Population Aging and the Rising Cost of Public Pensions

SINCE 1950, THE MEDIAN AGE of the population in the developed world— North America, Japan, Europe, and Australia/New Zealand—has increased from 29 years to 37 years, and it is expected to reach 45 years in 2050 (United Nations 2003). In contrast, the median age in the developing world—Africa, Asia (excluding Japan and Australia/New Zealand), and Latin America— stands at only 24 years. However, declines in fertility and mortality in these regions will inevitably also result in rapid aging, with the median age projected to reach 36 years in 2050. The developing world therefore will remain younger than the developed world, but the gap between them is closing. The present study focuses on the developed world. Population aging has raised concerns about the sustainability of public pension systems (OECD 1998; World Bank 1994). In the past, the limited old-age support that existed was usually provided through informal family and community arrangements, but these have weakened nearly everywhere. Much of the support for the elderly in contemporary advanced societies is provided by public and private pensions and by government health care. These programs have been successful in closing the income gap between the elderly and the working-age populations, and poverty rates among the elderly have declined substantially. However, expenditures by widely implemented pay-as-you-go public pensions, which rely on transfers from younger to older generations, are becoming increasingly burdensome on the contributors and are eventually unsustainable as old-age “dependency rates” rise to high levels. A study from the International Monetary Fund suggests that failure to address these fiscal stresses in pay-as-you-go pension systems could inflict “serious macroeconomic damage, both on the domestic economy and, in the case of large industrial countries through international linkages, on the world economy” (Chand and Jaeger 1996: 1). The need to identify and implement reforms of public pension systems under these changing demographic conditions represents an urgent challenge for public policy.