New Policies for Dealing with Ageing

Kumiharu Shigehara
Deputy Secretary-General of the OECD

The OECD Observer, June/July 1998

In most OECD countries, population ageing will cause economic, social and political strains. A vital element in dealing with these strains is improved economic and financial-market performance. And policies should increasingly be seen from the "life-course" perspective Đ taking people's entire lives into account. The policy response to ageing thus involves cutting across traditional boundaries of economic, financial and social disciplines, and across the customary areas of responsibility of government administrations. The OECD is uniquely placed among international institutions to deal with such cross-cutting issues.

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During the years 2010~30, the baby-boom generation now in their working-age years will reach retirement age. This development, together with increased longevity and declining birth rates, will reduce the ratio of the number of people of working age (15~64) to the number of old people (over 65). In addition to these demographic factors, recent trends towards shorter periods in work through longer school and earlier retirement, if continued, would further reduce the overall supply of labour, even though the labour-market participation ratio of women may continue to rise.

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In this setting, a number of concerns have been expressed:

how will the young be able to support the public-pension benefits and health-care costs of growing
numbers of older, retired people while sustaining an upwards trend in their own material living
standards?
how can the contribution of older people to the economy and society be enhanced?
how should infrastructures for financial markets and funded pension systems be improved to support the income of older people after retirement?

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Higher economic growth will ease the constraints faced by society in general and particularly the problems to be caused by ageing. If overall incomes are rising fast, taxes levied on the young to support the retired will be easier to bear, and will therefore be politically more practical. With economic growth, the material living standards (that is, real consumption of goods and services) of the retired can be protected while the young can look forward to rising prosperity. But if the sort of low productivity growth that has been experienced in the past 25 years continues, and if the trends towards increased unemployment and social marginalisation continue, the outcome may be very different.

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How can higher economic growth be achieved? There is some hope that the information revolution, increased world trade and capital mobility, and the introduction of reforms of product and labour markets will all help to boost economic growth in the years ahead. Good macro-economic policy is a prerequisite, and cutting government budget deficits and maintaining low inflation are therefore high on the policy agenda. The OECD Jobs Study developed policies to improve labour-market performance. In addition, the OECD has undertaken work on the creation and diffusion of new technologies and on the role of entrepreneurship. All of these should help to achieve higher growth, or shape the policies that will foster it. Yet, even as such reforms are being carried out, societies must remain concerned about protecting the employment opportunities and income of the most vulnerable among the young as well as the old who may not directly benefit from such reforms. Analysis by the OECD last year (Ageing in OECD Countries: A Critical Policy Challenge, 1997.) already addressed many of the policy issues associated with population ageing:

although higher labour productivity is central to increasing the living standards of the whole population, it does not directly address the fiscal dimensions of ageing; higher productivity also results in higher future pension costs since under current schemes pensions are generally related to wages. Existing public pension programmes must be reformed if they are to be made sustainable;
policies will have to be developed to ensure the continued integration of the old into society, including an increased emphasis on measures early in life that allow people to respond better to changing circumstances; and,
the presence of increasingly older workers will require improved learning and training opportunities throughout life.

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One particularly clear policy conclusion emerged from the OECD analysis: it is imperative that steps be taken soon to reverse the trend towards earlier retirement. In particular, policies that encourage or subsidise early retirement should be reformed. It is clear that older workers can be productive members of the economy, and making pension arrangements more flexible for those who wish to continue work would ease the financing problem of pension programmes. Early retirement has political appeal at times of high unemployment, but such policies will only create expectations for today's workers that cannot be fulfilled.

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