Long life expectancy and aging societies are either already a reality or soon will be in many countries. The proportion of over-sixties in the German population, which currently stands at around 26 percent, is set to increase to around 40 percent by the middle of the century. The positive development of longevity is the result of enormous social, medical and social progress. But longevity also comes at a price. By 2060 state expenditures for pensions, care and health will make up just under 30 percent of the gross domestic product in the Eurozone. Germany is close to the average EU level at 28.4 percent. To put this in perspective, the expected cost increase for Europeans due to the explosion of age-related state spending alone would consume the current economic output of the Netherlands, according to a recent
The price of our long lives
Allianz Demographic Pulse study. "Aging worldwide is a structural trend with potentially dramatic social and economic consequences, both for state budgets and for individuals," says Alexander Börsch, Senior Economist International Pensions at Allianz.
Demography – an insidious challenge
The financial crisis has placed national debt at the focus of political debate and public awareness. Economic programs, capital injections and declining tax revenues have put an enormous burden on public finances and budgets in many countries the world over. However, in all probability the shock will pass in time. The same cannot be said of the rapid aging of our societies. Unlike the financial crisis, this new global challenge is foreseeable. Its knock-on effects are long-term and slow to develop, which is why they are quickly forgotten – or do not even become the subject of public debate.
Rising age-related costs a global phenomenon
The aging problem knows no borders or boundaries. Pensions, health and care are the most obvious and most directly affected areas. In Germany the greatest increase in percent due to rapid aging of the population is predicted in the area of care costs. Overall, age-related costs in Germany will rise by 4.8 percentage points of GDP by 2060. Yet the challenges resulting from aging will differ radically in the European Union, the USA and in Asia, depending on the social systems in place. Whereas the USA can expect a relatively favorable demographic trend, and for the most part state pensions are designed only to provide a basic income supplemented by substantial individual contributions, the healthcare system is driving up public spending.
Different challenges for the USA and Asia
Thus, Allianz Demographic Pulse reports that public spending on health in the USA has been rising by 5 percent per annum since 1970, and if this trend continues it will reach 18 percent of GDP by 2050. On the other side of the globe the rising Asian economic powers such as South Korea, Taiwan, Singapore and China still have relatively young populations. However, this is set to change dramatically in the coming years, particularly in China. The birth rate in China has fallen from 5.5 children per female in 1960 to just 1.8 today. At the same time life expectancy has risen by an astonishing 28 years. Both the pension and healthcare systems are in a stage of early development or reform. There are two pension systems in China, which cover less than half of workers in cities and just 12 percent of workers in rural areas. It is already clear that these reforms and their design are among the most daunting social, economic and fiscal challenges facing China today.
Pensioners spending longer in retirement
The new study also examined people’s life expectancy in detail. By the end of the 1990s rising life expectancy together with a falling retirement age had led to an enormous increase in the time people spend in retirement. In the industrialized countries men spend on average around 20 years in retirement. Pensioners in France benefit most, with an average retirement time of 24 years, compared to 16.8 years in Switzerland. German pensioners are positioned in the mid-field with a retirement period of 19.8 years.
The course must be set now
The study has made one thing clear: aging societies will place a huge burden on state finances the world over. The key question is how to control public spending. Setting up sustainable and financially viable systems in the areas of pensions, care and health is essential. It is instructive to look beyond local borders. Take the Swedish pension system, for example. Alongside Australia it is the country with the most sustainable pension system, according to the "Allianz Pension Sustainability Index", and is a prime example of diversifying retirement income across various pillars. In Sweden capital-funding and a developed welfare state are not mutually exclusive and, in fact, can complement each other. "Sustainable social systems and economic growth are the two main tools for controlling the effects of aging on state finances. If the course is set in the right direction in time, the state can maintain its shaping role and attention can shift from the challenges of aging societies to the opportunities they offer. Sustainable systems and private provisions are the basic requirements for a financially sound retirement for current and future generations," Börsch concludes.
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