Ageing and demographic change

Fiscal challenges and inclusive growth in ageing societies Dorothée Rouzet Aida Caldera Sánchez Théodore Renault Oliver Roehn OECD Economics Department September 2019

G20 populations are ageing rapidly Expected life expectancy at age 65 1980 Japan France Spain Korea Italy Australia Canada United Kingdom Germany United States Mexico Brazil Turkey Argentina China Saudi Arabia Russia India South Africa Indonesia 65

2015

Old-age dependency ratios

Number of people older than 65 years per 100 people of working age (20-64)

2060 90 80 70 60 50 40 30 20 10 0

70

75

80

85

90

95 Years

Source: National sources; Eurostat Population Projections (2008 revision); UN World Population Prospects, 1950-2050 (The 2008 Revision); United Nations World Population Prospects: The 2017 Revision.

2

The public debt burden is already high G20 advanced economies % of GDP 250

2017

2007

G20 emerging economies

% of GDP 250

200

200

150

150

100

50

0

100

50

0

% of GDP

2017

2007

% of GDP

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

Note: LHS panel: Public debt ratios are based on the national account definitions except for EU countries where debt ratios based on Maastricht criteria are shown. RHS panel: Total stock of debt liabilities issued by the general government Sources: OECD Economic Outlook database, and IMF Global Debt database.

3

WHAT ARE THE COSTS OF AGEING?

4

Ageing will weigh on living standards in most G20 countries Working-age population contribution to annual GDP per capita growth Between 2018 and 2030

Between 2030 and 2060

%

%

0.4

0.4

0.2

0.2

0.0

0.0

-0.2

-0.2

-0.4

-0.4

-0.6

-0.6

-0.8

-0.8

Source: Guillemette and Turner (2018), “The Long View: Scenarios for the world economy to 2060�, OECD Economic Policy Paper.

5

Ageing will increase public pension costs Public expenditure on pensions % of GDP 20 18 16 14 12 10 8 6 4 2 0

2015*

2060**

% of GDP

Note: * 2015 or latest available. **Projections are until 2060 for France, Germany, Italy, Spain and the United Kingdom; 2055 for Australia; and 2050 for the others. Projections assume no further policy changes in the projection period.

Source: European Commission and Standard and Poor's.

20 18 16 14 12 10 8 6 4 2 0

6

Ageing will increase health expenditures Public health spending projections % of GDP 18

2016

2030

2060

% of GDP 18

16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

Note: Public health expenditure includes long-term care spending. Expenditure excludes investments.

Source: OECD Health Statistics 2017 database; OECD Long-Term Model; and OECD calculations.

7

The need for long-term care will increase Costs of LTC for people of retirement age or older % of disposable income

Note: Percentages are averages of 13 OECD countries. Low, moderate and severe needs correspond to 6 ½ , 22 ½ and 41 ½ hours of care per week, respectively. The costs of institutional care include the provision of food and accommodation, so are overestimated relative to home care.

Source: Muir (2017), “Measuring social protection for long-term care”, OECD Health Working Paper.

8

Increases in taxes will be needed to contain ageing-related fiscal pressures…

Change in tax revenue necessary by 2060 to stabilise debt ratios at current levels Health expenditure

Pension expenditure

Other primary expenditure

% of potential GDP 15

Other factors Total % of potential GDP

15

10

10

5

5

0

0

-5

-5

NLD

AUS

FRA

GBR

ITA

KOR

DEU

ESP

JPN

CAN

USA

Note: Projections are based on current policy settings. Based on projected government pension expenditures from European Commission (2018) and Standard and Poor’s (2016), and projected growth in public health care expenditure per capita with the methodology of Marino et al. (2017). Other primary expenditure is assumed to remain constant in real terms on a per capita basis.

“Other factors” mostly capture the initial gap between primary revenue and the level that would stabilise the debt to GDP ratio, but also changes in GDP growth rates over the projection period.

Source: Guillemette and Turner (2018), “The Long View: Scenarios for the world economy to 2060”, OECD Economic Policy Paper.

9

‌ and avoid a rapid increase in public debt G20 Emerging

G20 Advanced % 400

Without ageing pressure

With ageing pressure

% 400

350

350

300

300

250

250

200

200

150

150

100

100

50

50

0

2010

2020

2030

2040

2050

2060

Without ageing pressure

0

2010

2020

2030

With ageing pressure

2040

2050

2060

Note: In the scenario without ageing pressures, the cyclically adjusted primary balance as percent of GDP is held constant at the (projected) 2020 level.

The ageing pressure scenario includes health and pension expenditures projections; other primary expenditures are assumed constant in real per capita terms. Primary revenues are held constant in percent of GDP. Growth and interest rate projections are based on the OECD Long-Term Model. In the scenarios, the growth and interest rate differential is gradually turning positive over the projection period. Aggregates are weighted averages using GDP at market prices. The G20 Advanced aggregate includes Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States. The G20 Emerging aggregate includes Argentina, Brazil, China, Indonesia, India, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Source: OECD calculations.

10

Ageing could exacerbate poverty risk Poverty rate by age %

66-75

76+

Whole population

60 50 40 30 20 10 0

Note: 2016 or latest year available. Poverty defined as having incomes below 50% of median equivalised household disposable income, after taxes and transfers.

Source: OECD Income Distribution database.

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REFORMS TO ADDRESS AGEING COSTS

12

A combination of policies is needed Reforming public and private pension systems

Promoting labour force participation of older workers and other groups, including women, low skilled, youth and migrants

Containing the increase in health and long term care spending

Lifting productivity and leveraging the “silver economy� for innovation and entrepreneurship

13

Most countries have limited room to increase contribution rates to improve pension adequacy Mandatory pension contribution rates for an average worker % of gross earnings of the worker, 2016

% 35

Public

Private

30 25 20 15 10 5 0

Note: Contribution rates include employee and employer contributions. The rates for both employee and employer are based on the gross earnings of the worker. * indicates social insurance contribution, including non-pension benefits.

Source: OECD Pension at a Glance 2017.

14

Retirement ages will continue to increase in some countries Normal retirement age in G20 countries Current

Future

Brazil Indonesia India Saudi Arabia South Africa Russia China Turkey Korea France EU 28 Spain Argentina United Kingdom Mexico Japan Germany Canada Australia United States Italy 40

45

50

55

60

65

70

Note: Retirement age for men entering the labour force at age 20. Future retirement age is for people who entered the labour force in 2016, based on currently legislated provisions. Announced but not yet legislated measures are not reflected.

Source: OECD Pensions at a Glance dataset.

75 15

Some recent pension reforms • Link retirement age to life expectancy: Denmark, Finland, Italy, Netherlands, Portugal, Slovak Republic • Automatic adjustments of benefits: • To life expectancy • To dependency ratios or fiscal balances of PAYGO (paying attention to low income earners) • Germany, Japan, Portugal, Spain, Sweden • Flexible retirement (combining work and retirement; retirement age) with adequate financial incentives: e.g. Germany 16

Linking retirement age to life expectancy could mitigate ageing costs Increase in GDP per capita by 2030 if minimum and normal retirement ages rise by at least two-thirds of gains in life expectancy at 65 Relative to baseline

1.6

%

1.2 0.8 0.4 0.0

Source: OECD calculations.

17

Policies need to incentivise private savings Financial literacy

%

% of respondents achieving the minimum target score on financial knowledge

100 90 80 70 60 50 40 30 20 10 0 Note: The minimum target score is reached when answering 70% of the financial knowledge questions correctly. G20 is the simple average of the country percentages for all G20 countries with comparable data. G20 countries that are excluded from this figure do not have comparable data.

Source: G20/OECD INFE report on adult financial literacy in G20 countries.

Examples of policies to encourage private pension savings • Introduce automatic enrolment systems • Simplify the contribution process • Improve the structure of incentives • Promote the annuitisation of accumulated assets for the pay-out phase • Make reliable mortality tables available • Improve financial literacy 18

Promoting longer working lives goes beyond the pension system Reducing incentives for early retirement

GOVERNMENTS EMPLOYERS UNIONS CIVIL SOCIETY

Promoting employability throughout working lives

Encouraging employers to retain and hire older workers 19

Highly educated older workers are more employable Employment rates of older workers 55 to 64, by educational group

%

Tertiary education

Upper-secondary education

No upper-secondary education

100 80 60 40 20 0

Note: Data on upper-secondary education or below are not available for Japan.

Source: Calculations from the OECD Education Database.

20

Policies need to promote healthy ageing and contain costs in the health sectors Share of people reporting bad health by age and education

Lower educated

• Promote healthier lifestyles, e.g. in curbing tobacco, alcohol consumption or obesity

Medium educated

Higher educated

%

60

Examples of health policies

50 40

• Contain health costs in introducing budgetary caps

30

• Tackle wasteful spending • Promote competition among health care providers

20 10 0

20

25

30

35

40

45

50

55

60

65 Age

Note: “Low”, “medium” and “high” levels of education correspond to International Standard Classification of Education (ISCED) codes 0-2, 3-4, and 5-6, respectively.

Source: OECD calculations from microdata on 24 OECD countries.

• Increase the scope of goods and services covered by basic health care coverage 21

In many emerging economies, the priority is to expand coverage Informal employment % of total employment Female

% 100

Male

90 80 70 60 50 40 30 20 10 0

Chile

South Africa

Brazil

Argentina

Indonesia

India

Note: Data as of 2018 or latest available. Employment in the informal sector comprises all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status in employment and whether it was their main or a secondary job.

Source: ILOSTAT database.

22

The gender gap has been reduced but remains high in some countries Difference in employment rates between men and women % pts

2000

2018

60 50 40 30 20 10 0

Note: Employment rates refers to employment to population ratios for people aged 15-64 years old.

Source: OECD Labour Force Statistics.

23

A better use can be made of migrants’ skills Differences in employment rates between foreign-born and native by level of education 30

% pts

Low-educated

Highly educated

20 10 0 -10 -20

Note: Data for 2015-16.

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Key takeaways Reforming pension systems in an equitable way and containing the increase in health costs and long term care costs • Link retirement age to life expectancy and allow for flexible retirement with adequate financial incentives • Encourage private savings, e.g. with automatic enrolment and matching contributions, and improve financial literacy • Health systems: contain costs and improve efficiency to ensure fiscal sustainability • In emerging economies, the key challenge is reducing informality to ensure sufficient coverage and financing of pensions, health and LTC

Raising labour market participation and productivity • Tackle barriers to employment of older workers such as mandatory retirement, lack of flexible work arrangements and seniority wage settings • Promote skills development for older workers and life-long learning • Improve labour force participation of women, youth and migrants • Boost productivity, entrepreneurship and innovation with structural reforms

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