Introduction
Ageing population can be described as the shifting of the average ages of a population towards an older age. The world population has been rapidly ageing since the mid-twentieth century, arising from increasing longevity and declining fertility rates. (United Nations, 2013). Population ageing is often associated with profound social and economic implications as it is the result of generations of progress and could take decades to develop and recede. Consequently, there is a natural urge to promote the well-being of the growing proportion of older people around the world and for them to be able to participate in and benefit from the development of the economy to provide for their later lives. Societies should therefore help and encourage them by providing an open environment for them to do so and is an important step to ensure the continuity of the society.
An ageing population may come with considerable effects on the make-up of the economy as older people are often associated with reduced levels of economic activity. Hence, there is a growing necessity for people to increasingly extend economic activity into later life. In this report, we shall investigate the implications of an ageing population to the current social security system. We will focus on the impact on pensions and state benefits in particular and discuss the ways and different policies that have been designed and set up to counter the effects of this phenomenon such as the sustainability of the current benefits.
The implications of societal ageing on intergenerational dependence is also worth exploring as the effect of an aged population will also affect the generation above and below it. For example, an ageing generation will require support from the following generation and in the same time they will have provided for the older generation above them. Also, ageing in the less developed countries where there is little or no infrastructure to provide long-term care or social security is of our interest because they must resort to other means of financing their post-retirement lives such as using owned assets, family transfers or personal savings. This opens up a variety of interactions between each party in the economy.
In all cases, the current social security systems could be hard to sustain due to the increased longevity and pension period, especially in a pay-as-you-go system. We will look into alternative methods that can help to improve the situation and alleviate the burden of older people. We are racing against time to find a solution to avoid the breaking point of such called ‘Pension Crisis’ where individual and government are struggling to come up with enough funding to support the old population when they cannot contribute more to the economy.
In the first chapter, we will analyze the trend of human longevity and fertility rates and try to understand the reason behind the shifting of the demographics towards an older age. Then, we can look at different ways currently implemented all over the world to tackle the problems associated with ageing populations. We will continue to explore and model alternative methods that can be used to confront these problems and try to come up with solutions and suggestions.
Chapter 1: The Trend on Longevity and Fertility Rates
Tinker (2002) suggests that ageing population can be traced to two main reasons: improving longevity and declining fertility rate of the population. Migration may in some extent affect ageing but on a global level the impact effectively nets out. Together, these trends eventually lead to a smaller proportion of working adults and larger proportion of elderly people in the population. In most developed countries, population ageing has been happening for decades while it is relatively recent in less developed regions of the world according to population data from the United Nations (2017).
Fertility rate
The fertility of a population can be quantified using the crude birth rate, which is defined by the United Nations (1991) as the total number of births per 1000 population or the total fertility rate (TFR), which is a measure of the average number of children per woman in her lifetime. In this report, we will use the total fertility rate as it is independent of the age structure and also easier to understand in terms of population replacement. A TFR of around 2.1 would be a rate that women are giving birth to enough babies to sustain the population level by replacing herself and her partner, accounting for the mortality in female population from birth to the end of childbearing years (United Nations, 2001). However, (Espenshade et al., 2003) argues that there could be a large variation from country to country in the replacement fertility level due to differences in mortality and different ratio of births are needed to keep the population stable. According to United Nations data, the world total fertility rate has fallen by almost a half from 5.03 in the 1960-1965 to 2.47 in 2015-2020 and is forecasted to continue declining for the rest of the century. This presents a problem that will decrease the population starting from the youngest level. This can propagate up older age group and create a tail in the demographic distribution.
Figure 1
Total fertility rate: World and development regions, 1960-2050 Source: UN, 2017
Figure 1 shows that the decline in fertility rate is faster in less developed regions, and the gap with developed areas is closing. Another interesting result is that the fertility level in developed regions actually rose after the low point of 1.6 children per woman in 2000-2005. This suggest the rate may stabilize around the 2 children per woman mark as forecasted in the United Nations fertility rate projection.
Mortality Rate
In the meantime, changes are happening rapidly at the other end of life. All regions of the world have shown improvements to the life expectancy. It is celebrated as one of the achievements of human civilization to delay the inevitable and it does not in itself result immediately in population ageing. Improvements in life expectancy in the early stage of life actually means less child mortality, increased numbers of children and a reduction in the proportion of older people. The problem is that the continued improvement in life expectancy at old age as more people survive at older age that increase the proportion of older lives. Hence, lower mortality level followed by low fertility rate catalyzes the effect of both on population ageing.
Figure 2
Life Expectancy at birth: World and development region, 1960-2050 Source: UN, 2017
Based on data from the United Nations, the life expectancy at birth in 2015-2020 is 72.0 years, a 5 years’ increase since the turn of the millennium. The life expectancy at birth is projected to continue to rise in the coming decades although the pace has slowed. We can see from both figure 1 and 2 the world measure is mainly driven by the less developed regions and simply because the population in these countries are much higher. Thus, it would be interesting to investigate the less developed countries to understand the effects of these trends.
The trend in the number of births, combined with a long-term trend of declining mortality, is pushing the world in to a demographically old aged population, with the majority of people over 60 years old.
An extension of the life expectancy is the healthy life expectancy, defined by the World Health Organization (WHO) as the average number of years spent living in self-assessed good health and increasingly used to assess the quality of the additional years of life. This is particularly important in measuring the social and economic impact of ageing population as the more time an individual spend in good health, the lower the cost of providing care to an aged population. Data from the WHO shows that the healthy life expectancy at birth increased from 58.5 years in 2000 to 63.3 years in 2016, an increase of 4.8 years and roughly equal to the improvement in life expectancy through the same period. This implies that the increase in number of years lived are spent in a healthy state and if the trend continues, the proportion of life spent in a healthy state is becoming higher.
The socioeconomical impact of the trends
As population age, health expenditures tend to grow rapidly since older people usually require more healthcare in general and sometimes more specialized services to deal with their daily care. This is further reinforced by the survival into older ages that lengthens the period between onset of significant disability and therefore increases the lifetime cost of health care. The economic problems occur when we consider how these costs are met. Currently, a high proportion of that is being funded by government fund and that translates to taxpayers’ money. As older population leaves the workforce, they need to rely on the younger generations to fund them after they retire. In less developed region however, the health expenditure is mainly financed with private spending (Gottret, P & Scheiber, G., 2006). We need to encourage people to work longer and participate in the labour force for a longer time for them to save enough money and lessen the burden of younger generations.
In most modern societies, older persons consume more than they produce and therefore resort to other sources of support such as income from their assets, savings and transfers from family and the government. How older people finance their later life differs widely across countries and depends on cultural, constitutional and economic factors.
Chapter 2: How Countries and Policies are Reacting
With the demographics development trend in the background, some organizations such as the World Bank have advocated a multi-pillar approach to pension provisions. The World Bank argued that public pension systems were unsustainable in the long run and proposed a three-pillar pension system in its policy research report titled “
Averting the Old Age Crisis”
(World Bank, 1994). The three pillars were summarized in Figure 3.
Figure 3: Summary of the three pillars pension approach by the World Bank
As population ageing is not a new phenomenon, countries around the world have come up with different ways to anticipate the lasting impact of it. In this section, we will look at 4 different countries including UK, Japan, China and France and try to find a common theme in their approach and also quantify how effective the methods are.
UK
The United Kingdom’s retirement system comprises a single tier state pension supported by a means-tested credit system. The systems are also supplemented by occupational pension schemes and persona savings pot (Mercer, 2018)
With reference to the three pillars approach, the first pillar is a basic state pension that is currently provided to citizens aged 65 for both genders as inscribed in the Pension Act 2011. The state pension aims to provide a minimum level of income for retiree to avoid poverty in retirement when people are no longer working. (Pensions Policy Institute, 2018) The pension system operates on an unfunded basis, where current workers contribute through the National Insurance system to fund the pensioners. The benefits of this system is that the state doesn’t need to save up a pool of fund for the future and bear the risks of inflation and investments throughout the accumulation period. The downside is that there is a mismatch in the liabilities and contributors for the state pension, as the current generation of pensioners have to be supported by the current generation of workers, meaning that the ratio of people in retirement over the workforce is a very important measure of the sustainability of the system. In addition, the income provided through the state pension is inadequate to maintain the lifestyle before retirement and is only designed to redistribute wealth across the population. For example, the current state pension is a flat rate of £164.35 per week (Department for Work and Pensions, 2018) whereas the median weekly wage in the UK is £569 (Office for National Statics, 2018). There is a triple-lock mechanism in play to guarantee that the pension increase is the largest of 2.5%, inflation or average earnings growth (HM Treasury, 2010).
The second pillar for the UK pension system is workplace pensions. Occupational pensions are voluntary though there is some push with the introduction of automatic enrolment under the Pensions Act 2008, but the ultimate decision lies with the individual. The objective of this arrangement is to supplement the state pension and link up the pensions with pre-retirement income because the benefits are calculated based on salaries. It is a form of wealth redistribution across an individual’s lifetime.
The second/third pillar for UK pension is private pension. It is voluntary and more flexible as the individual can choose the amount that they would like to receive in retirement and the contributions they would like to make. On the other hand, people will need to have the correct knowledge and financial literacy to be able to make the optimum decision to fund their retirement.
To combat ageing population, the main thing that the government plans to do is to raise the state pension age. This will have a feed through effect to the private pension arrangements to also mimic the move of the government. The current state retirement age, defined here as the age that state pension can be taken, is 65 for both genders. The government has announced proposals increase retirement age to 68 between 2037 and 2039 (Department for Work and Pensions, 2017).
Japan
Japan is known for its citizens’ longevity and the economy has been stagnant for most of the last two decades after the inflationary bubble during the 90s. Japan has dealt with this problem the longest time and could be a mirror to the other developed countries in handling the problem. According to (Mercer, 2018) report on global pension, Japan’s retirement income system currently comprises a flat-rate basic pension, an earnings-related pension and voluntary supplementary pension plans.
The pension system in Japan is very similar to the arrangements in the UK, there is a flat-rate National Pension System that forms the first pillar and provides basic income for the pensioners. The second pillar consists of the Employees’ Pension Insurance System that is mandatory and managed by the Japan Pension Service together with the National Pension. This second pillar provides a benefit linked to income to help provide a similar living standard for the retirees. Both types of pensions are managed by the Japan Pension Service and are standardized across all employer as opposed to the UK. For self-employed and unemployed, they need to pay a fixed amount and receive the basic pension. The third pillar is the voluntary pension schemes, either through employers or insurance companies that provide more income for the individuals that want to save more for retirement (Japan Pension Service, 2018).
The current retirement age in Japan is 65 years old where retiree can begin to withdraw the basic pension but the pensionable age for the Employee’s Pension Insurance (EPI) is 60. The Japan government have introduced a reform in 2000 that plans to increase the beginning age of the EPI earnings-related portion from 60 to 65 between 2013 and 2025 for men, with the lifting schedule for women 5 years behind. Another reform in 2004 introduced the Automatic Adjustment Mechanism (AAM) to adjust the pension benefit automatically to demographic changes. The mechanism works by keeping the pension increases slower than prices and wages inflation through indexing.
China
China is a largest country by population, but the pension system is less developed than the other 3 countries in this report. The retirement income system in China comprises 2 systems, the basic pension system for employees of enterprises and a basic pension system for rural and non-working urban residents (OECD, 2017).
The basic pension system for employees of enterprises consists of a pooled account from employer contributions and a personal account funded by employee contributions based on wages. There is also a separate system for public sector employees. The payment of basic pension is calculated based on the personal wage and the term of contributions and everyone will receive a different amount with no element of wealth redistribution in the scheme. The pension funds are pooled at the provincial level and not administered nationally.
The basic pension system for rural and non-working urban residents also consists of a pooled account and personal accounts. The central government give various subsidies to the provinces as contributions to the social pool account. The personal accounts are funded voluntarily by personal contributions with the local government giving a subsidy to each personal contribution. The basic pension payment standard is set by the central government and the local government can adjust the standard according to local conditions. Due to the size of the country, we can observe that the pension system is fairly decentralized.
The whole basic pension system for employees of enterprises, public employees and rural and non-working urban residents can be seen together as the first pillar of the pension system, providing the basic income for pensioners, which, different from UK and Japan, is based on past contribution levels. The second pillar comprises supplementary enterprise annuity plans that are provided by some employers and currently expanding. The third pillar of the pension system is the personal savings that adds to the overall income after retirement (Ministry of Finance of The People’s Republic of China, 2018).
The main focus for reform of the Chinese Pension System is to bring the various pension schemes under national unified management and gradually postponing the retirement age to combat the challenges that pension funds in some provinces is in deficit due to ageing population. In June 2018, the State Council launched a central adjustment mechanism that gives the power to the government to transfers pension fund in provinces with surpluses to those with deficit to resolve risk of shortage of payment.
France
France’s retirement income system is an earnings-related public pension with a minimum pension level, supplemented by two mandatory occupational pension plans for executives and non-executives and voluntary occupational plans after the pension reform of January 2014 (CLEISS, 2018).
The first pillar is the basic pension calculated based on the average annual earnings of the individual’s 25 best-earning years multiply by a rate between 37.5% and 50% multiplied by the length that the individual contributed to the scheme.
On top of the basic pension, there are compulsory supplementary pensions for all employees as the second pillar that are administered by ARRCO (Association for Employees’ Supplementary Pension Schemes) that cover all categories of employees and AGIRC (General Association of Retirement Institutions for Executives) covering only managerial and executive staff. One distinct feature of these schemes is that they are operated on the pay-as-you-go basis and calculate the pension using a points system that can be accrued throughout the individual’s working life.
The French retirement system emphasizes the pay-as-you-go principle and value solidarity between generations as the current pensions has to be paid by contributions of the present workers where they also earn their entitlement for future income at the same time. As population ages, the sustainability of the arrangement is in question. The French government is eager to push through a reform that is universal and more unified by 2025 (Pailliez et al., 2018) and there is pressure to retain the retirement age at the current level.
Ostaszewski (2012) concluded that recent developments around the world have make the future very challenging for the pillars of the retirement system. In the first pillar, public social security systems are under tremendous pressure politically and economically to reduce benefits as expenditure for social benefits rise. In the second pillar, employers are seeking to cut costs and less willing to provide guaranteed pension benefits and existing funds are underfunded as a result of low interest rates. In the third pillar, investments are struggling with low interest rates, reducing the attractiveness of saving plans. As a result, the three pillars approach of the current pension system are under great pressure to reform.
Table 1: Comparison of the current retirement system in each country
|
|
UK |
Japan |
China |
France |
|
|
First Pillar: New State Pension Second Pillar: Occupational Pension Third Pillar: Voluntary private pension |
First Pillar: National Pension System Second Pillar: Employee’s Pension Insurance Third Pillar: Voluntary private pension |
First Pillar: Basic Pension System(s) Second Pillar: Enterprise Annuity Plan Third Pillar: Personal savings |
First Pillar: Basic Pension Scheme Second Pillar: Compulsory Supplementary Schemes Third Pillar: Voluntary private pension |
|
|
65 (increasing to 66 by Oct 2020) |
65 |
60 for men; 55 for female |
62 (statutory retirement age); 67 (full retirement age) |
|
|
i)Further increase to retirement age |
i)Increase pensionable age ii)Adjust benefit levels |
i)Increase retirement age ii)Unify schemes nationally |
i)Unify various schemes |
|
|
31.11% |
50.24% |
27.21% |
25.55% (ratio of population aged 60 above to population aged 20-59 as data only available in 5 years age groups) |
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