Global aging is no longer a distant challenge looming over the horizon.
The unchecked growth in pension expenditures in some European countries is a major factor in the debt crisis that shook the euro zone this year.
In the United States, first-wave baby boomers will become eligible for full Social Security and Medicare benefits next year, initiating a two-decade cost spiral in which government benefit spending is projected to double as a share of G.D.P.
In China, where the rising old-age dependency burden still largely falls on families, the onrushing age wave is giving rise to the “4-2-1 problem” — one child caring for two parents and four grandparents.
The demographic transformation now sweeping the world promises to affect everything from business psychology and workforce productivity to the direction of global capital flows.
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 least prepared?
The Global Aging Preparedness (GAP) Index, of which we are the authors and which is being released this week by the Washington-based Center for Strategic and International Studies, provides a 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.
The GAP Index consists of two separate subindices — fiscal sustainability index and income adequacy. It covers 20 countries, developed and emerging.
The index has good news and bad news. The bad is that very few countries score well on both sustainability and adequacy.
Three of the seven highest-ranking countries on the fiscal sustainability index (Mexico, China and Russia) are among the seven lowest-ranking countries on the income adequacy index. Four of the seven highest-ranking countries on the income adequacy index (the Netherlands, Brazil, Germany and Britain) are among the seven lowest-ranking countries on the fiscal sustainability index.
Two countries — France and Italy — score near the bottom of both indices. Both have legislated large prospective cuts in the generosity of their public pension systems, threatening to erode the living standard of the old. Yet despite the cuts, the systems remain so costly that they will impose a large and rising burden on the young.
The good news is that there are exceptions. Australia, which combines a low-cost, means-tested floor of public old-age poverty protection with a large, mandatory, and fully funded private pension system, scores in the top half of both indices. So does Chile, which has a similar mix of retirement policies.
Several other countries are clearly moving in the right direction.
Like France and Italy, Germany and Sweden have scheduled deep reductions in the future generosity of their public pension systems.
But unlike France and Italy, they are on track to fill in the resulting gap in elderly income by increasing funded pension savings and extending work lives.
Although their fiscal burdens remain high, they have been cut well beneath what they would otherwise be without undermining adequacy.
This contrast points to a crucial lesson. Most of the world’s developed economies will have to make large reductions in state retirement provision to stave off a fiscal Armageddon. So too will a few major developing economies, notably Brazil and South Korea.
But unless reform also ensures income adequacy for the old, the reductions are unlikely to be politically sustainable.
Saving more and working longer are a crucial part of any overall reform strategy because they provide the best means — indeed, the only means — to shore up the living standard of the old without imposing a new tax or family burden on the young.
With much of the world still reeling from the global economic crisis that began in 2008, many policy leaders may conclude that now is not the right time to address the long-term challenge of global aging. This would be a mistake.
In fact, the economic crisis has made timely action even more urgent. It has drastically reduced the fiscal resources that most countries have to accommodate rising old-age benefit costs, and at the same time it has left many elderly people more vulnerable.
There’s also the critical issue of confidence. The public and the markets increasingly worry that governments have lost control over their fiscal future. In this sense, taking credible steps to address the long-term aging challenge may be a necessary part of ensuring near-term recovery as well.
Richard Jackson, Neil Howe and Keisuke Nakashima, respectively, senior fellow, senior associate and fellow at the Center for Strategic and International Studies.