Fiscal challenges and inclusive growth in ageing societies

Fiscal challenges and inclusive growth in ageing societies Executive Summary September 2019

2 . FISCAL CHALLENGES AND INCLUSIVE GROWTH IN AGEING SOCIETIES – EXECUTIVE SUMMARY

Rapid ageing will weigh on living standards and put public finances under severe pressure Populations are ageing rapidly across advanced economies and many emerging market economies, as a result of spectacular improvements in life expectancy and continued declines in fertility. The number of people over 65 for each working-age person will at least double in most G20 countries by 2060 (Figure A), and the share of people over 80 in the world’s population will triple.

Figure A. Old -age dependency ratios will rise fast

2015

2060

Japan Italy Germany France European Union Slower or even negative growth of the working-age United Kingdom population will hold back GDP per capita growth in the Spain coming decades in most economies. The impact will be more Canada severe if investment, productivity and business dynamism United States slow down as a result of shrinking and ageing populations.

Australia Moreover, the current young may face higher inequality Russia and poverty risk in their old age than previous generations, Argentina as they are expected to spend more years on retirement Korea income and as the less privileged accumulate disadvantages China over their life course.

Brazil Rising old-age dependency ratios will put unprecedented Turkey stress on the financing of public pensions, health and Mexico long-term care, especially in a slow growth and high debt India environment. Under current policy settings, the tax burden Indonesia would need to increase by between 4½ and 11½ percentage South Africa points of GDP by 2060 in G20 countries to stabilise public Saudi Arabia debt-to-GDP ratios at their current levels (Figure B). If no reforms are undertaken and taxes do not increase, ageing pressures could increase the public debt burden by an average of 180% of GDP in G20 advanced economies and 130% of GDP in G20 emerging economies over the next three decades.

0

20

40

60

80

Note: People older than 65 years per 100 people aged 20-64.

Source: Eurostat, UN and national sources.

Figure B. Steep tax increases would be needed to absorb ageing costs Increase in tax revenue by 2060 to keep publicdebt ratios stable

Health % of potential GDP 12

Pensions

Other primary expenditure

Other factors

Total

8 4 0 -4

Note: Primary expenditure other than pensions and health is assumed constant in real per capita terms. Other factors capture the initial gap between primary revenue and the debt-stabilising level, and changes in GDP growth over the projection period.

Source: OECD (2018), “The Long View: Scenarios for the World Economy to 2060”.

FISCAL CHALLENGES AND INCLUSIVE GROWTH IN AGEING SOCIETIES – EXECUTIVE SUMMARY . 3

Pension and health policies must achieve a delicate balancing act To reform public pension systems, governments face a triple challenge: improving fiscal sustainability, reducing old-age poverty risk, and ensuring equity between generations. Linking the retirement age to life expectancy can help keep pension systems afloat without cutting benefits or adding to the burden on the young, though potentially stronger effects on low-income people who have shorter life expectancy should be considered.

Allowing for flexible retirement choices, such as combining part-time work and partial pensions, with adequate financial incentives, can help respond to workers’ diverse preferences and incentivise people to work longer.

Countries with high old-age poverty could expand the pension coverage of non-standard workers and improve the adequacy of safety net pensions.

Figure C. Retirement ages are set to increase in half of G20 countries

Current

Future

those with lower socio-economic status, especially as both saving rates and rates of return are low. Automatic enrolment, matching contributions by employers or governments or fixed nominal subsidies targeted at these groups, and annuitisation can help incentivise participation in voluntary schemes and raise savings. Financial education also needs to be stepped up in many countries for people to make informed retirement planning choices.

Rising health and long-term care expenditure will exacerbate the pressure on public finances from pension costs. Improving health outcomes would help raise the well-being of seniors, especially those with lower socioeconomic status (Figure D), and favour longer active lives.

At the same time, promoting healthy ageing, containing costs and realising efficiency gains in the health and longterm care sector is crucial to ensure sustainability.

Figure D. Health worsens with age, especially for less educated people

Low

% 60

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

Upper secondary

Tertiary

50 40 30 20 10 0

20

25

30

35

40

45

50

55

60

65 Age

Source: OECD calculations from microdata on 24 OECD countries.

40

45

50

55

60

65

70

Note: Normal retirement age for men entering the workforce at age 20. Future refers to people who started working in 2016.

Source: OECD Pensions at a Glance dataset.

Private pension schemes are under pressure: the solvency of defined benefit systems can be at risk from rapid ageing combined with low returns, while defined contribution systems may provide insufficient retirement income for

In many emerging G20 economies, ensuring sufficient

75 coverage of pensions, health and long-term care is the main challenge. Reducing informality will be essential to improve the financing and adequacy of pension and social security systems. Policy action to achieve this goal should rest on three pillars: reducing the costs of formalisation, increasing the perceived benefits of formal employment, and strengthening compliance with regulations through better enforcement.

4 . OECD ECONOMIC SURVEY OF JAPAN – EXECUTIVE SUMMARY

Policies need to help seniors remain active while lifting innovation to meet the elderly’s needs’ The policy response needed to raise employment and living standards in the face of ageing goes well beyond pension reform. Policymakers should strive to enhance the employability of senior workers, enable multi-stage careers and improve the well-being of seniors at work.

Promoting life-long skills development to enhance the career opportunities and productivity of senior workers is a priority, in particular through training in the use of digital technologies. Barriers to the employment of older workers, such as mandatory retirement, seniority wage-setting and lack of flexible work arrangements, should be tackled.

Improving the labour force inclusion of women, youth and migrants helps mitigate the consequences of ageing on the financing of pensions, and can reduce old-age inequality and poverty. Policies that help

reconcile work and family commitments, starting with an expanded provision of affordable childcare, are key to encourage female labour force participation and can also have a positive effect on fertility.

Ageing will create new opportunities for technology to respond to unmet needs of the elderly in areas spanning health care, leisure, financial services or housing. Innovative solutions will be increasingly needed to help the elderly remain healthier, more autonomous and age in their own homes. Countries where policy conditions enable innovation and entrepreneurship to thrive will be best placed to benefit from this growing market.

More info: www.oecd.org/economy/ageing-inclusive-growth/