PROJECT
Social Security and Population Aging in the Developed World

Contemporary high-income countries (e.g., Europe, Japan, and the United States) have novel demographic regimes that are radically altering their economic and social environments. The most important demographic development is an unprecedented rise in the proportions of elderly as a result of low fertility and high and still-increasing life expectancy. As a consequence of this trend, the cost of old-age support is expected to grow considerably.

All advanced societies have well-developed public and private pension systems and government health care programs. Widely implemented pay-as-you-go pension schemes rely on transfers from younger to older generations, but become increasingly burdensome on the contributors and are eventually unsustainable as old-age dependency rates rise. Health care costs, concentrated at the end of life, raise analogous financing issues, but for the most part retain pay-as-you-go features.

Another reason for concern about aging is a potential decline in economic productivity. There are several reasons to expect an aging population to experience a slowing of productivity growth. Some may be poorly founded, like the claim that innovation is associated with youthfulness and vigor. But others have a more empirical basis, such as the crowding-out effects on investment of rising health and welfare expenditures or the structural shift of the economy toward service sectors with low productivity.

A critical investment that risks being underfinanced, despite low fertility, is that needed to create human capital in the next generation of labor force entrants. Immigration may be a less expensive source of human capital, as educational costs are borne elsewhere, but in most societies its scale is sharply limited owing to economic, social, or cultural causes. Finding routes to continued advances in average individual well-being under these changing demographic conditions is a major new challenge for public policy.

A recent study examines the role of population aging in the rising cost of public pensions and analyzes available policy options. The first part of the study identifies the four factors that determine trends in public pension expenditures: population aging, pension benefit levels, the mean age at retirement, and the labor force participation rate. The second part presents projections to 2050 of the impact of demographic trends on pension expenditures in the absence of changes in pension benefits, labor force participation, and age at retirement. These projections demonstrate that current trends are unsustainable, because without reforms population aging will produce an unprecedented and harmful debt accumulation.

A number of projection variants assess the potential impact of a range of policy options aimed at improving the sustainability of social security systems. Although conventional responses are considered (such as reductions in benefits and increases in taxes), particular attention is given to the demographic options of encouraging higher fertility and permitting more immigration. This analysis is illustrated with data from the seven largest countries in the Organisation for Economic Co-operation and Development.

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Location

New York

Duration

2003–2005

Population Council researchers

John Bongaarts, Geoffrey McNicoll

Donors

The William and Flora Hewlett Foundation

The Andrew W. Mellon Foundation

Population Council

Publications/Resources
Council researchers' names appear in boldface type.

2004
Bongaarts, John. “Population aging and the rising cost of public pensions,” Population and Development Review 30(1): 1–23. (PDF) Also issued as Policy Research Division Working Paper no. 185. New York: Population Council. (abstract) (PDF)

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See Also

• Aging

• Social Science

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