The Global Aging Preparedness Index: A New Tool for Assessing How Well Prepared Countries are for Global Aging
The world stands on the threshold of a stunning demographic transformation. For most of history until well into the 19th century, the elderly—defined here as adults aged 60 and over—comprised only a tiny fraction of the population, never more than 4 or 5 per cent in any country. In the developed world today, they comprise roughly 20 per cent of the population. Three decades from now in 2040, the share is on track to reach 30 per cent—and that is just the average. In Japan and the fastest-aging European countries, it will be approaching or passing 40 per cent.1 (See Figure 1.)
Figure 1: Elderly (aged 60 and over), as a per cent of the population in 2007 and 2040
The developing world as a whole is still much younger, but it too is aging—with some countries traversing the entire demographic distance from young and growing to old and stagnant or declining at a breathtaking pace. By 2040, Brazil and Mexico will be nearly as old as the United States and China will be older. Meanwhile, South Korea will be vying with Germany, Italy, and Japan for the title of the country with the oldest population on earth.
The demographic transformation now sweeping the world promises to affect every dimension of economic, social, and political life. Perhaps most fatefully, it could throw into question the ability of societies to provide a decent standard of living for the old without imposing a crushing burden on the young.
Which countries are most prepared to meet the challenge? And which countries are the least prepared? The Global Aging Preparedness Index (or GAP Index), developed by the Center for Strategic and International Studies, provides the first comprehensive quantitative assessment of the progress that countries worldwide are making in preparing for global aging, and particularly the old-age dependency dimension of the challenge.
1. Purpose and Structure of the GAP Index
Ten or 15 years ago, global aging barely registered as a policy issue. Today, it has become the focus of growing concern worldwide. Many governments are beginning to debate and some have enacted major reforms.
Most of the concern, especially in the developed world, is focused on the rising fiscal cost of government benefit programs. Most developed countries have expensive pay-as-you-go public pension systems that were put in place or expanded back in the early postwar decades when workers were relatively abundant and retirees scarce, but which the steep decline in fertility and the steady rise in life expectancy are now rendering unsustainable. Graying also means paying much more for healthcare, because the elderly typically consume at least three times more per capita in medical services and at least ten times more in long-term care services than the non-elderly.
Meanwhile, in the developing world, governments are beginning to worry that societies may grow old before they grow rich. Many emerging markets are aging before they have had time to put in place the full social protections of a modern welfare State. In China, India, and Mexico, only a fraction of the workforce is earning a formal retirement benefit of any kind, and the majority of elders still depend heavily on the extended family for support. Yet the informal family networks on which elders depend are already under stress from the forces of modernization—and will soon come under intense new pressure as populations age and family size declines. Here the problem is not so much the growing burden on the young as the growing vulnerability of the old.
Yet despite the growing concern, there exists no satisfactory measure of how well countries are actually responding to the challenge. The purpose of the Global Aging Preparedness Index is to fill this gap. The GAP Index is based on projections of public benefit spending and household income by age through the year 2040. It covers 20 countries, including most major developed countries and a selection of economically important emerging markets for which adequate data were available.
In calculating the GAP Index, we use a current policy and current behavior baseline. The projections fully reflect the future impact of retirement policy reforms that have already been enacted but are being phased in over time. They also incorporate predictable “cohort effects” in rates of labor-force participation and pension receipt. The projections, however, do not anticipate additional policy or behavioral responses beyond those that are already in the pipeline. The GAP Index thus serves as a “stress test” of current retirement policies. Its purpose is not to forecast where countries will necessarily end up, but rather to show where they are heading on their current course.
The GAP Index consists of two subindices—a fiscal sustainability index and an income adequacy index. These subindices in turn are based on indicators grouped into distinct categories, each dealing with a different dimension of the challenge (see Figures 2 and 3).
On the fiscal side, the GAP Index includes three indicator categories: public burden, fiscal room, and benefit dependence. The public burden category measures the magnitude of each country’s projected public old-age dependency burden, including both State pensions and health benefits. The fiscal room category measures each country’s ability to accommodate the growth in its public old-age dependency burden by raising taxes, cutting other government spending, or borrowing. The benefit dependence category measures how dependent the elderly in each country are on public benefits, and thus how politically difficult it may be to enact cost-cutting reforms—or indeed, to follow through on reforms that have already been enacted but not yet phased in.
Figure 2: GAP Fiscal Sustainability Index
Figure 3: GAP Income Adequacy Index
On the adequacy side, there are also three indicator categories: total income, income vulnerability, and family support. The total income category measures the overall level of and trend in the living standard of the elderly relative to the non-elderly in each country. The income vulnerability category measures the relative level of and trend in the living standard of “middle income” elders in each country, a group that will be disproportionately affected by changes in the generosity of retirement income systems, as well as the extent of elderly poverty. The family support category measures the strength of informal family support networks, which play a crucial role in retirement security in many emerging markets and some developed countries.
Note that the GAP Index measures the performance of countries relative to each other rather than against some absolute standard of “preparedness”. We considered establishing such a standard, but concluded that any benchmark would be arbitrary. There is no real consensus within countries, much less across countries, on what constitutes an acceptable old-age benefit burden on workers or an acceptable living standard for retirees. Yet almost everyone would agree that the lower the burden on workers is and the higher the relative living standard of retirees is, the more prepared the country is.
Richard Jackson: CSIS (Center for Strategic and International Studies), Washington
1 The demographic projections cited in this article are from the United Nation’s World Population Prospects: The 2008 Revision (New York: UN Population Division, 2009). They refer to the UN’s “constant fertility variant”, except for India, where they refer to the “medium variant”.
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