Facing up to the global age wave
Been to Florida lately? You may not have realized it, but as you gazed on the vast concentration of seniors there - nearly 19 percent of the Sun State's population - you were looking at humanity's future. Today's Florida is a demographic benchmark that every developed nation will soon pass. Italy is due to pass it this year, followed by Japan in 2005 and Germany in 2006. France and Britain will pass present-day Florida a decade later, around 2016. The United States and Canada will pass it in 2021 and 2023.
A demographic iceberg looms in the future of the largest and most affluent economies of the world - the challenge of global aging. What's visible above the waterline is the unprecedented growth in the ratio of elderly to working-age people. What lurks beneath the surface are the wrenching fiscal and economic costs that threaten to bankrupt even the greatest of powers, the United States included.
Between 2000 and 2040, according to the Center for Strategic and International Studies, the average bill for pensions to the elderly in the developed world will grow by over 6 percent of GDP. But pensions aren't the only public costs that rise as populations age. All told, the cost of public retirement benefits - pensions and health care - is on track to balloon by 12 percent of GDP in most of the developed countries. This vast increase is over three times what the United States currently spends on national defense. It also represents an extra 25 percent taken out of every worker's taxable wages - in countries where total payroll tax rates often exceed 40 percent already. In short, these kinds of increases are unthinkable - politically, economically, and socially.
Global aging is what happens when people start living much longer. Global life expectancy has grown more over the last 50 years than the previous 5,000. Over the next 30 years, it is projected to rise by another seven or eight years - which alone will increase the number of elderly by roughly one-third. If the US Social Security retirement age of 65 had been indexed to longevity since 1935, today's workers would be waiting until age 73 to receive full benefits and tomorrow's workers even longer. In reality, workers throughout the developed world have been retiring earlier, not later.
Global aging is also what happens when people start having fewer babies. Thirty years ago, the typical woman worldwide had 5.0 children over her lifetime. Today, the global ``total fertility rate'' has fallen to 2.7. In the developed countries, it has fallen all the way to 1.6 - which is 25 percent beneath the 2.1 ``replacement rate'' needed merely to maintain a fixed population from one generation to the next. There are now fewer babies born each year in Germany than in Nepal, with a population one-quarter as large.
The central issue is not whether the developed countries will change course, but how and when. If reform happens sooner, the changes can be made with deliberation and foresight and in a way that strengthens our economies, gives families time to prepare, and secures the safety net for those who really need it. If it happens later, the changes may be sudden and painful - and arrive in the midst of financial crisis and political upheaval.
Timely reform won't be easy. Indeed, the politics are absolutely toxic. Voters have become habituated to pay-as-you-go systems that bank every generation's future retirement on the next generation's resources, rather like a giant Ponzi scheme. People find it hard to believe that a system that worked wonderfully for their parents (who signed up early) won't do nearly as well for their kids (who are signing up late).
In Europe, where the ``welfare state'' is more expansive, the public regards generous unfunded pensions as the very foundation of social democracy. In the United States, the problem is not so much a habit of welfare-state dependence as the peculiar American notion that every citizen has personally earned and therefore is ``entitled'' to whatever benefits government happens to have promised.
The coming demographic transformation doesn't just pose fiscal challenges. It will raise fundamental questions about the future of the developed world. How will it restructure the economy - as many nations with shrinking work forces experience a long-term stagnation (or even decline) in their real GDP? How will it affect global financial markets and regional economic unions - as different nations respond to the aging challenge with widely diverging benefit reforms and fiscal policies? How will it reshuffle the ethics of life and death - as medical progress acknowledges limited resources? How will it transform attitudes toward progress, public investments, innovation, and posterity - as youth becomes less numerous and influential? How will it affect the geopolitics of the next century, and particularly the capacity of the great powers to maintain their post-9/11 security commitments - as today's global divide between rich and poor nations is redefined as a divide between old and young nations?
Unlike many predictions about the future, global aging is not a mere hypothesis. It is as close as social science comes to a certain forecast. Absent a Hollywood catastrophe - a colliding comet or an alien invasion - it will surely happen. What remains to be seen is whether humankind can gracefully accommodate the new realities it brings in its wake. Global aging will not adjust to our visions. One way or another, we will have to adjust to it.
Peter G. Peterson, is chairman of the Federal Reserve Bank of New York and the Council on Foreign Relations and author of "Gray Dawn: How the Coming Age Wave Will Transform America - and the World''
© Copyright 2003 Globe Newspaper Company.