PROSPERITY IN AN AGING SOCIETY

MADRID

JUNE 2001

THE PROBLEMS OF MAINTAINING PROSPERITY IN AN AGING SOCIETY

• THE FISCAL CHALLENGE

• THE PRODUCTIVITY CHALLENGE

• THE DEMAND CHALLENGE

• THE POLITICAL CHALLENGE

THE CHALLENGES

• INCREASED LONGEVITY

• COMBINED WITH DECLINING BIRTHRATE

• MEANS THAT AN INCREASING FRACTION OF THE POPULATION WILL BE RETIRED

• AND AN INCREASING FRACTION OF THE POPULATION WILL BE OVER 85

THE FISCAL CHALLENGE• AN INCREASING DEPENDENCY RATIO—THE RATIO

OF THOSE NOT WORKING TO THOSE WORKING• LARGER FRACTION IN RETIREMENT ONLY

PARTIALLY OFFSET BY SMALLER FRACTION IN SCHOOL

• RISING HEALTH COSTS, ESPECIALLY FOR THE AGED—PARTIALLY A REFLECTION OF NEW MEDICAL TECHNOLOGIES—WILL COMPOUND PROBLEM

• WILL PLACE A BURDEN ON THE PUBLIC SECTOR– UNLESS ADEQUATE FUNDS ARE SET ASIDE

(PREPAYMENT)• REDUCING FUNDS AVAILABLE FOR INVESTMENT,

INCLUDING INVESTMENT IN YOUTH• DISSAVING BY OLD MAY REDUCE OVERALL

SAVINGS RATE, REDUCING GROWTH

ADDRESSING THE FISCAL CHALLENGE

• PRIVATIZATION OF SOCIAL SECURITY (OLD AGE PENSIONS) IS NOT THE ANSWER

• MORE PREFUNDING IS– PREFUNDING PENSIONS– PREFUNDING MEDICAL CARE FOR AGED– PREFUNDING ASSISTED LIVING

• BETTER HEALTH MAY LIMIT GROWTH OF HEALTH CARE AND DISABILITY EXPENDITURES– LARGELY LIFE-STYLE QUESTIONS—SMOKING,

ALCOHOL, ACCIDENTS, DRUGS, NUTRITION

THE PRODUCTIVITY CHALLENGE

• HUMAN CAPITAL IS LIKE PHYSICAL CAPITAL: IT BECOMES OBSOLETE AND NEEDS TO BE RENEWED. NEW ENTRANTS “EMBODY” LATEST TECHNOLOGY (MOST CLEARLY SEEN WITH IT). AN AGING WORK FORCE MAY BE A LESS PRODUCTIVE WORKFORCE

• NEED TO OFFSET THROUGH INCREASED INVESTMENT IN EDUCATION

• EDUCATION AIMED AT LIFE-LONG LEARNING• EDUCATION SYSTEM AIMED AT CONTINUING EDUCATION• MAINTAINING HEALTH IS ESSENTIAL TO MAINTAINING

PRODUCTIVITY, LIMITING DISABILITY• AGAIN, LIFE STYLE ISSUES ARE AS IMPORTANT AS ACTUAL

EXPENDITURES ON HEALTH CARE• BUT SO ARE WORKING CONDITIONS

• ADVERSE EFFECTS CAN BE PARTIALLY OFFSET BY DRAWING INTO LABOR FORCE MORE EXTENSIVELY GROUPS THAT PREVIOUSLY WERE PARTIALLY EXCLUDED (WOMEN)

• GOOD NEWS: SMALLER FLOW OF NEW ENTRANTS INTO LABOR FORCE MAY LEAD TO LOWER UNEMPLOYMENT

THE DEMAND CHALLENGE

• RESTRUCTURING PRODUCTION, WORK PLACES, CITIES, TO REFLECT THE NEW DEMOGRAPHY

THE POLITICAL CHALLENGE

• AGED MAY HAVE A TENDENCY TO DEMAND MORE BENEFITS FOR THEMSELVES—IN US THE AMERICAN ASSOCIATION OF RETIRED PEOPLE (AARP) HAS BECOME ONE OF THE MOST POTENT POLITICAL FORCES

• THE INTERESTS OF THE AGED MAY PREVAIL OVER THOSE OF THE ECONOMY AS A WHOLE,

• WITH EXPENDITURES ON THE AGED CROWDING OUT INVESTMENTS IN EDUCATION AND THE OTHER PROGRAMS DESCRIBED ABOVE

• WE CAN CREATE A PROSPEROUS SOCIETY WHICH PROVIDES SOCIAL JUSTICE FOR THE OLD AND OPPORTUNITIES FOR THE YOUNG, BUT THIS WILL REQUIRE CAREFUL BALANCING OF THE POLITICAL AGENDA