EUROPEAN PAPERS ON THE NEW WELFARE

Intertwining of Ageing and Sustainability in Eastern Europe

3. Consequences for Health Care and Pension Systems

Demographic transition affects health care and pension systems.
Most East European countries have already undergone several reforms of their health systems, typically transferring the health care cost to the patients, and additionally increasing inequalities, sometimes particularly painful inequalities. Health care expenses include treatment cost, hospitals, ambulances, physicians, nurses, technical support and administrative support. Health care cost is also affected by rising pharmaceutical and technological costs and these are even higher3 than those due to population aging. Similarly, the labor cost in all these components is appreciable. Alternative medicine is increasing sometimes having good but also bad effects on the health of the nation.
Healthy aging is the most important factor, which will determine the effect of aging on health care expenditure. Namely, if an older population remains reasonably healthy, it will be able to contribute productively to society without increasing their health care costs. On the other hand, unhealthy aging would be very bad for public finances. Healthy aging is however also related to questions of lifestyle and life purpose, which can be significantly improved with availability of high quality life long education.
Large pension obligations will significantly increase public spending in many East European countries, since – as we have already pointed out — there will be a significant increase in their over 65s. The typical system is the Pay-as-you-go system, i.e. a method of financing in which current outlays on pension benefits are paid out of the current revenues from an earmarked payroll tax, sometimes with indexation. Indexation includes increases in benefits by reference to an index, usually of growth in prices, although in some cases growth in average earnings. Pension system dependency rate is defined as the ratio of persons receiving pension from a certain pension scheme divided by the number of workers contributing to the same scheme in the same period. The old-age dependency rate is defined as the number of persons older than age 65 divided by the number of persons age 15 to 64. Although the vast majority of the region’s elderly population collect pensions, the majority of the working-age population does not contribute to a pension system. This situation results from the low employment rates among some age groups, lower retirement ages and early retirement provisions still prevalent in the region, but even more from the growing informalization of the labor market. There is a system of social pensions, i.e. pension solely on the basis of age and citizenship without regard to work or contribution records, are given in several East European countries. Table 23 gives the population dependency rates and pension system dependence rate for several East European countries.

Table 2: Population dependency rates (PDR) and pension system dependency rates (PSDR)

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Pension system dependency rates in East European countries are more than three times the population dependency rates; in individual countries, they can be even higher. As the pension system dependency rate rises, expenditures rise relative to revenues, thereby raising substantial fiscal problems for the system.
Pension spending as a percentage of GDP in 2004 has been 15% in Ukraine, 14% in Poland, 12% in Croatia and 10% in Slovenia, and it is projected that it will increase by 2025.
There are actually many possible and well known solutions to this challenge These, however, are not very popular, e.g. making the retirement age for male and female equal, increasing the retirement age, and introducing various pension reforms. All these reforms put a heavier load on workers and imply stability of the saving system. The public feeling is that all these reforms reduce the existing social security rights and therefore, they are difficult to implement. However, the most dangerous situation is that the policy-makers and decision-makers do nothing, and allow the rapidly increasing ratio of retired over active population to continue.
The best solution would be to ensure certain earnings for all individuals throughout their lifetime requiring that they all do some economically useful work. This solution is based on two assumptions. The first assumption is that everybody, including those who are disabled, can do economically useful work, and this is corroborated by the fact that monetized work (i.e. standard employment) is only a fraction of the total productive work. The second assumption is that individuals will change their work many times throughout their lives and in order to be able to do so, they will have to learn continuously, implying that their original education has to enable them to learn later in their lifetime.

4. Consequences for the Educational System

Demographic transition is producing two competing effects on education, which work in opposite directions. As there are fewer young people, traditional education will become cheaper. However, mature people too will need to learn new skills in order to remain competitive in the labor market. This will mainly happen outside the traditional educational system, thereby offering many possibilities for innovations and cost savings. Currently, life- long learning is nonexistent and adult education is very rare in East European countries, and mainly limited to people with the highest education, who make use of their personal initiative to take care of their educational needs.
The existing lack of life-long learning activities also presents excellent opportunities for educational entrepreneurs. There are many possibilities for innovative educational services from low price internet based courses to intensive workshops in some area of highly specialized knowledge. Here the initiative to learn is left to the individual. However it is necessary to create and stimulate a creative environment, where learning is not only desired but becomes a necessity. Such an environment can on one hand be created by fiscal measures and on the other hand a grass root movement of concerned citizens can have an important effect on learning culture. While at the moment these measures do not appear urgent, it is very dangerous to wait for their implementation as it takes time before their effect becomes visible, and the speed of aging clearly demonstrates that we are already running out of time.

5. Work Force Productivity Effects

The usual definition of the working-age is the age between 15 and 64. Both limits are incorrect. First, contemporary global society requires much more knowledge than could be provided by the age of 15, even if the educational process would start considerably earlier, say at the age of 4-5. It is reasonable to design the total educational system in such a way that necessary fundamental knowledge and necessary basic skills are given to individuals by the age of 20, so that persons could start their employment, continue to learn and be educated throughout their employment and their life. Second, the age of 65 should be the age at which individuals are entitled to receive some compensation so that they can work part-time, with no requirement for their complete retirement, since total disconnection from the working process is not healthy.
Aging brings significant changes to the labor force. In principle a worker should be improving his/her skills until a certain age, after which the effects of aging start decreasing these skills. In this way one obtains an inverted U curve for work force productivity as a function of age. However, studies on aging effects on aggregate productivity do not find strong correlations between age and productivity. Because of the recent transition from an industrialized society to a service economy, traditional effects of aging may no longer be very important. It is therefore possible that in certain professions aging does not decrease productivity, but only increases experience. Such an increase in productivity is only possible with a concerted effort to considerably strengthen lifetime learning activities.
The above analysis clearly demonstrates that significantly strengthened life-long learning activities are necessary to mitigate negative effects of the expected demographic transition. This is such an important task that it cannot be successfully solved by any individual country in Eastern Europe. Therefore, at least a Europe wide effort to build the knowledge-based society remains the only reasonable solution, which could to some extent mitigate the negative effects of expected aging and maximize its positive effects. We discussed possible steps toward a knowledge-based society in detail at the Dubrovnik 4th Conference on Sustainable Development of Energy, Water and Environmental Systems7 and present here some of the most important findings relevant to aging in Eastern Europe.

7 Blinc, R., Zidanšek, A. and Šlaus, I. (2007): “Is there a Sustainable Future for Europe?”, in: Guzović, Zvonimir (Ed.), DUIĆ, Neven (Ed.), BAN, Marko (Ed.), 4th Dubrovnik Conference on Sustainable Development of Energy, Water and Environment Systems, Dubrovnik, Croatia, June. CD proceedings. [S. l.: s. n.].


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