their old-age benefit programs, there’s been little serious attempt to create a comprehensive measure of aging preparedness that takes into account both the long-term fiscal sustainability and adequacy of countries’ retirement systems.

We wanted to create a comprehensive set of metrics that are consistent across countries, and this became the Global Aging Preparedness Index, or GAP Index. The overall GAP Index contains two sub-indices—a fiscal sustainability index and an income adequacy index.

On the fiscal side we look not just at the burden of supporting a growing elderly population, but also at the differing ability of countries to accommodate the growth in old-age benefit spending by raising taxes, cutting other government spending, or borrowing. On the adequacy side we look at the long-term trend in the living standard of the elderly relative to the non-elderly, as well as the extent of elderly poverty and the strength of family support networks in each country.

There is good news and bad news. The bad is that very few countries do well on both dimensions of aging preparedness. There is a very worrisome tradeoff between adequacy and sustainability.

The good news is that there are ways to square the circle. Australia, which has a modest public floor of old-age income support and a large and mandatory private pension system, scores well into the top half of the GAP Index on both fiscal sustainability and income adequacy. Meanwhile, Germany and Sweden are moving in the right direction by reducing the cost of government benefit promises, which restrains the burden on the young, while increasing private retirement savings and extending work lives, which helps to maintain the living standards of the old.

The U.S. enjoys some important demographic and economic advantages, but there’s no law of nature that you won’t squander your relative advantages.

LeadingAge: How do you rate the United States’ prospects?

Richard Jackson: The prospects in the U.S. are decidedly mixed. On the plus side, we are a partial exception to the hyper-aging trend sweeping the developed world. People assume that our age wave is particularly large, but in fact we are the youngest of the rich countries today and we’ll still be the youngest in 2030 or 2040.

Even if the degree of aging is not as severe in the U.S. as in Japan or Europe, because our baby boomer generation is unusually large, the elder share of the population and the dependency burden will ramp up quite steeply over the next few decades. That will constitute a major fiscal shock. We’re looking at roughly an extra eight percent of GDP at the federal level spent on Social Security, Medicare and Medicaid.

Again on the plus side, the U.S. also has some notable economic advantages: flexible labor markets, relatively low levels of elder dependency on public benefits, and a well-developed private pension system. Unfortunately, we also labor under some notable handicaps: a very low national savings rate, an extraordinarily high rate of growth in health care costs and a political culture that finds it difficult to make tradeoffs.

Ironically, some of Europe’s largest welfare states have taken decisive steps to address the aging challenge by indexing their pension systems to their demographics in whole or in part. There is some question whether these reforms are politically sustainable, but at least other countries are taking constructive action, while policy in the U.S. remains gridlocked.

In short, the U.S. enjoys some important demographic and economic advantages, but there’s no law of nature that you won’t squander your relative advantages.

LeadingAge: In your recent article, “How Ready for Pensioners?” you include a table of seven key policy reforms and then rank how urgently those changes are needed in the 20 countries included in the GAP Index. For six countries—France, Germany, Italy, Japan, South Korea and Spain—three or more policy reforms are given a “high priority” ranking. Given the severity of the situation in these countries, is there any way for them to succeed while avoiding unrest?

Richard Jackson:
It’s an open question in some countries. Take Italy. It is aging so rapidly and has such an expensive old age benefit system that despite the fact it has enacted large prospective cuts in benefits that may jeopardize the living standard of the future elderly, it still faces a large and rising burden on the young. In other words, Italy is moving toward a retirement system that is at once inadequate and unaffordable. It is difficult to believe that there won’t be political conflict over planned old-age benefit cuts, when half or more of the country’s electorate is past retirement age by the 2020s. The result could be not just an economic crisis but a regime crisis.

The way to avoid this outcome is to ensure that the gap in elderly income caused by fiscally necessary reductions in the generosity of government old-age benefit programs is filled in with other sources of income support. If you take action sooner, you can give people some time to adjust and prepare. They can save more, plan on working longer, maybe in a new job or career, or forge closer family ties. It is possible to fashion a set of comprehensive reforms that protect the most vulnerable—but only if you couple cost-saving measures with measures designed to ensure adequacy.

LeadingAge: Are the challenges in developing countries similar?

Richard Jackson: In some ways they are even more daunting. The big challenge in a China or India or even in a Korea is not how to control the rising fiscal burden of old-age benefit programs. Rather, it’s that these countries are aging before they’ve had time to put in place the institutions and social protections of a modern welfare state. There is still enormous dependence on the extended family. Strong family bonds are a plus, but can also become vulnerability if families are under stress. One indicator in the GAP Index is the projected change in the average number of surviving children of the elderly. In China, between now and 2040, the average number of surviving children will decline by 1.6. In Brazil, the decline will be 1.7; in South Korea 1.8; and in Mexico, 2.5. The families in these countries are already under stress from urbanization and mass migration of the young to cities, but will soon face the additional stress of declining family size.

This change in size and shape of family is an issue in developed countries too. There is enormous variation in how long-term care for the elderly is handled. In Sweden it is almost all publicly financed. In Italy, Spain and Japan, a very large share still occurs through families. Here’s one of my favorite statistics: By mid-century in Italy, over half of the people in their 20s will have no brothers, sisters, uncles, aunts or cousins. The family tree is becoming all root and stem and no branch in a country where large extended families have always been the social glue. In a place like Italy almost none of the cost of long-term care now shows up in public benefit projections. You could eventually have a huge additional public cost shifted to government budgets if tomorrow’s smaller families find themselves unable to bear the burden.

Yet the prospect doesn’t seem to have changed either personal behavior or public policy in most developed countries. Italians still love children, they are just not having any. They also care about the elderly, but haven’t put in place adequate substitutes for family care. In contrast, in East Asia there is some movement toward community-based care for the elderly. The trick is, how do you help families without undermining their incentive to give elders the support that they now give for free? Long-term care is the most explosive dimension of old age dependency, and it would be a fiscal disaster if the entire cost of caring for the frail elderly ended up in government budgets.

It is possible to fashion a set of comprehensive reforms that protect the most vulnerable—but only if you couple cost-saving measures with measures designed to ensure adequacy.

LeadingAge: How has China’s one-child policy shaped its future?

Richard Jackson: That policy’s purpose was to relieve the enormous burden of youth dependency and avert a looming Malthusian catastrophe. There’s been a lot of good macro modeling which demonstrates that the shift in age structure has been a driving force in the economic takeoff in China. Fewer children mean a larger share of the population in the working years, and this boosts per capita GDP. As youth dependency declines, labor force participation, saving rates, and incentives to invest in human capital also go up.

The problem is that the other shoe eventually falls. In the long term the working-age bulge in the population becomes a senior citizen bulge. Falling birthrates are of course contributing to population aging in countries around the world. What’s unique about China is not that fertility came down, but that the one-child policy brought fertility down at an earlier stage of social and economic development than otherwise would have occurred. China is thus prematurely aging—or to put it another way, is on track to grow old before it grows rich.

The one-child policy, in conjunction with China’s traditional preference for sons, also helped create an extraordinarily serious gender imbalance. Recourse to sex-based abortion to ensure that one’s only child is a son is commonplace. The extremely skewed sex ratio at birth—120 boy babies born for every 100 girl babies—is beginning to concern the Chinese authorities themselves, since bride shortages and bachelor surpluses are a potential cause of social instability in a society where the expectation of marriage is nearly universal. When it comes to elder care, there’s a tremendous irony here. The Chinese are having boys rather than girls because it’s the son’s responsibility to care for his aged parents. But who actually provides the care? Not the son, but the daughter-in-law! Today’s bride shortage will thus eventually become a caregiver shortage.

LeadingAge: A fertility rate of 2.1 is considered “replacement rate” for a population, and we know that many countries are now well below that. Is there any point of no return—a fertility rate so low that a society cannot recover?

Richard Jackson: Wolfgang Lutz, an Austrian demographer, writes about what he calls the low-fertility trap. Lutz puts the threshold at about 1.5. If a society sinks much beneath a fertility rate of 1.5 and stays there for a generation or more, it becomes very hard to climb back out because the social norm for what constitutes ideal family size is defined downward.

The trends that have suppressed fertility, from rising affluence and educational attainment to the availability of effective contraception, are pretty deep-seated in the economy and society. Moreover, even if a country’s birthrate turned around suddenly it wouldn’t help much for 25-30 years. For the first few decades, you wouldn’t have any new workers—just a lot more kids to care for. Japan and parts of Europe are also in the grips of “negative demographic momentum.” Because fertility has been far beneath replacement for so long, the generation of women now in their childbearing years is relatively small. Even if they start having a lot more kids, the population will continue to age and contract for decades to come. Demography’s like an ocean liner. You can’t turn it around on a dime.

LeadingAge: Does this inevitably mean that the role of families will have to change in caring for elders, at least in some societies?

Richard Jackson: Let me focus on the U.S and begin by situating us in the international context. Seventeen percent of U.S. adults aged 60 or over now live with a grown child, including both parents living in the grown child’s household and grown children living in the parents’ household. That puts us roughly in the middle of the spectrum for a developed country. The share of U.S. elders living in multigenerational households is much higher than in northern European countries like the Netherlands, Germany, or Sweden, where the share is a mere four percent. But it is significantly lower than in Italy, where it is 28 percent, Spain, where it is 42 percent, or Japan, where it is 44 percent.

Because the countries with very high levels of multigenerational living are also countries that have very low fertility rates, family support networks will come under intense pressure—and the role of the family in caring for the elderly is likely to diminish over time. On the other hand, the extended family has not disappeared in the U.S., nor will it disappear given our relatively high birthrate. Here family care is likely to remain important, and indeed may grow more important—not just because of demographics but also because of changing generational attitudes.

Actually I think we’re already seeing a shift toward a re-strengthening of family ties. Neil Howe [a senior associate at CSIS], whom I’ve worked with many times over the years, is perhaps best known as the generations guru. He coined the term “millenials.” He says that the prevalence of multigenerational families in the U.S., which bottomed out in the 1990s, is once again rising. Understandably, there’s been a spike following the 2008 economic crisis, but the trend antedates that and thus reflects a deeper shift in attitudes. Across the board, baby boomers in particular want to strengthen ties with their grown children. As part of this development, we are not only seeing a rise in the number of multigenerational families, but also an acceleration in the shift away from age-segregated retirement communities toward aging in place. I personally don’t know a boomer who dreams of retiring to Sun City.

The whole notion of retirement as a distinct lifecycle phase is largely a social construct of the postwar era. With both the workforce and the economy rapidly growing, we decided to heavily subsidize retirement so that everyone could aspire to it. But the favorable demographics that underpinned today’s pay-as-you-go retirement systems have shifted, and in the future we will have to take more of the marvelous longevity dividend we are enjoying as extra years of work and less as extra years of leisure. At the minimum, people will work a lot longer—and by the way, elderly labor-force participation rates are already rising again the U.S. and a number of European countries. But we may need to go further and rethink the whole three-box life cycle of education, work and retirement. Maybe we’ll take more leisure earlier in life to raise children or train for a second career, then keep working longer later in life, whether part-time or full-time and whether in a paid job or a volunteer job. I think the boomers will spearhead this shift as well. In the end, we’ll look back on this era of universal all-or-nothing retirement as quaint.

There’s a corollary to this that’s worth underscoring. I often go to aging conferences and everyone is talking about how age is no longer relevant and that we should aspire to an age-blind society just as we aspire to a color-blind or gender-blind society. Yet nobody takes the next logical step and asks: If age is no longer a proxy for poverty or disability or ability to contribute, why should it be a proxy for access to a public subsidy?

In the future we will have to take more of the marvelous longevity dividend we are enjoying as extra years of work and less as extra years of leisure.

LeadingAge: What would you like the members of LeadingAge and IAHSA to take away from your presentation in October?

Richard Jackson: In terms of the GAP Index, it’s this extremely worrisome trade-off between adequacy and sustainability. You cannot maintain the living standard of the old in the long run by imposing a rising burden on the young that confiscates their economic progress. Yet a decent society also has to provide adequate income support and protection for the old. Countries like France or Italy that have slashed public benefit promises to the future elderly without putting much in their place may have solved the projections, but they haven’t solved the problem. Meanwhile in the U.S., we perversely persist in wanting more from government than we’re willing to pay for. That too is obviously unsustainable, even in the near term, as the S&P downgrade reminded us.

We must also acknowledge that creating new opportunities for the old must come with new responsibilities. We need to move into a future where the elderly aren’t ghettoized, and are re-mainstreamed, but that means in turn that subsidies will need to be based more on need than on age.