How Ready for Pensioners?

• Author: Neil Howe and Richard Jackson
• Position: and are, respectively, Senior Associate and Senior Fellow at the Center for Strategic and International Studies.

Which countries are most prepared to meet the challenge? And which countries are least prepared? The Global Aging Preparedness (GAP) Index, developed by the Center for Strategic and International Studies (Jackson, Howe, and Nakashima, 2010), provides a new analytical tool for assessing the progress that countries worldwide are making in preparing for global aging, and particularly the old-age dependency dimension of the challenge as the number of elderly relative to the working-age population continues to grow.

The GAP Index finds that with a few exceptions the countries best prepared to meet the promises they have made to retirees are those that have promised them the least.

A look at 20 countries

The GAP Index covers 20 countries, including most major developed economies and a selection of economically important emerging markets. The projections extend through the year 2040 to capture the full impact of the demographic transformation sweeping the world. The overall GAP Index consists of two separate sub-indices: a fiscal sustainability index and an income adequacy index. These sub-indices in turn are based on indicators grouped into distinct categories, each dealing with a different dimension of the challenge.

On the fiscal side, the GAP Index includes three indicator categories: public burden, fiscal room, and benefit dependence. The public burden category measures the projected magnitude of total government benefits to the elderly, defined as adults ages 60 or older. The fiscal room category measures the ability of countries to accommodate their growing old-age dependency burdens by raising taxes, cutting other spending, borrowing, or some combination thereof. The benefit dependence category measures the degree to which the elderly rely on government benefits in different countries. The assumption is that the more dependent the elderly are on those benefits, the greater the likelihood of political resistance to enacting new cost-cutting reforms or even to following through on reforms that have already been enacted but are not yet fully in effect.

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 nonelderly in each country, based on projections that reflect the effect of changes in government benefit programs, private pension provision, and...