EUROPEAN PAPERS ON THE NEW WELFARE

Aging in the United States and South Korea: Reexamining the Recommendations of the Commission on Global Aging

1. Introduction

In 2002, the Commission on Global Aging, a blue-ribbon panel co-chaired by former U.S. Vice President Walter Mondale, former Japanese Prime Minister Ryutaro Hashimoto and former Deutsche Bundesbank Chairman Karl Otto Pöhl, issued its report outlining a series of policy recommendations for addressing the adverse economic and financial consequences of population aging across different regions and countries. This paper reexamines the Commission’s findings and recommendations in the context of the unique issues raised by aging in the United States and South Korea.

The U.S. and Korean challenges differ markedly. The U.S. faces an ‘aging of the budget’ caused by the retirement of the postwar baby boom generation amid very high rates of per capita health spending on the elderly. Its traditional old-age benefit programs can be maintained so long as the price of goods and services in the health sector are held in check. In contrast, South Korea faces severe depopulation. To address this intractable challenge, Korea must establish a family-centered welfare state — a radical departure from the old-age welfare state model that predominates in the West.

2. Global Aging

Population aging is among the most widespread and revolutionary trends of our time. It is rooted in improved health, which in turn is a byproduct of better nutrition, better medicine and better personal health practices, such as washing your hands or boiling drinking water. These improvements impact the population age structure most directly through reductions in child mortality. Throughout most of human history, women needed to have at least six children in order for two to live long enough to reproduce. After World War II, rapid reductions in child mortality throughout the developing world led to a series of population explosions, as societies failed to calibrate their childbearing to the new survival rates. During this phase of aging — the youth bloom — individuals are living longer, but the proliferation of children causes societies’ median ages to decline. Much of Africa is still in this stage.

However, when fertility finally does adjust downward, it sets in motion increases in the median age. The rate at which societies age is largely a mathematical echo of earlier declines in the birthrate. Beginning in the 1970s, a new phase of aging, caused by below replacement-rate fertility, took hold throughout the developed world. In developed countries, women must have an average of 2.1 children during their reproductive years in order for each generation to reproduce itself. Sustained below-replacement fertility, combined with longer life expectancy at the older ages, will dramatically accelerate increases in the median age, literally, for generations into the future.

Milestones in global aging include:

• In 1950, only 15 countries had a median age over 30.

• In 2000, 62 countries had median ages over 30, and two — Japan and Italy — had median ages over 40.

• By 2050, some 89 countries are expected to have median ages over 40, and 19 of these are expected to have median ages over 50.

• The world median age is expected to rise from 29 today to 38 years old in 2050.

The world’s regions and countries are aging at different rates. While Europe is the world’s oldest region, its aging path is gradual. This is because Europe did not experience a significant baby boom after WWII, and its birthrate consequently did not decline rapidly. North America and East Asia both had baby booms, and their subsequent fall in birthrates has produced a steeper rate of increase in the median age. North America’s birthrate, however, currently is much closer to replacement than that of either Europe or East Asia, with the result that, among the developed regions, its median age will rise the least in the years going forward.

Figure 1: Median Age of Selected Regions
hewitt-fig1
Source: United Nation (2006).

Looking at individual countries, with the exception of Korea, the fastest aging countries are either less developed or post-communist. The most rapidly aging countries saw substantial reductions in their birthrates following baby booms. South Korea stands out not only as the world’s fastest aging country, but also as the country that is likely to have the world’s oldest median age at mid-century.

Table 1
hewitt-tab1
Excludes countries with populations of less than 2 million. Source: UN (2006) and Korean National Statistical office (2006).

The Commission on Global Aging found, in general, that aging would negatively impact the economic and budget fundamentals of the countries most affected. These impacts include:

• Labor bottlenecks. In depopulating countries, the labor supply will begin shrinking year after year, and one industry’s expansion will come at the expense of another’s decline. The economist Joseph Schumpeter described the process of shifting labor and capital away from declining industries and into rising ones as “creative destruction.” But a nation whose labor force is shrinking will have to aggressively abandon its least productive activities in order to make labor available for competitive high value sectors. This high degree of labor mobility is starkly at odds with the lifetime employment model seen in countries like Korea and Japan.

• Lower savings rates. At some point in the aging cycle, the share of the population in its high savings years — the 35-60 age group — will decline, even as burgeoning numbers of elderly begin drawing down their savings in retirement. Dissaving could, in turn, produce current account deficits and create downward pressures on currencies.

• Reduced productivity growth. In addition to the aforementioned impacts on labor supply, older workforces tend to have older skills and are less prone to innovate or take entrepreneurial risk. These labor force characteristics may impede efforts to aggressively replace older industries with rising ones.

• Lower and, in some cases, negative GDP growth. A nation’s gross domestic product is the number of workers times the productivity per worker. A country with zero labor force growth will grow only at the rate of productivity, while countries with shrinking workforces will be pre-disposed to aging recessions — where GDP declines when the labor force contracts faster than productivity grows.

• Chronic budget crises. Under the existing social model, the cost of old age benefit spending as a share of gross domestic product will rise from one year to the next not simply for a few difficult years, but decade after decade into the indefinite future. In many countries, there will be no respite from the persistent pressure of spending reductions and tax increases.

• Slow growing or declining worker living standards. As government spending rises faster than wages, increasing revenue needs could cause the living standards of working families to decline. Or conversely, if benefits are reduced, the living standards of dependent populations will decline.

• Chronic industrial over-capacity. In countries where depopulation is a problem, many industries that depend on domestic markets will find themselves in a permanent state of decline, with deflationary implications. For example, many Koreans will see the value of their homes decline throughout their lives, making it increasingly difficult to obtain long-term financing for real estate. Some version of this problem will affect a range of domestic markets, from universities to automobiles.

• Increased potential for international financial crisis. Many countries will see government costs rise faster than wages for the indefinite future under the existing social model, and it is likely that some — perhaps all — will run large, unsustainable budget deficits, year after year for decades until their debt becomes too risky for markets to bear. The falling creditworthiness of developed world governments could produce a global financial crisis of major proportions.

The Commission made 43 recommendations for addressing these challenges, with the caveat that not all of these ideas would be appropriate for every country. They include:

• Pre-fund pensions. Each generation should pay more of its own way through retirement. Greater individual self-sufficiency would, in turn, make it possible to reduce cash transfers to retirees.

• Immigration. High-skill immigrants can bolster competitiveness in high value-added occupations such as technology or business administration. Low skill immigrants can perform tasks like child and elder care, thereby freeing up highly educated mothers (for example) to pursue high value-added activities.

• Lengthen work lives. The employment of older populations can provide a one-off boost to GDP and tax revenues, while reducing benefit costs. This avenue of reform is appropriate to all aging societies, but has its limits when societies are depopulating. Once the labor force participation rate of older populations has reached its maximum, the labor force will begin declining again.

• Provide opportunities for women. Increasing women’s earning power and labor force participation can similarly provide a one-time boost to GDP and tax revenues.

• Facilitate the shift to “aging-society industries.” Moving capital and labor into “growth” areas of the economy is crucial, especially if these shifts also increase productivity.

• International dialogue. “Peer pressure” among aging societies can help to prevent domestic budget deficits from becoming global crises. Early warning systems and regular aging summits should become a fixture of global financial management.

Paul S. Hewitt served as director of the Commission on Global Aging. He is President of Americans for Generational Equity (www.age-usa.org).


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