PETER G. PETERSON Chairman, The Blackstone Group
The aging of the population poses an enormous challenge for the developed countries. Businesses will have to cope with an aging and shrinking labor pool. Families will have to cope with a burgeoning number of frail elders. Most fatefully, workers and taxpayers will have to foot the growing bill for today's pay-as-you-go retirement programs.
Graying means paying. Today, the total public cost of public pensions and elder health benefits consumes an average of 12 percent of GDP in the developed countries. By 2040, this cost is on track to rise to 24 percent of GDP The increase alone--12 percent of GDP--is three and one-half times more than everything the United States spends on national defense. This increase is also the equivalent of 30 percent of workers' payroll on top of payroll tax rates that often exceed 30 percent already.
Global aging poses the greatest--and more immediate--threat to Europe and Japan, which is where we find the fastest-aging populations, the most generous benefit systems--and the most unsustainable projections. The United States, with its younger population and more dynamic economy, is better positioned to confront the challenge. But let there be no doubt. Global aging will wreak havoc on the economy of any nation that fails to prepare, even the United States.
The federal government has accumulated roughly $25 trillion in unfunded liabilities for Social Security and Medicare alone. That staggering sum constitutes a hidden lien on our future--that is, our children and grandchildren--six times the size of the official publicly held debt. That sum is also roughly one hundred times larger than the combined unfunded liabilities of all U.S. private-sector pension plans. If Congress had to observe the same accounting standards that the recent Sarbanes-Oxley law imposes on private companies, every member of Congress would be in jail.
Within a decade, the baby boom's retirement will be in full swing and the unfunded liabilities will begin coming due. Now is the time to prepare for the fiscal gauntlet that lies ahead by trimming benefits, raising retirement ages, and--above all--saving more. Instead, in a shocking abdication of generational responsibility, we are accumulating massive new deficits, both domestic and foreign. The federal budget is on track to run deficits totaling $5 trillion over the next ten years--and that's before the age wave hits. Meanwhile, to pay for this profligacy, we are borrowing abroad hand over fist. The capital inflow now comes to roughly $500 billion a year or $1.5 billion a day.
The late Herb Stein, the former chairman of the Council of Economic Advisers and sometimes humorist, was fond of saying that things that are unsustainable tend to stop. I've asked a dozen or so top experts about America's twin deficits. Many believe that we run a serious risk of a hard landing--a plunging dollar, surging interest rates, and of course goodbye Dow 10,000. But even if we avoid a near-term train wreck, the river of foreign capital propping up the U.S. economy will eventually run dry. Why? Precisely because other developed nations are aging faster than we are and face even larger long-term deficits than we do. By the mid-2020s, government borrowing to cover widening pension deficits is on track to consume all the savings of the G7 countries.
Let me return to where I started. America's relative youth and economic dynamism give it an advantage in confronting the age wave. But unless we dramatically improve our national balance sheet--and soon--we may find ourselves no better off than Europe and Japan.
JAMES SCHLESINGER Senior Advisor to Lehman Brothers, Chairman of the MITRE Corporation, and former Secretary of Defense
Since everything has some sort of downside, almost everything can be interpreted as a ticking time bomb. In the underdeveloped world, a rapidly growing population is viewed as a ticking time bomb--unemployment among youths, shrinking per capital income, etc. By parallel in the developed world, an aging population will be viewed as a ticking time bomb--specially if there are substantial and inflexible welfare programs.
In Europe and Japan, the very low birth rate and the prospectively shrinking population pose major problems. Japan's population will both age and shrink--in the absence of immigration--and the Japanese economy will have lost the vibrancy that marked it for so many years. In Europe, the problem is slightly eased by the steady, if unwanted, immigration. Nonetheless, in Europe there is a sharp clash between the aging of its population and the ability to sustain its welfare system. It should be noted, however, that the problem is not confined to developed countries. China, with its one-child policy, will have an aging population, will need to devote more resources to caring for the elderly--and likely will lose its now-robust economic growth.
Still, the ticking time bomb may be more relevant in the realm of psychology than that of economics. An aging population is most concerned about security. A low birth rate and a limited youth population leans against risk and casualties. Such nations, especially when democratic, will tend toward timid rather than bold foreign policies. They will seek to avoid military action, push trouble off to the future, be intolerant of casualties, and likely underfund and undercut their own defense establishments. To the extent that this would temper what some see as an aggressive China would not be without some advantages. Nonetheless, it does raise some interesting long-term questions about the steadfastness of the Western democracies in the face of global terrorism. Now, there is a ticking time bomb.
SAMUEL BRITTAN Commentator, Financial Times
Most of the world's populations are aging. This partly reflects the very welcome increase in life expectancy as a result of higher living standards and the progress of medical science. But it also reflects in many countries a fall in the birth rate. In Europe the typical female reproduction rate is 1.5 as against 2.1 required to maintain the population without immigration. The baby boom has been followed by a baby blip. Not only is the proportion of old people in the population rising; but the proportion of working age adults available to support them is declining.
The problem is much less spectacular in the United States where thanks to a higher birth rate and more liberal immigration policy, the total population is expected by the United Nations to rise from 285 million in 2000 to almost 400 million by 2050. By contrast, the population of the European Union is expected to have fallen from 377 million to 339 million. This population trend could reduce the underlying European growth rate so much that its share of world output will have fallen to 10 percent from 18 percent. The United States on the other hand is expected to increase its share of global output slightly from the present 23 percent.
The burden of supporting the older population will however be rising everywhere. According to the UN estimates, the median age in the European Union's present fifteen members will rise from 38 now to 49 by 2050. Even in the United States, the median age is expected to rise from 35 to 39.
The first part of any policy to alleviate the problem must be to index the pension age to life expectancy. It is totally absurd that the advance of medical science should go to waste in increasing and often involuntary idleness. It is important to have an automatic indexation formula. A staged rise to another fixed age, say 70, advocated by some European "reformers" does not meet the bill. Nor is doing away with compulsory retirement ages, U.S.-style, sufficient. Some notional retirement age has to be written in to the finances of any government social security scheme. And even pension funds and insurance companies make explicit or implicit assumptions on the matter. Obviously higher retirement has to be coupled with changes in work practices to make it easier for older workers to work shorter hours in a less arduous way, perhaps for lower pay.
The controversial question is what role immigration can play in improving the denominator of the dependency ratio (that is the ratio of old people to those of working age). Even if immigrants ultimately succumb to the forces making for lower birth rates among the native population, this will take many decades and in the meantime the working age population is replenished.
There is very little case however for so-called selective immigration permits for workers deemed in short supply. Labor shortages and surpluses depend overwhelmingly on pay and conditions offered. Advanced western countries could certainly recruit more native-born nurses, IT technicians, and kitchen cleaners if they offered better wages and working conditions.
Ultimately, attitudes toward immigration depend on how far present populations value the cultural mix that immigration brings and how far they are prepared to share their opportunities with both refugees and other people seeking a better life.
One counter-argument could be the pressure on limited land and the resulting congestion and urbanization. Here the United States and Ireland are much better placed than the rest of western Europe, while Australia is virtually empty. But even the Netherlands, which has one of the highest population densities, manages a quite reasonable quality of life.
A final consideration is that immigration controls, like controls on drugs, are obviously an incitement to crime on the part of unscrupulous entrepreneurs prepared to take risks. As one way or another immigrants are going to come, then why not enjoy the process and in the meantime give ourselves a breathing space in dealing with rising dependency ratios?
RICHARD N. COOPER Maurits C. Boas Professor of International Economics, Harvard University
A population can age either from increased longevity or...