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World: Global Aging Is An Iceberg Many Don't See

  • Robert Lyle

Washington, 12 March 1999 (RFE/RL) -- A dramatic shift in the makeup of the world's population is looming in the not-too-distant future and it will have an impact that could make it the transcendent political and economic issue of the 21st century.

The change is the aging of the populations in all of the developed and many of the developing nations of the world. The United Nations, the World Bank, the Population Research Institute, and many more say it will be the most significant demographic shift in history.

It will see those over 65 years of age, who historically made up no more than 2-3 percent of the total population and who now amount to about 14 percent of today's developed world, becoming 25-30 percent of the population within another 30 years.

Where only one person in every 40 was over 65 at the time of Julius Caesar and even Thomas Jefferson, current generations will see the elderly become one in every four or even one in three people.

The effects of this shift could bankrupt the richest nations, transform cultures, turn political systems upside-down, and switch the division between rich and poor nations into a battle between the old and the young.

In the following three stories, RFE/RL's economics correspondent in Washington looks at the problem itself and what some are already doing to deal with it:

A Wake-Up Call On The Demographic Future

Describing global aging as an as-yet-unseen iceberg which lies dead-ahead, on a collision course with the major economies of the world, Peter Peterson says national leaders everywhere need to wake up to the fact that this demographic shift cannot be avoided. It is inevitable:

"The iceberg essentially is the fact that the number of elderly, due to a wonderful blessing called increased longevity, and a baby boom that followed the second world war in many countries, are already born and they can be counted."

Peterson, a former U.S. Commerce Secretary who now chairs the Blackstone Group, a leading New York investment bank, as well as the Council on Foreign Relations and the Institute for International Economics, is most concerned about the economic impact of hitting this iceberg.

In his new book "Gray Dawn," Peterson says that to be able to pay promised pensions to this bulging post-65 population over the next 30 years, government's would have to spend an extra nine to 16 percent of their GDP (gross domestic product) annually simply to fulfill old-age benefit promises. They would have to increase payroll taxes by 25 to 40 percent, an impossible burden, says Peterson, where such taxes already run as high as 40 percent in some European countries:

"However you measure the costs, they are unsustainable. I looked at it in terms of the unfunded liabilities, by which we mean the benefits that have been earned but for which nothing has been saved. Those numbers for the developed world including health care, are a stunning 70 trillion dollars or so, which would be many times the public debt of the countries."

In Germany, Peterson says pension costs are projected to rise from 11 to nearly 17 percent of GDP, in Italy, from 13 percent of GDP to over 20 percent. Peterson says that pension benefits alone owed to future generations amount to between 100 and 250 percent of GDP of the developed world.

Making the aging population even heavier is the fact that birth rates in most developed nations have fallen to record lows. Italy has the lowest rate in the world at 1.2 children per woman's lifetime (it's less than one in many parts of Italy), but the nations of Central and Eastern Europe are no better -- the Czech Republic, Romania and Bulgaria are also at 1.2, Latvia, Estonia, Slovenia and Russia at 1.3 and Ukraine is at 1.4.

In fact, says the United Nations, of the 23 nations in the world with fertility rates beneath 1.5, 20 are in Central and East Europe. That means, according to the OECD (Organization for Economic Cooperation and Development), that while in 1960 there were 6.8 workers to support each retiree, by the year 2030, that ratio will drop to just 2.5 workers for every elderly retiree.

"Birth rates have fallen so dramatically, particularly in Europe, we're going to be confronting a totally new situation in the work force, which is a rapidly shrinking work force. For example, in Japan, between the years 2000 and 2010, based on people that are now born, they're going to experience a 25 percent drop in their workforce under the age of 30."

By way of contrast, the picture is the exact opposite in the Middle East, Central Asia and Africa, notes Peterson, where fertility rates are the highest in the world -- just over 5 children per woman's lifetime -- while life expectancy is among the lowest -- 60 years in Kazakhstan and Iraq, under 50 south of the Sahara. In the year 2030, for example, Peterson says that while half the Italian population will be over age 52, half of the Iraqi population will be under 25. The political implications of that difference are very large indeed for the world, says Peterson.

Italy may be the first to reach a senior population of 18.5 percent in three years, but the rest of Europe and the major industrial nations will not be far behind.

That means, says Peterson, that governments must deal quickly with the pension and retirement systems which will be unsustainable and will sooner or later grind to a halt:

"It's going to have to stop and the question is under what circumstances. Are we going to reform these programs on a timely and I think humane basis or are we going to wait until there's some kind of huge financial crisis where we actually hit the iceberg. And then I think the effects of that would be quite Draconian, because there are millions and millions of elderly who depend on these programs in their retirement years."

The proof of this danger is shown clearly in the nations in transition in Central and Eastern Europe and Central Asia, says Peterson. The old communist system tried to meet the aging challenge head on and failed, he says. They promised universal public retirement systems with pay-as-you-go financing, generous benefits, early retirement, lax disability standards and plunging fertility rates, but without the economic growth necessary to keep them solvent.

"In America, about half of the workers in America are on company pensions and those programs are very largely funded and they're set aside. But in these (former) communist countries, the retirement programs of the employees are as unfunded as the public retirement programs. So you have a kind of double whammy on there."

Peterson says the choices in most of the nations of the world are clear but not very appealing -- raise the age of retirement, lower benefits, increase immigration, boost birth rates or a combination of all of these. The easiest choice is to greatly increase private savings, to make people themselves responsible for some of their retirement income:

"But life is a choice of alternatives and at some point our democracies have to confront the fact that if the taxes we're talking about are unthinkable and the financing of them is unthinking, we have to confront the fact that these programs have to stop. I hope we don't feel that the only way we can approach this problem is to hit the iceberg."

Alternatives to hitting the iceberg are now being discussed.