The Institute for Domestic and International Affairs, Inc.

Economic and Financial Economic Ramifications of an Aging Population

Director: Kevin DaCruz

 2012 Institute for Domestic & International Affairs, Inc. (IDIA) This document is solely for use in preparation for Rutgers Model United Nations 2012. Use for other purposes is not permitted without the express written consent of IDIA. For more information, please write us at idiainfo@idia.net

Policy Dilemma _______________________________________________________________ 1 Chronology __________________________________________________________________ 3

1935: Social Security Act in the United States __________________________________________3 1943-1960: Baby Boom _____________________________________________________________4 1996: The Personal Responsibility and Work Opportunity Reconciliation Act _______________5 2000: Japans Pension Reform _______________________________________________________6 2008: Chiles Pension Reform________________________________________________________7 2010: French Reform_______________________________________________________________8

Actors and Interests ___________________________________________________________ 9

Elderly___________________________________________________________________________9 Labor Force _____________________________________________________________________10 States with Aging Populations ______________________________________________________12

Possible Cause_______________________________________________________________ 13
Retirement Age __________________________________________________________________13 Benefit-Defined Pension Programs __________________________________________________14 Healthcare Spending ______________________________________________________________15 Comparison of Causes _____________________________________________________________17

Projections__________________________________________________________________ 17 Conclusion__________________________________________________________________ 19 Discussion Questions _________________________________________________________ 20

Works Cited _____________________________________________________________________22 Works Consulted _________________________________________________________________26

Rutgers Model United Nations Policy Dilemma

Since the baby boom in the mid 20th century, the worlds age demographic as indicated by its median age has steadily increased.1 The last decade has experienced a shift of population growth to less developed regions, however major population increases have resided in the developed world for the last fifty years. This is causing and will cause economic problems for developed and developing states, respectively. Though there are many problems associated with an older population, the main economic concerns revolves around public pensions, or government retirement plans, and how they can continue to be sustainable as more of the population is in need of them. There are two basic forms of public pensionsdefined benefit and defined contribution. A defined benefit public pension is a retirement plan where employees benefits are determined by salary history and duration of employment.2 A defined contribution public pension is a retirement plan in which an employer sets aside a certain amount or percentage of the workers annual salary and that amount is usually matched by the employer until a maximum amount.3 The impact of aging demographics will be most acute within developed states. In the developed world, populations are getting old quickly. As this is occurs, fewer workers are in the labor force and more elderly people who have either retired or are unable to work are drawing from their public pensions. Many developed countries have pensions, which will incur an exorbitant cost in the next twenty years as baby boomers set to retire and there are less workers to sustain these pensions.4 These countries will have no choice but to reform public pensions, as it will begin to eat up a large part of the national budget.5 Furthermore in developed states, people are not only living longer but
1

David E. Bloom, Population Aging and Economic Growth. Commission on Growth and Development, no. 32 (2008): 1-48 2 Investopedia, Defined-Benefit Plan, Investopedia. http://www.investopedia.com/terms/d/definedbenefitpensionplan.asp#axzz1uK5S59YJ (accessed May 2, 2012) 3 Investopedia, Defined Contribution Plan, Investopedia. http://www.investopedia.com/terms/d/definedcontributionplan.asp#axzz1uK5S59YJ (accessed May 2, 2012) 4 A slow burning fuse, The Economist. (2009) http://www.economist.com/node/13888045 (accessed Feb 27 2012) 5 A slow burning fuse, The Economist. (2009) http://www.economist.com/node/13888045 (accessed Feb 27 2012)

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they are also having fewer children.6 With fewer young people in the population, there are fewer workers in the labor force causing less output than in previous generations. As a result, an increasingly larger, older and retired portion of the population will have to rely on the economic output of an increasingly smaller, young and working portion of the population. State governments are finding that the cost of maintaining public pensions are too high and have resulted in reforming. Many states, such as France and Italy, have slowly added to their national debt through public pensions but recently, the fact populations are aging became a harsh reality.7 8 For a while, Greece was a welfare state where the government oversees and administers healthcare, education, and social security benefits.9 It continued to spend outside of its means in order to continue supporting the nation and had problems paying for its debt. When it did not reform fast enough, creditors upgraded the amount of risk that is associated with buying a bond from Greece and now the country is amidst a huge socioeconomic and political crisis. However, some states did have some foresight with the matter. In order to force people to work, some states have lowered their national retirement age. France and Spain, for example, implemented legislation that would incrementally increase the retirement age from sixty-two and sixty-three, respectively, to sixty-seven. In America where the legal retirement is sixty-six years old, the average person retires at sixty-four and then lives for another sixteen years. With life expectancy at a historic high, people are retiring at a fairly young age and thus straining the public pension systems.10 By increasing the retirement age, countries effectively increase their workforce, which helps to alleviate the labor force concerns brought on by an aging population.
6 7

David E. Bloom, 3 Edward Cody, To fight defecits, France plans to raise minimum retirement age, The Washington Post. http://www.washingtonpost.com/wp-dyn/content/article/2010/06/16/AR2010061601350.html (accessed May 8 2012) 8 Investopedia, What the National Debt means to you, Investopedia. http://www.investopedia.com/articles/economics/10/national-debt.asp#axzz1uK5S59YJ (accessed May 9 2012) 9 Investopedia. Welfare State, Investopedia. http://www.investopedia.com/terms/w/welfarestate.asp#axzz1uK5S59YJ. (accessed May 9 2012) 10 Ageing in the world: The End of Retirement, The Economist. (2009) http://www.economist.com/node/13900145 (accessed Feb 27 2012)

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Many public pensions rely on the workers to pay into a fund for current retirees. If there are more retirees than workers, the system may become unbalanced and therefore unsustainable over the long term. Though the contemporary problem of aging demographics lies within developed nations, it will quickly shift to developing nations. The United Nations predicts that by 2050 more than four fifths of the sixty-five and older population will be living in developing nations as their current youth-heavy populations naturally get older.11 An indicator for the speed of population aging is to look at the time it takes for the population of people sixty-five and older to double. In France it took a century, but projections for some emerging states, such as Vietnam and Syria, indicate it occurring in as little as seventeen years. If wealthy nations cannot develop feasible solutions to support their economies in the face of an aging population, it will create a huge dilemma in the next decade as the elderly set to retire. Meanwhile, developing nations will begin to scramble to set up a pension system as an influx of elderly will set to retire in the fifty years and tap into a retirement plan These countries, and many others who are economically strained, have a relatively short time to create a viable and sustainable solution for the elderly to live off of. If they cannot, more than four fifths of the worlds elderly population will be living in poverty.12

Chronology 1935: Social Security Act in the United States

In 1935, U.S. President Franklin Delano Roosevelt signed into law the Social Security Act.13 The Act gave benefits to citizens as a form of protection after the Great Depression wiped out much of everyones lifetime savings.14 This specific benefit that
11

World Population Ageing1950-2050, Department of Economic and Social Affairs. (2002) http://www.un.org/esa/population/publications/worldageing19502050/ (accessed Feb 27 2012) 12 Mark Doyle, Developing World Faces Age Crisis, BBC News (2009). http://news.bbc.co.uk/2/hi/8131567.stm (accessed Feb. 27 2012) 13 Social Security Online, Main Provisions of the 1935 Act, SSA. http://www.ssa.gov/history/law.html. (accessed May 8, 2012) 14 Ourdocuments.gov Social Security Act 1935, Ourdocuments. http://www.ourdocuments.gov/doc.php?flash=true&doc=68. (accessed May 8, 2012)

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came to define this act was Social Securitythe United States of Americas solution to a pension system. With this act the Federal government became involved and concerned with the wellbeing of its elderly.15 The act was unique to its time as it differed from many European states solutions to a public pension. Social Security was set up and funded through taxation or contribution from workers wages and employers payroll tax. In European states, this system is funded by usually government funds.16 During the twentieth century when there were less elderly dependent upon the system, it was effective in giving assistance to retirees. However, in the twenty-first century, America is dealing with the possibility of a Social Security collapse. An estimate made by the Congressional Budget Office state that Social Security will run a deficit until it runs out of money in 2037.17 If not addressed soon, the elderly population bulge will create an insolvent pension system and many of citizens will be left with no retirement plan.

1943-1960: Baby Boom

Though often categorized and perceived from the American perspective, the postWorld War II baby boom was actually a period of increased births for many actors of the War. During the 1950s, when the baby boom was at its peak, the total fertility rate was roughly five children per woman.18 Initially, birth increases had little overall economic effect for states as many of the economies affected by the baby boom also had booming economies. Furthermore, when the baby-boom generation joined the workforce, they had a positive economic effect lasting nearly three decades. They brought on the tech boom
15

Social Security Online, Main Provisions, SSA. http://www.ssa.gov/history/1935table.html. (accessed May 8, 2012) 16 How Social Security Works, http://money.howstuffworks.com/personal-finance/financial-planning/socialsecurity.htm. (accessed May 8, 2012) 17 ABC News, CBO Projects Social Security Will Be Drained By 2037, ABC News. http://abcnews.go.com/US/cbo-projects-social-security-drained-2037-generationsolvent/story?id=12776481#.T6m67I6iHDk. (accessed May 8, 2012) 18 UN Data, Crude Birth Rate, UN Data. http://data.un.org/Data.aspx?q=world+population&d=PopDiv&f=variableID%3A53%3BcrID%3A900 (accessed March 10, 2012)

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and created a boon for the housing market. Specifically in the United States, from 19701980, which was around the time many of the baby boomers were first buying a house, the market increased by thirty-two per cent.19 In other western states such as France, the baby boom was felt as well. From 1950-1960 France enjoyed a population growth of one per cent per year, which was the highest sustained growth rate in the history of France.20 Australia was impacted the same way by the baby boom, which first occurred for them in 1947 when 182,400 babies were born. This created a total fertility rate for that year around 3.1, which is one complete integer higher than what it was during the early 1930s during the Great Depression.21 However, now the baby boom generation is retiring. The influx of retirements for the next few years will burden the current worker and national governments public programs. By the end of the decade the majority of births from the baby boom will now be retirees tapping into the public pension and public health care systems.22 The larger retirement sector and increased strain upon public pensions are unprecedented, and necessitate reform by these governments.

1996: The Personal Responsibility and Work Opportunity Reconciliation Act

In 1996, the Clinton Administration in the United States reformed its welfare programs. The administration aimed to incentivize labor force participation by those currently receiving welfare benefits. The plan increased the requirements in order to qualify for these benefits. It also changed the benefit structure, ensuring that fewer people remained on welfare for an extended period of time.23

19

Gregory Mankiw and David N. Weil, The Baby Boom, The Bust, and the Housing Market, Harvard University. (1988) 20 World Bank France Demographics, The World Bank. 21 Australian Bureau of Statistics, Social Trends, ABS. http://www.abs.gov.au/ausstats/abs@.nsf/1020492cfcd63696ca2568a1002477b5/47f151c90ade4c73ca256e9e001f8 973!OpenDocument. (accessed May 8 2012) 22 The Baby Boom, The Bust, and the Housing Market, 4 23 Cynthia Woodside, Summary of Provisions, National Association of Social Workers. (1996)

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United States policymakers contended that elevated welfare payments encouraged the unemployed to stay on welfare. The economic impacts of high welfare payments were twofold, as growing numbers of citizens did not contribute to economic production or tax revenues and the government spent more to keep these programs solvent. 24 Two essential piecesa five year limit and the requirement after 2 years to go back to workplaced in the legislation helped reduce costs while expanding the labor force as people had to look for jobs in order to maintain income. Also after two years of receiving cash assistance from the government, citizens are required to go back to work. These provisions gave necessary reform to a country whose budget was being strained by citizens who felt they were better living off the government rather than providing for themselves. Though more reform is necessary as costs of healthcare and social security begins to rise as the baby boomers set to retire, this framework set by President Clinton gives a feasible solution to other countries that are experiencing unsustainable costs.25

2000: Japans Pension Reform

Japan has become of the most frequent reformers of their public pension system. Every five years the Japanese government reviews the pension to give itself an opportunity to change the program in order to keep it solvent. In 2000, the government restructured the pension in order to keep the pension solvent through 2060.26 The main concern during the 2000 reform was trying to restructure the pension due to population aging while not adding to the burden of the government deficita yearly statistic that shows more spending than revenue.27 Japans demographics recently have shifted towards an elderly-heavy population that is coupled with a shrinking economy. In 1998 the Japanese elderly dependency ratiothe population of sixty-five or older divided by the population aged 15-64was

24 25

Ibid, 1 Ibid, 5 26 The Economist, Dont grow old, The Economist. http://www.economist.com/node/2304686 (accessed May 8 2012) 27 Public Pension Reform in Japan, Social Security Bulletin, no. 4 (2000)

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elderly.29 In 2050, the projections are that the ratio increases to 56.5 per cent.

44 per cent.28 Meaning, for every one hundred citizens aged 15-64, there were forty-four An economic boondoggle, the Japanese government has tried to mitigate the problem of spending too much on its pension system by cutting benefits, raising the age at which one can draw from their pension, and increasing the tax rate.30 The reform was touted a not too radical yet necessary reform. It let the public, who contribute monthly to the plan, lower the contribution plan after a short-term increase. Meanwhile, it gave full-time students the opportunity to delay their payment plans until graduation. It also gave subsidies to people with low-paying jobs. Instead of paying the full amount monthly the government exempts them from fifty per cent while giving them two-thirds of the benefits when they retire unless they pay into the system more.31

2008: Chiles Pension Reform

In 1981, the Chilean government passed legislation to overhaul its public pension program. The new reform had workers choose between a public pay-as-you-go system (PAYG) and a privately managed system (AFP), unless workers were eligible to retire in five years. In 1982, all new entrants into the labor force had to set up an AFP as PAYG system were being phased out by 2050 as the number of beneficiaries decreased.32 Two main issues forced Michelle Bachelets administration to once again reform the system in 2008. The privately funded pension fund excluded many poor workers who did not have enough disposable income to contribute to an adequate pension fund. Moreover, administrative costs were very high and became unsustainable for the government.33
28 29

Ibid, 4 Investopedia, Dependency Ratio, Investopedia. http://www.investopedia.com/terms/d/dependencyratio.asp#axzz1uK5S59YJ. (accessed May 8 2012) 30 Junichi Sakamoto, Japans Pension Reform, SP Discussion Paper. No. 0541 31 Public Pension Reform in Japan, Social Security Bulletin, no. 4 (2000) 32 U.S. Social Security Administration, Chiles Next Generation Pension, Office of Retirement and Disability Policy. (2008) http://www.ssa.gov/policy/docs/ssb/v68n2/v68n2p69.html (accessed March 4, 2012) 33 OECD, Latin American Economic Outlook 2008, OECD. (2008) 1-194

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The result of this reform in 2008 involved four main elements. First was the creation of a solidarity pension system for citizens who are unable to save towards their retirement. This system replaced the minimum pension with a single type of pension benefits for citizens sixty-five or older and who have lived in Chile for at least twenty years. 34 The second ensured greater coverage of women who often stay at home to look after children and therefore do not have income to pay into a private pension.35 The third changed the framework that regulates investment that can be made by pension fund administrators, and finally mandate all self-employed workers to contribute to the private individual retirement system within the next seven years.36 Though Chile is not facing an aging population yet, its hybrid solution is a solution to the high costs of public pensions. Other countries that are facing an aging demographic shift can attempt to mitigate their problems by dissecting Chiles pension to see what works and what is wasteful. Chile gave the freedom to the wealthy to pay into a private retirement plan that gives the retiree the control of his funds. Meanwhile, the poor, who originally were left out of the 1981 reform, now at least have a retirement plan. The European Union may have to consider such a system as the cost of public pensions begins to weigh too large. The Chilean model is better suited for rich countries that have a large percentage of wealthy that can pay into a private pension plan.

2010: French Reform

On 15 September 2010, the French government passed legislation overhauling its retirement system, raising the minimum retirement age from sixty to sixty-two and full retirement from sixty-five to sixty-seven by 2023. Before the reform, Frances retirement age was one of the lowest in Europe37. The reform sparked much opposition and France was plagued with protests through the country.38 This reform brought France up to par with many countries in
34 35

Ibid, 74 Ibid, 78 36 Ibid, 79 37 Katrin Bennhold, France Moves to Raise Minimum Age of Retirement, New York Times. (2010) http://www.nytimes.com/2010/09/16/world/europe/16france.html?ref=pensionreform (accessed March, 2012) 38 BBC News, France Hit by New Wave of Mass Pension Protests, BBC. (2010) http://www.bbc.co.uk/news/world-europe-11559265 (accessed March 4, 2012)

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Western Europe and North America in terms of retirement age. With a new demographic change, the previous system seemed to be a problem. In 1960 there were four workers for ever retiree, in 2020 it is projected to be just 1.5.39 The reform has been calculated to cut the French governments deficit 0.5 per cent and then add 0.3 per cent to Gross Domestic Product in the coming three years. Yet, there is widespread doubt that this retirement raise will have any drastic impact. When compared to other European nations, France is taking baby steps towards reform. In Germany the retirement age has already been raised to sixty seven, in Spain it is sixty-five and Britain and Portugal have stated there intentions of moving their age towards sixty-eight in coming decades.40

Actors and Interests Elderly

The elderly face a future of an unprecedented and uncertain nature. Having never experienced such a growth in this demographic in history, the elderly could become the generation of cut benefits or of increased taxation. Regardless of the solutions put in place by national governments, the population will age. The elderly are facing and will be faced with solutions that directly affect their retirement and could make it harder to retire. However, the elderly electorate throughout the developed world is a staunch opponent to reforming retirement in any way. In 2010, French protesters took to the street in response to the actions taken by the government to raise the retirement age. Strikes like these will not be an isolated event if reforms continue to cut into the elderlys benefits. Even with the resistance to reform, many states seem unwilling to change reform, as they have no found any other solution.41 In the past fifty years the number of persons sixty years or over has tripled worldwide and the UN predicts it will triple again in the next fifty years. With the
39

Kristen Francoz, Retirement Reform in France 2010, Peter G. Peterson Foundation. (2010) http://www.pgpf.org/Issues/Spending/2010/09/Retirement-Reform-in-France-2010.aspx (accessed March 4, 2012) 40 Katrin Bennhold, France Moves to Raise Minimum Age of Retirement, New York Times. (2010) http://www.nytimes.com/2010/09/16/world/europe/16france.html?ref=pensionreform (accessed March, 2012) 41 Henry Blodget, Americans Dumbfounded As French Protest Increase In Retirement Age To...62, Yahoo.com http://finance.yahoo.com/tech-ticker/americans-dumbfounded-as-french-protest-increase-in-retirement-age-to...62535535.html?tickers=XLE,UUP,TLT,TBT,TOT,OIL (accessed Feb 12, 2012)

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increase of elderly people throughout the world, governments of all states will need to determine how to better care for their ageing citizens. This is most important in developing nations where by 2050, fourth fifths of the elderly will be living in this region. Thus, countries from developing nations and developed nations must work together to formulate plans that will help guide the elderly in the future.42 Though the French people came out with resistance to raising the retirement age, other countries have done so with a little less problems. Spain recently increased its retirement age from sixty-five to sixty-seven as it will be faced with a thirty two per cent demographic of citizens aged sixty-four or older by 2050. This projection shows that under the current Spanish system pension payments account for nine per cent of public spending, by 2040 to fourteen per cent. Such an increase is in large part because during that time the number of pensioners will rise from eight million to twelve million.43 However, unlike in France, the Spanish government also gained the trade support creating an environment of social stability. This shows that Frances resistance can actually become a compromise in some nations as the retirement age is too low.44

Labor Force
When thinking about population aging, the obvious category to look at is the elderly population. However, as the population becomes older, the workers will struggle more than the elderly. The labor forcecitizens fifteen years or older who have or are actively seeking jobs--is experiencing massive strains in current public pension systems such as those in place in France and the United States of America as the baby boomers set to retire and create a lopsided demographic.45 The demographic trend globally is moving towards more retirees than workers and thus will result in countries to respond
42

Department of Economic and Social Affairs, World Population Ageing 1950-2050, Population Division http://www.un.org/esa/population/publications/worldageing19502050/ (accessed Feb. 11, 2012) 43 Sarah Rainsford, Spanish government reaches deal to raise retirement age, The BBC. http://www.bbc.co.uk/news/business-12305246 (accessed March 9, 2012) 44 Raphael Minder, Spain Raise Retirement Age, The New York Times. http://www.nytimes.com/2011/01/28/world/europe/28iht-spain28.html (accessed March 9, 2012) 45 Investopedia, Labor Force, Investopedia. http://www.investopedia.com/terms/c/Civilian-LaborForce.asp#axzz1uK5S59YJ (accessed May 8 2012)

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with very few options. Countries currently are working increasing the tax rate to keep up with the growing amount of elderly in their country, which is effecting workers. Workers end up with less income, as tax increases are implemented in order to pay for retirees. This will have huge economic implications in the short term and long term. In the short run, workers will be unable to consume at the same levels they previously were as they have less disposable incomethe income one has after taxes.46 In the long run workers will have less savings which will hinder overall economic performance as lower savings correlates with less economic growth.47 However, beyond the global economy incurring problems, the individual worker is facing uncertainty. Many fear that states will not be able to provide for the labor force as it did in past generations. States will be heavily focused on mitigating the problem of population aging and leave the younger generation to the wayside. This is in part reason because historically elderly people are more likely to vote in municipal and national elections. And with more elderly than workers, the voice of the elderly will resonate, as their votes will control the fate of the country.48 Many of the workers in Western states are part of a labor unionan organization that represents the collective interest of the workers.49 Labor unions are there to protect its workers so oftentimes a stalemate is created between the government and the union. However, unions are usually most interested in keeping benefits the same. Therefore, compromise can be created through higher tax rates on the overall public and raising the age of retirement. Though there have been consistent protests from the latter, it is still something that can be compromised upon.

46

Investopedia, Disposable Income, Investopedia. http://www.investopedia.com/terms/d/disposableincome.asp (accessed May 8 2012) 47 Bloom, 25 48 Lloyd-Sherlock,Peter. Population ageing and international development : from generalisation to evidence. Bristol: Policy Press, 2010. 49 Investopedia, Labor Union, Investopedia. http://www.investopedia.com/terms/l/laborunion.asp#axzz1uK5S59YJ. (accessed May 8 2012)

Rutgers Model United Nations States with Aging Populations

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Population aging is a slow process that is rather easy to predict, however, countries have not thought much about this problem as it has never occurred in human history. In 2005 developed countries, the population of people sixty or older will be represented by one fifth, by 2050 it will be a third and there will be two elderly people for every child.50 The median age, a key indicator of population aging, shows that eleven developed countries have a median age of over forty. By 2050 there will be ninety-nine countries in this category.51 These statistics show that in the near future, countries may have to reassess their government programs, look towards privatization of these costly programs and decide what reforms and cuts are necessary to create a sustainable economic environment.52 Japan, a country with an aging population paid $3,000 for airfare to any immigrant worker and then $2,000 for every dependent. These immigrant workers were no longer allowed to apply for a work. 53 However, Japan needs more migrant workers in their country in order to maintain a proper economic environment. A United Nations estimate is that in order to keep the size of the working-age population constant at a level of 87.2 million, Japan would need 33.5 million immigrants from 1995-2050. That would be an average of roughly six hundred thousand immigrants a year.54 In 2012, Japans net migration rate was zero migrants for every one thousand people in the population.55 Though not contracting, it is far off what Japan needs to maintain a proper labor force. Nations, such as The United States, Canada, New Zealand, and Australia, that are suffering from low fertility rates are reversing the problem by enticing foreigners to

50 51

UNFPA, "Population Ageing: A Larger and Older Population." 5 (2002): 1-87. Ibid, 4 52 Ibid, 5 53 Hiroko Tabuchi Japan Pays Foreign Workers to go Home, The New York Times. (2009) http://www.nytimes.com/2009/04/23/business/global/23immigrant.html?pagewanted=all (accessed March 5, 2012) 54 Department of Economic and Social Affairs, Replacement Migration: Is It a Solution to Declining and Ageing Populations? (2009) 55 CIA, The World Factbook Central Intelligence Agency. (2012) https://www.cia.gov/library/publications/theworld-factbook/geos/ja.html (accessed March 5, 2012)

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immigrate into their country. 56 Though immigration laws are rather strict in these countries, the job opportunities and high standard of living are two key incentives that create demand for migrant workers. However, only very few countries are given a keen economic environment to entice immigration.57 Therefore, nations must create their own specific plan in order to keep enough workers in the labor force in the future. The Russian Federations Vladmir Putin in 2006 proposed a bonus for women to have a second child. To stop the falling birth rate, which was at the time 1.17, compared to 2 in 1990, Putins plan gave out 250,000 rubles ($9,200) to women who bore a second child. 58 It is too early to determine the effectiveness of this plan. However, the steps taken by both countries shows those countries with public pensions for the elderly need young workers to help fund these systems.

Possible Cause Retirement Age

Since the twentieth century overall life expectancy has increased, while the retirement age has stayed stagnant for the majority that same period. Currently the retirement age is around a decade to two decades below the life expectancy rate. This means that more pensioners will begin to draw from their public pensions for a longer period of time. The public institutions set up for retirees was meant to take care of the majority of the elderly for a short span, not upwards of two decades. As the population continually increases and ages, pensions will be a cost countries will have to incur for a longer period of time. This will increase the spending over time and start to strain public finances and budgets. In the United States of America, the male life expectancy in 1965 was roughly sixty-five and in 2005 the male life expectancy rate went up to seventythreean increase of eight years. The average male retirement age in 1965 was 62.9, in

56 57

Howe, Neil. Jackson, Richard. Nakashima, Keisuke., "The Global Aging Preparedness Index." (2010): 1-64. Neil, 4 58 BBC Putin reveals plan to boost Russia birth rate, BBC. http://www.bbc.co.uk/news/business-13143523. (accessed March 24, 2012)

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2005 it was 63.3a 0.4 increase in retirement age.59 The pension systems that are becoming unmanageable and more unsustainable are partly because of low retirement age. Retirement ages in Europe and East Asia entice many who are still capable of being productive members of society into retiring. Without increasing the retirement age a few years in countries such as Japan and Greece, the labor force will dwindle even quicker as the baby boomers will be quick to leave the market in order to receive a pension. The World Economic Forum in 2004 stated in a report that business and governments could both play a role in encouraging longer working lives.60 This comes as a boost to governments, who by themselves face immense disapproval by the public for raising the retirement age.61 With incentives to continue working such as better benefits that if retired or moving the maximum retirement age, the age at which one can receive full benefits, should be raised proportionately with life expectancy.62

Benefit-Defined Pension Programs

Though many nations with a defined benefit pension have begun moving towards defined contribution pension plans, many current workers in the United Kingdom, the United States, Canada, and Australia, are still part of this system.63 A defined benefit pension plan is an employer sponsored plan in which the employees benefits are tied to a formula, which takes into account the employment length and salary history with the company. Meanwhile, a defined contribution pension plan is a retirement plan where the employees benefits are unknown but the employer gives a percentage of money is setaside for the employees future retirement. Since there are still quite many workers in these defined-benefit pension plans, which could pose problems as they try to retire.

59

David E Bloom, David Canning, and Gunther Fink, Implications of Population Aging for Economic Growth, Program on the Global Demography of Aging. (2011) 60 Bloom, 14 61 Bloom, 10 62 Bloom, 20 63 Joan Broadbent, Michael Palumbo, Elizabeth Woodman The Shift from Defined Benefit to Defined Contribution Pension Plans-Implications for Asset Allocation and Risk Management, Bank for International Settlements (2006)

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In the United States, Canada, the UK, and Australia, the main problem is that this program burdens the employer to take of the employee in the future. So be it a corporation or a country, it must account for a pool of different people who will have a different retirement start date and a different retirement length. Furthermore, definedbenefit plans are used with many assumptions taken. These assumptions include a retirement benefit formula, an employee salary growth rate estimate, estimated length of working career, and length of time employee will receive a monthly retirement benefit. All of these assumptions are impossible to account for accurately for a small company, let alone a system such as the United States Social Security system.64 With the burden brought upon the employer and/or national government, the risk of an underfunded retirement plan falls completely on the employee/citizen. The citizen has no say in how the money is being invested and thus has no control over the money put into the pool of the pension fund. This leaves uncertainty to a retiree who could experience anywhere from a short retirement plan of a couple years to a long retirement plan of a couple decades.65

Healthcare Spending
As the population ages, they incur more chronic disease and thus, need for healthcare increases.66 The cost by which to take care of this need will start to cut into nations budgets. This will affect the amount of money that can be funneled into a pension fund. The United States spends the most on health care by percentage of its gross domestic product, the measure of a countrys goods or services annually, by far. In 2009 it spent 2.5 trillion or roughly seventeen per cent of GDP.67 With increase medical costs, the total cost of livinghow much it costs for everyday essential livingfor the
64

Investopedia, The Defined Benefit Plans Many Problems, Investopedia. http://www.investopedia.com/articles/r etirement/10/demise-defined-benefit-plan.asp#axzz1og81Fa7w (accessed March 9, 2012) 65 John A. Turner and Gerard Hughes, Large Declines in Defined Benefit Plans Are Not Inevitable: The Experience of Canada, Ireland, the United Kingdom, and the United States, The Pension Institute. (2009) 66 Paul Kielstra, Future Proofing Western Europes Healthcare, The Economist. (2011) 67 Cms.org NHS Fact Sheet, Centers for Medicaid and Medicare Services. http://www.cms.gov/NationalHealthExp endData/25_NHE_Fact_Sheet.asp#TopOfPage (accessed March 8, 2012)

Rutgers Model United Nations

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elderly. With more pensioners needing medical assistance, they will use their pension to pay for procedures and care. However, the pensioners have begun to find that the public pension they were so reliant on does not provide enough benefit. If the basic costs of health care cannot be mitigated through state run programs or subsidies to lower the cost of health care, the elderly will be unable to sustain their cost of living. European states, such as Spain, are beginning to feel the same economic effects. Spanish regional governments budgets are thirty to forty per cent funding for health care and owe drug companies and medical technology suppliers thirteen billion USD in debt.68 In the European Union, forty per cent of the population fifty years or older already has two or more chronic disease. Fortunately these states have universal health care, which provides health care for all citizens regardless of physical or mental state. However, instead of the pensioners spending having to spend their pension funds to pay for their procedures, the cost gets passed along to the government. These governments soon will be unable to pay for all of the sick elderly and will need to reform this system.69 As spending continues on health care, the prices will follow in the same direction and inflation will rise. Nations, especially the United States, will have to keep their prices at an inflation rate that is comparable to the price indexthe price average for a given year.70 Nations must closely monitor the cost of health care closely as it will be harder to fund through taxation if there is not a sufficient supply of labor. With no labor force, businesses will be scarce, and leads to a cycle that feed on itself. A country cannot feasibly maintain a situation where tax revenues dwindle as government expenditure increases. This will cause governments to go even deeper in debt in order to finance health care for the old.

68

The Economist, Health spending in Spain, The Economist. http://www.economist.com/node/21529082 (accessed March 8, 2012) 69 Keilstra, 4 70 Keilstra, 10

Rutgers Model United Nations Comparison of Causes

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Retirement age is the driving force behind the possible high costs countries will incur in the near future. Retirees, in some countries, can retire upwards of three decades before retirement, as the minimum age is sixty. This low retirement age incentives workers into leaving the labor force because there are public pensions to take care of them when retired. These systems were designed to be tapped into when the worker can no longer physically be productive and thus has to rely on the government for welfare.71 Weaning the public off of reliance upon the government can only be attained when the government begins to incentivize different behavior.72 Some government policies create citizen dependency, which increases the spending. The only way this will change is through comprehensive reform. Countries with an aging population and public welfare and health care systems will need to tackle the issue of spending within their means. To continually spend at a higher percentage of GDP without checking this spending can hurt business and stifle the global economy. It is taking money that could be put towards longterm investment into transfer paymentstax revenue that the country ends up giving back its citizens for welfare. These transfer payments do not add to the economies over all well being as it does not increase production of goods and services.73

Projections
The worlds population aging is a trend that is going to occur regardless of the economic and social implications. However, governments need a sustainable plan of combating the increase in cost of pensions. If left unaddressed, nations and its labor supply. With a decrease in the labor supply and with more people dependent on the government because of more elderly, the global economy could find itself in stagnation or a prolonged contraction without a solution. As the demographic of sixty and over begins to expand towards its projected two billion in 2050 the public pension systems we
71 72

Keilstra Bloom, 20 73 Keilstra

Rutgers Model United Nations

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know of will be severely drained. 74 It will result in a heavy burden on the young workers in order to maintain comfortable incomes for the old. Various nations are at different points in their population aging, but nations should all reform before the problem actually occurs. If this is not done, the states will face enormous pressure on the young workers, create a spending crisis, or force governments to drastically cut back on benefits to the retired. Countries who do not plan for a strain on public systems may find themselves giving the elderly inadequate care. Projections through 2050 show that the global population will hit a maximum before falling thus resulting in a decrease in the disparity between the elderly and workers. However, in the next half-century, economies will face problems of an increasing disparity between young and old and which will result in uncertainty and economic instability.75

74 75

Howe, Neil. Jackson, Richard. Nakashima, Keisuke., "The Global Aging Preparedness Index." (2010): 1-64. UNFPA, "Population Ageing: A Larger and Older Population." 5 (2002): 1-87.

Rutgers Model United Nations Conclusion

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The economic implications of population aging go beyond a state-by-state solution and incorporates the enter world because of a very interconnected, global economy. Defined benefit pension programs, low retirement age and health care systems have created an economic environment of waste and irresponsible spending. Nations facing an aging population currently have to face reforming pensions, health care, while increasing the labor supply. EcoFin wants to address the issue in order to dodge a potential economic collapse in the near future from strain public finances.

Rutgers Model United Nations Discussion Questions

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What are the current age demographics of your country? How has this affected your economic prosperity recently? Does your country have public pensions? Are the most widely used definedbenefit pension plans or defined-contribution plans? What kind of health care system does your country have? What will the effect be upon this system as your nations population begins to age? How can we entice the people nearing retirement to continue to stay active in the workforce? Why is this problem important to EcoFin? How can EcoFin mitigate these problems in order to continue economic growth?

Rutgers Model United Nations Annotated Bibliography For Further Reading

Bloom, David E., D. Canning and G. Fink. Implications of Population Aging for Economic Growth, Program on the Global Demography of Aging. (2011) The report by David E. Bloom looks at the concerns of the developed and developing nations when faced with population aging. The paper analyzes the economic problems that could arise from population aging. A practical look at the future, the report goes on to say that the though the task seems formidable, it is not impossible. UNFPA, "Population Ageing: A Larger and Older Population." (2002): 1-87. This population report looks at the statistical current and projected numbers. It gives policy guidelines for an effectively responding to the needs of the elderly. It also breaks down the elderly into subdivisions that can be used for various countries to study.

21

Howe, Neil. Jackson, Richard. Nakashima, Keisuke. "The Global Aging Preparedness Index." (2010): 1-64. The Global Aging Preparedness Index is an assessment of the countries that are preparing for an aging population. This report look at mostly developed nations with a few emerging markets to see how economically equipped they are to deal with this mounting dilemma.

Rutgers Model United Nations Works Cited

"Ageing in the world: The End of Retirement, The Economist. (2009) http://www.economist.com/node/13900145. A slow burning fuse, The Economist. (2009) http://www.economist.com/node/13888045.

22

ABC News, CBO Projects Social Security Will Be Drained By 2037, ABC News. http://abcnews.go.com/US/cbo-projects-social-security-drained-2037-generationsolvent/story?id=12776481#.T6m67I6iHDk. Australian Bureau of Statistics, Social Trends, ABS. http://www.abs.gov.au/ausstats/abs@.nsf/1020492cfcd63696ca2568a1002477b5/4 7f151c90ade4c73ca256e9e001f8973!OpenDocument. BBC Putin reveals plan to boost Russia birth rate, BBC. http://www.bbc.co.uk/news/business-13143523. BBC News, France Hit by New Wave of Mass Pension Protests, BBC. (2010) http://www.bbc.co.uk/news/world-europe-11559265. Bennhold Katrin, France Moves to Raise Minimum Age of Retirement, New York Times. (2010) http://www.nytimes.com/2010/09/16/world/europe/16france.html?ref=pensionrefo rm. Blodget Henry, Americans Dumbfounded As French Protest Increase In Retirement Age To...62, Yahoo.com http://finance.yahoo.com/tech-ticker/americansdumbfounded-as-french-protest-increase-in-retirement-age-to...62535535.html?tickers. Bloom David E., David Canning, and Gunther Fink, Implications of Population Aging for Economic Growth, Program on the Global Demography of Aging. (2011) Bloom, David E. Population Aging and Economic Growth. Commission on Growth and Development, no. 32 (2008): 1-48 Broadbent Joan, Michael Palumbo, Elizabeth Woodman The Shift from Defined Benefit to Defined Contribution Pension Plans-Implications for Asset Allocation and Risk Management, Bank for International Settlements (2006)

Rutgers Model United Nations

CIA, The World Factbook Central Intelligence Agency. (2012) https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html. Cms.org NHS Fact Sheet, Centers for Medicaid and Medicare Services. http://www.cms.gov/NationalHealthExp endData/25_NHE_Fact_Sheet.asp#TopOfPage.

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Cody Edward, To fight defecits, France plans to raise minimum retirement age, The Washington Post. http://www.washingtonpost.com/wpdyn/content/article/2010/06/16/AR2010061601350.html. Department of Economic and Social Affairs, Replacement Migration: Is It a Solution to Declining and Ageing Populations? (2009) Department of Economic and Social Affairs, World Population Ageing 1950-2050, Population Division http://www.un.org/esa/population/publications/worldageing19502050/. Doyle, Mark, Developing World Faces Age Crisis, BBC News (2009). http://news.bbc.co.uk/2/hi/8131567.stm. Francoz, Kristen, Retirement Reform in France 2010, Peter G. Peterson Foundation. (2010) http://www.pgpf.org/Issues/Spending/2010/09/Retirement-Reform-inFrance-2010.aspx. Hiroko, Tabuchi, Japan Pays Foreign Workers to go Home, The New York Times. (2009) http://www.nytimes.com/2009/04/23/business/global/23immigrant.html?pagewant ed=all. "How Social Security Works, http://money.howstuffworks.com/personalfinance/financial-planning/social-security.htm. Howe, Neil. Jackson, Richard. Nakashima, Keisuke., "The Global Aging Preparedness Index." (2010): 1-64. Hughes, Gerard and John A. Turner , Large Declines in Defined Benefit Plans Are Not Inevitable: The Experience of Canada, Ireland, the United Kingdom, and the United States, The Pension Institute. (2009)

Rutgers Model United Nations

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Investopedia, Defined Contribution Plan, Investopedia. http://www.investopedia.com/terms/d/definedcontributionplan.asp#axzz1uK5S59 YJ. Investopedia, Defined-Benefit Plan, Investopedia. http://www.investopedia.com/terms/d/definedbenefitpensionplan.asp#axzz1uK5S5 9YJ. Investopedia, Dependency Ratio, Investopedia. http://www.investopedia.com/terms/d/dependencyratio.asp#axzz1uK5S59YJ. Investopedia, Disposable Income, Investopedia. http://www.investopedia.com/terms/d/disposableincome.asp. Investopedia, Labor Force, Investopedia. http://www.investopedia.com/terms/c/Civilian-Labor-Force.asp#axzz1uK5S59YJ. Investopedia, Labor Union, Investopedia. http://www.investopedia.com/terms/l/laborunion.asp#axzz1uK5S59YJ. Investopedia, The Defined Benefit Plans Many Problems, Investopedia. http://www.investopedia.com/articles/r etirement/10/demise-defined-benefitplan.asp#axzz1og81Fa7w. Investopedia, What the National Debt means to you, Investopedia. http://www.investopedia.com/articles/economics/10/nationaldebt.asp#axzz1uK5S59YJ. Investopedia. Welfare State, Investopedia. http://www.investopedia.com/terms/w/welfare-state.asp#axzz1uK5S59YJ. Junichi, Sakamoto, Japans Pension Reform, SP Discussion Paper. No. 0541 Kielstra, Paul, Future Proofing Western Europes Healthcare, The Economist. (2011) Lloyd-Sherlock, Peter. Population ageing and international development : from generalisation to evidence. Bristol: Policy Press, 2010. Mankiw, Gregory, and David N. Weil, The Baby Boom, The Bust, and the Housing Market, Harvard University. (1988) Minder Raphael, Spain Raise Retirement Age, The New York Times. http://www.nytimes.com/2011/01/28/world/europe/28iht-spain28.html.

Rutgers Model United Nations

OECD, Latin American Economic Outlook 2008, OECD. (2008) 1-194 Ourdocuments.gov Social Security Act 1935, Ourdocuments. http://www.ourdocuments.gov/doc.php?flash=true&doc=68.

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Public Pension Reform in Japan, Social Security Bulletin, no. 4 (2000) Rainsford Sarah, Spanish government reaches deal to raise retirement age, The BBC. http://www.bbc.co.uk/news/business-12305246. Social Security Online, Main Provisions of the 1935 Act, SSA. http://www.ssa.gov/history/law.html. The Economist, Dont grow old, The Economist. http://www.economist.com/node/2304686. The Economist, Health spending in Spain, The Economist. http://www.economist.com/node/21529082. U.S. Social Security Administration, Chiles Next Generation Pension, Office of Retirement and Disability Policy. (2008) http://www.ssa.gov/policy/docs/ssb/v68n2/v68n2p69.html. UN Data, Crude Birth Rate, UN Data. http://data.un.org/Data.aspx?q=world+population&d=PopDiv&f=variableID%3A5 3%3BcrID%3A900. UNFPA, "Population Ageing: A Larger and Older Population." 5 (2002): 1-87. Woodside, Cynthia, Summary of Provisions, National Association of Social Workers. (1996) World Bank France Demographics, The World Bank. World Population Ageing1950-2050, Department of Economic and Social Affairs. (2002) http://www.un.org/esa/population/publications/worldageing19502050/

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Works Consulted
BBC News, France Hit by New Wave of Mass Pension Protests, BBC. (2010) http://www.bbc.co.uk/news/world-europe-11559265 Bennhold, Katrin. France Moves to Raise Minimum Age of Retirement, New York Times. (2010) http://www.nytimes.com/2010/09/16/world/europe/16france.html?ref=pensionrefo rm Blodget, Henry . Americans Dumbfounded As French Protest Increase In Retirement Age To...62, Yahoo.com http://finance.yahoo.com/tech-ticker/americansdumbfounded-as-french-protest-increase-in-retirement-age-to...62535535.html?tickers=XLE,UUP,TLT,TBT,TOT,OIL Bloom, David E. The Population Aging and Economic Growth. Commission on Growth and Development, no. 32 (2008): 1-48 Bloom, David E., D. Canning and G. Fink. Implications of Population Aging for Economic Growth, Program on the Global Demography of Aging. (2011) Broadbent, J., M. Palumbo, and E. Woodman. The Shift from Defined Benefit to Defined Contribution Pension Plans-Implications for Asset Allocation and Risk Management, Bank for International Settlements (2006) Castillo, Daniel. German Economy in 1920s, University of California Santa Barbra. http://www.history.ucsb.edu/faculty/marcuse/classes/33d/projects/1920s/Econ20s. htm CIA, The World Factbook, Central Intelligence Agency. (2009) https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html#People CIA, The World Factbook Central Intelligence Agency. (2012) https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html Cms.org NHS Fact Sheet, Centers for Medicaid and Medicare Services. http://www.cms.gov/NationalHealthExp endData/25_NHE_Fact_Sheet.asp#TopOfPage.

Rutgers Model United Nations

Cohen, Rogers Retirement at 62? Non! New York Times. (2010) http://www.nytimes.com/2010/10/15/opinion/15ihtedcohen.html?ref=pensionreform Damon, B.L. and F. Hobbs, 65+ in the United States, US Department of Health. (1996).

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Department of Economic and Social Affairs, Replacement Migration: Is It a Solution to Declining and Ageing Populations? (2009) Dinmore, Guy. Italy takes axe to pension system, FT.com, http://www.ft.com/cms/s/0/d3ec9142-2027-11e1-987800144feabdc0.html#axzz1mQNYIwNE. Doyle, Mark. Developing World Faces Age Crisis, BBC News. http://news.bbc.co.uk/2/hi/8131567.stm The Economist, A slow burning fuse, The Economist. http://www.economist.com/node/13888045 The Economist, Ageing in the world: The End of Retirement, The Economist. (2009) http://www.economist.com/node/13900145 The Economist, Health spending in Spain, The Economist. http://www.economist.com/node/21529082. Fitzpatrick, Laura. Chinas One-Child Policy, Time Magazine. (2009) http://www.time.com/time/world/article/0,8599,1912861,00.html Francoz, Kristen. Retirement Reform in France 2010, Peter G. Peterson Foundation. (2010) http://www.pgpf.org/Issues/Spending/2010/09/Retirement-Reform-inFrance-2010.aspx Hughes, G and J. A. Turner. Large Declines in Defined Benefit Plans Are Not Inevitable: The Experience of Canada, Ireland, the United Kingdom, and the United States, The Pension Institute. (2009) Howe, Neil. Jackson, Richard. Nakashima, Keisuke. "The Global Aging Preparedness Index." (2010): 1-64.

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