Experts debate pension reforms

What public policies are required to accommodate our greying populations? In part one of a four-part series, specialists consider pension reform.
The extent of the aging problem the developed – and increasingly the developing – world faces is evident in looking at a few statistics about Japan, which is the world's most rapidly greying population.

Japan boasted the developed world's youngest population in 1950, with only 4.9% of its people aged over 65. But by 2015, one in four Japanese will be elderly, making it the oldest and this will rise further to nearly one out of three in 2050. Whereas in 1950, Japan's fertility rate was 2.75 (the number of children per couple), today it is 1.43 – which means while today Japan's population is about 126 million, it will decline to 100 million by 2050.

Other developed countries, particularly in Western Europe, have similar and sometimes worse trends. The United States, despite immigration, is not immune to these problems, and now developed Asia (Hong Kong, South Korea, Singapore) is in the same boat. Worse, China could be the first country to face a Japan-style demographic crisis while still being poor.

Pension experts from around the world debated the key elements of reforming pension schemes around the world at a conference on aging and the global economy in Tokyo sponsored by the Center for Strategic and International Studies, a Washington, DC think tank, and the Japan External Trade Organization. Much centred on Japan's attempt to create a successful, aged society; how pay-as-you-go pension systems no longer work and what sacrifices will now be required; and the challenges societies face as they are forced to become more economically efficient.

Future articles in this series will address issues of economic and social productivity of ageing societies; the intergenerational conflicts of pension reform; the impact of ageing on Asian economies; ageing in the context of globalization; how ageing will shape international financial markets; and structural reform required in ageing societies. This article looks at politician's often rose-tinted view of pension reform.

What politicos say

Most politicians have defined the problem as one of populations growing older. In Japan, this means re-wiring the social contract between the government, companies and families. In the United States, it is more a question of improving the efficiency of social insurance. And in Europe, the debate is about maintaining social solidarity between economic actors as well as between generations, with a heavier role of the state.

Ryutaro Hashimoto, a Japanese Diet member and former prime minister, said his government's principle political challenge over the next three years is to ensure "People must feel secure and confident about the future." In addition to pension reform, he points out the huge costs to health care that having an elderly population creates: Japan spent Y31 trillion in health care in 1999, and is now considering spending caps and boosting efficiencies in its system.

Hashimoto also notes related concerns for public officials: Japan now has a mandatory retirement age of 60, and he would like to see it raised to 65, along with the enactment of anti-age discrimination legislature. In addition, increasing numbers of women in the workforce requires a better childcare support system. But Japan's most immediate problem is the retirement of its baby boom generation in 2010, which its finances are unable to handle.

The United States' biggest policy debate is what to do with Social Security, which is the national foundation of its social insurance system, supplemented by tax-based employer and employee savings programmes. The George Bush administration wants to carve personal accounts out of a portion of Social Security so that people can invest them outside of government bonds. Earl Pomeroy, a member of the US House of Representatives, says such changes to Social Security face great political resistance because private accounts will exhaust Social Security's funds 14 years earlier than the pay-as-you-go system's current lifespan; that the recent market falls will deter savers; and that private accounts won't help baby boomers retiring in the next 10 years.

In Europe the main issues involve maintaining social solidarity. Germany has recently enacted reforms to increase federal budget outlays to cover employee contributions, and to take measures against non-compliance by individuals and companies to paying retirement taxes. Contribution rates were also lowered but the mandatory retirement age will be gradually raised to 65 by 2004. This is all designed to keep the system going.

A fresh perspective came from the Nordic countries. Per Kleppe, a former finance minister of Norway, framed the question as not about greyer hairs, but about why women are increasingly refusing to have children. Certainly in Japan and many Western European countries, this is the case. Kleppe says Scandinavian countries have higher birth rates than other Europeans because of their strong welfare states, support for women's equality and childcare, and involving fathers more in family life. Norway has the comfort of massive oil reserves to fund all this, but nonetheless Nordic countries have an appealing model where public policy addresses quality of life issues.

Working longer, living better

Some economists believe an important component to pension reform is to defer retirement dates. In Japan and several European countries, the retirement age is 60, although for some public servants in Europe it is as low as 50. Raising this gradually to 65 and increasing the involvement of elderly in economic activity is seen as crucial.

Atsushi Seike, professor of labour economics at Japan's Keio University, notes most countries' public pension finances are strained by more older people receiving benefits and less younger people paying them. This means traditional pay-as-you-go systems must transition to ones that are fully funded. Otherwise, contributions must be raised, which decreases workers' living standards and is a burden to employers; or benefits must be cut, jeopardizing retiree's stable lifestyles.

Seike believes the solution is an 'age-free active society', which essentially means encouraging elderly to continue working. He notes most countries, including Japan, have pension systems that actually penalize over-60s from working. He calls for raising retirement ages and scrapping earnings tests for the garnering of pension benefits, as the US has done this year. Seike says these structural disincentives mean companies are losing valuable, experienced staff. He notes educated and healthy workers tend to stay in the labour force after 60, and more would if the government and companies invested more in social capital such as continued training. "Europe has social solidarity and the US has efficiency; Japan can develop the mobilization of elderly workers as a model," he says.

Europeans are reaching similar conclusions. Kieran McMorrow, an economist at the European Commission, says pension reform designed to maintain present living standards can be aided by deferred retirement. He warns Japan and the European Union face economic growth problems as a result of ageing, estimating GDP growth will fall by 0.5% each year for 50 years; the US will suffer to a lesser degree as well. But pension reform, including reducing systems' generosity and getting workers to work longer, can offset most of these losses. It also helps fiscal budgets. He also recommends PAYG systems in Europe partially transit to fully funded ones.

Yoshio Yazaki, president of the International Medical Centre of Japan, has looked at the ability of senior citizens to be productive workers, and concludes that governments and companies need to be more sophisticated about how they define 'elderly'. He notes that in many jobs, being old is not a hindrance, particularly in sedentary occupations. He also believes workers' long experience makes them valuable. He believes as we grow older, the notion of working into one's 70s will become socially accepted, but elderly workers' motivation will depend on the tasks they are given and their related self-esteem. Nobody wants to be shoved into a meaningless or degrading position because of their age.

Some healthcare experts believe that an aged population is in some ways a blessing, not a curse. Timothy Flaherty, chairman of the American Medical Association, says medical improvements such as insulin and penicillin have made many formerly fatal diseases controllable. The Human Genome Project will continue this work. Other advances such as angioplasty and joint and lens replacements are improving the life of the elderly, so that problems such as heart trouble, arthritis and cataracts no longer condemn people to nursing homes.

He claims these advances are in fact a form of social capital investment. "It's a happy burden to carry," he remarks. Healthcare costs are becoming a budgetary burden, but more active seniors means they can put off retirement and skip the nursing home. All in all, better lifestyles have added some $3 trillion to America's GDP – double its healthcare costs.

Nonetheless there are problems with all of these positions. The next article in this series will address the problems of deferred retirement and other economic and social issues involved in an ageing world.

Share our publication on social media
Share our publication on social media