The gray tidal wave: Part 2, work longer
By: David A. Smith
[Continued from yesterday's Part 1.]
Yesterday’s post on the gray tidal wave of aging populations explored a new report (in Adobe Acrobat, and overview of results also in pdf) from the Washington-based Center for Strategic and International Studies authored by demographers Richard Jackson, Neil Howe, and Keisuke Nakashima, whose also penned an accompanying International Herald Tribune editorial, presented a Global Aging Preparedness (GAP) Index across twenty large countries.
When aging demand hits fiscal insolvency, something gives
Because we Boomers refuse to go gentle into that long good night, our greatest global-north challenge is our societal gerontification, and our overweening sense of entitlement to retire earlier, live longer, and play harder than any generation before us.
Ten years ago, the Boomers were in their mid-forties – they’re older now
Ah, but I was so much older then
I’m younger than that now
And we expect our society – namely, the government operated and funded by our children and grandchildren – to pay for our leisure. We had no business indenturing the next generation to pay for our profligacy, and now the great recession will break that promise.
We live in an era of many challenges, from global warming to global terrorism. But few are as certain as global aging and few are as likely to have such a large and enduring impact on the size and shape of government budgets, on the future growth in living standards, and on the stability of the global economy. Global aging promises to affect everything from business psychology and worker productivity to rates of savings and investment, long-term returns to capital, and the direction of global capital flows. Perhaps most fatefully, it could throw into question the ability of societies to provide a decent standard of living for the old without placing a crushing burden on the young. It is this “old-age dependency” dimension of the global aging challenge that the current report explores.
No matter how much we exhort our offspring to support our cushy lifestyle, they cannot afford what we demand that they pay us, as shown by the authors’ Fiscal Sustainability Index:
You can order anything you want from the menu … so long as you can pay for it
The Fiscal Sustainability Index estimates the nation’s ability to fund the pledges it has made to its elderly. Here’s how the authors describe it:
Fiscal Sustainability Index
PUBLIC BURDEN. This category contains two indicators that measure the sheer magnitude of each country’s projected public old-age dependency burden.
FISCAL ROOM. This category contains three indicators that measure each country’s ability to accommodate the growth in its public old-age dependency burden by raising taxes, cutting other spending, or borrowing.
BENEFIT DEPENDENCE. This category contains two indicators that measure how dependent the elderly in each country are on public benefits and thus how politically difficult it may be to reduce those benefits beneath current law—or even to carry out reductions in benefits that are already scheduled to take place.
Unlike housing, which is rationed because the supply is finite and the income-support benefits (like Section 8 in the US or housing benefit in the UK) are issued only discretely and not as-of-right, old-age benefits are generally structured as entitlements. Comforting though that is for beneficiaries, it means we have a Heisenberg Funding Uncertainty Principle – we cannot know with any confidence how much we are publicly obligated to spend, with even more uncertainty inherent since we do not know how much revenue the government will be able to collect in taxes:
The index has good news and bad news.
The authors are being ingenuous – the charts show only bad news.
The bad is that very few countries score well on both sustainability and adequacy.
India can afford the promises it made … because it didn’t make many
The Netherlands made fantastic promises … but can’t pay for any of them.
At times it takes awesome computational power to demonstrate something that a five-year-old would instinctively comprehend: if you make grandiose promises, you’ll probably fail to keep t hem, and if you want to be credible, promise too little:
Three of the seven highest-ranking countries on the fiscal sustainability index (Mexico, China and Russia) are among the seven lowest-ranking countries on the income adequacy index.
This is no paradox at all. Countries that are in good fiscal shape relative to their pension obligations did so by not promising much, while those that provide a lot for their elderly are cooked.
Four of the seven highest-ranking countries on the income adequacy index (the Netherlands, Brazil, Germany and Britain) are among the seven lowest-ranking countries on the fiscal sustainability index.
The developed world has obligated itself into penury.
Want to spend 16% of your GDP on the elderly? Just you wait!
Two countries — France and Italy — score near the bottom of both indices.
We’re both terrible at everything!
Why am I not surprised?
Both have legislated large prospective cuts in the generosity of their public pension systems, threatening to erode the living standard of the old. Yet despite the cuts, the systems remain so costly that they will impose a large and rising burden on the young.
You’d think the young French would understand this, but evidently they don’t.
French students riot at the prospect of raising the retirement age from 60 to 62
Like France and Italy, Germany and Sweden have scheduled deep reductions in the future generosity of their public pension systems.
No two ways about it – further benefit cuts are inevitable, and as the scale required is vastly larger than can be politically absorbed at once, the steady benefits erosion will be handled serially over multiple presidencies.
We’re passing more benefits legislation
This is also going to influence how we configure future affordable and elderly housing to minimize the pain.
The good news is that there are exceptions. Australia, which combines a low-cost, means-tested floor of public old-age poverty protection with a large, mandatory, and fully funded private pension system, scores in the top half of both indices. So does Chile, which has a similar mix of retirement policies.
Neither nation is large. Both are fairly new to affluence. And both use a strong private-sector private pension system. We in America have been living on borrowed time.
Several other countries are clearly moving in the right direction. Unlike France and Italy, Germany and Sweden are on track to fill in the resulting gap in elderly income by increasing funded pension savings and extending work lives.
That’s the key, isn’t it? Work 85% of your life, retire for 15%. When the average lifespan was 70, we could work until 65 and enjoy maybe a decade of pleasant retirement. As our lifespan pushes 80, the ratios shift, and we will simply work longer. As the French and Germans are showing us – granted, their populations are older than ours – there will come a moment when the retirement age is pushed upward to 67 or even higher.
This contrast points to a crucial lesson. Most of the world’s developed economies will have to make large reductions in state retirement provision to stave off a fiscal Armageddon.
It’s a law of economic gravity.
So too will a few major developing economies, notably Brazil and South Korea.
Brazil is a complete surprise – I wouldn’t have imagined a nation as vibrant as Brazil, with the income inequality it has, would be facing pension insolvency, but there’s no arguing with the wave.
You’re paying for this, sonny
But unless reform also ensures income adequacy for the old, the reductions are unlikely to be politically sustainable.
A very succinct way of saying, the elderly will need to work longer, and will need to be motivated to work longer.
Saving more and working longer are a crucial part of any overall reform strategy because they provide the best means — indeed, the only means — to shore up the living standard of the old without imposing a new tax or family burden on the young.
Besides, work is good for you – work longer, your brain will be active longer, you’ll be happy longer.
With much of the world still reeling from the global economic crisis that began in 2008, many policy leaders may conclude that now is not the right time to address the long-term challenge of global aging. This would be a mistake.
In fact, the economic crisis has made timely action even more urgent. It has drastically reduced the fiscal resources that most countries have to accommodate rising old-age benefit costs, and at the same time it has left many elderly people more vulnerable.
The report provides an interesting how-we-doin’? scorecard:
The US has very few stars.
There’s also the critical issue of confidence. The public and the markets increasingly worry that governments have lost control over their fiscal future. In this sense, taking credible steps to address the long-term aging challenge may be a necessary part of ensuring near-term recovery as well.
It would have been better advice three years ago, but better late than never.
Cut social security, will you?