Jenny François doesn't have the world's most glamorous job. For 20 years she has commuted 45 minutes to the office of insurer Macif in Agen, France, where she punches data from insurance forms into a computer. But in the not-too-distant future, François and hundreds of millions of people like her in the industrialized world could look back at the early 21st century as the beginning of the end of a wonderful era, when even average workers could retire in reasonable comfort in their still-vigorous 50s. Thanks to France's generous pension system, François, 58, is in "pre-retirement." For the past three years she has worked just two days a week and still collects $1,500 a month -- more than 70% of her old full-time salary. Her pay will decline only slightly when she reaches 60. "The system is great for me," François says, "and I think it should be every worker's right."
Lower Living Standards
It's already clear that the system will be far less generous to future retirees in France and elsewhere. And the message isn't going down easy. To avert a looming fiscal crunch, President Jacques Chirac's government in 2003 enacted new rules requiring people to work longer to qualify for benefits. The government endured a national wave of strikes. Italy and Germany also witnessed massive protests after their governments proposed similar measures. Despite electoral setbacks, Japanese Prime Minister Junichiro Koizumi still vows to ram through proposals to hike pension taxes from around 14% of pay to 18% by 2017 and to slash benefits from 59% of average wages now to 50%. In the U.S., the political debate is just starting to heat up over President George W. Bush's proposal to let workers park some of their Social Security contributions in personal investment accounts. Finland, South Korea, Brazil, and Greece all have recently moved or proposed to trim benefits, extend retirement ages, and hike workers' pension contributions.
The rollback of pension promises is just one symptom of one of the greatest sociological shifts in history: The graying of the baby-boom generation. The ranks of 60-year-olds and older are growing 1.9% a year -- 60% faster than the overall world population. In 1950 there were 12 people aged 15 to 64 to support each one of retirement age. Now the global average is nine. It will be only four-to-one by mid-century, predicts the UN Population Div. By then the elderly will outnumber children for the first time. Some economists fear this will lead to bankrupt pensions and lower living standards.
That's why even more cutbacks in retirement benefits are likely. "I don't even want to think about my children's pensions," says Lina Iulita, 72, referring to Italy's hugely underfunded system. "There won't be enough money coming in." In Iulita's town of Dormeletto, on the shore of Lake Maggiore, coffee bars are jammed with seniors. The town's over-75 population has doubled since 1971, and there are one-third fewer children under 6. Local schools and gyms have closed, while senior citizens' clubs are flourishing.
The trend has drawn the most attention in Europe and in Japan, where the working-age population will decline by 0.6% this year. By 2025 the number of people aged 15 to 64 is projected to dwindle by 10.4% in Spain, 10.7% in Germany, 14.8% in Italy, and 15.7% in Japan. But aging is just as dramatic in such emerging markets as China -- which is expected to have 265 million 65-year-olds by 2020 -- and Russia and Ukraine. Western European employers won't be able to count on the Czech Republic, Hungary, and Poland for big pools of low-cost workers forever: They're aging just as quickly. Within 20 years, East Asia's dynamic tigers will be youthful no longer. South Korea, Thailand, Taiwan, Singapore, and Hong Kong will have a median age of 40. Indonesia, India, Brazil, Mexico, the Philippines, Iran, and Egypt will still boast big, growing pools of workers for two decades. But they're on the same demographic curve and will show the effects of an aging population a generation or two later. "The aging workforce is the biggest economic challenge policymakers will face over the next 20 years," says Monika Queisser, a pension expert at the Organization for Economic Cooperation & Development.
The same basic factors are driving this shift: declining fertility and longer lifespans. Both are signs of enormous progress in the 20th century. With rare exceptions -- such as impoverished Sub-Saharan Africa -- birth control and better opportunities for women have lowered birth rates from five or six children per female in the 1950s to as few as one or two today. A fertility rate of 2.1 is seen as the population breakeven point. Over the same period, great advances in health care have added two full decades to the world's average life span, to age 66 now.
For most of the postwar era, the combination of baby booms, healthier populations, and smaller families amounted to what economists call the "demographic dividend," a tremendous, once-only chance to spur rapid development in nations with the right pro-growth policies. As boomers flooded into the workforce -- first in the West and Japan, then Latin America and East Asia -- they provided the labor for economic take-offs. Then, as they became parents, boomers had fewer children. So adults had more money to spend on goods and services and invest in their families' education.
But analysts and policymakers are starting to obsess over the flip side of the story: What happens when the baby boom becomes the geezer glut? How successfully this transition is managed around the world could determine the rise and fall of nations and reshape the global economy. Two key ingredients of growth are increases in the labor force and productivity. If countries can't maintain the size of their labor forces -- say, by persuading older workers to retire later, getting stay-at-home wives to find jobs, or taking in more immigrants -- they must boost productivity to maintain current growth levels. That will be a particular challenge in Europe, where productivity growth has averaged just 1.3% since 1995.
By these measures the U.S. is in relatively healthy shape despite the hand-wringing over Social Security and Medicare. Because of a slightly higher fertility rate and an annual intake of 900,000 legal immigrants, America's population should grow from 285 million now to 358 million in 2025. And the U.S. median age will rise just three years, to 39, over the next quarter-century, before the aging of America really starts to accelerate. The U.S. also has one of the world's most diversified retirement systems, including Social Security, company pensions, 401(k) savings plans that are largely invested in stocks, and private retirement insurance policies.
Nations with insolvent pension systems or insufficient private nest eggs, meanwhile, could face "an unprecedented societal crisis," warns OECD Secretary General Donald J. Johnston. Analysts say pension systems in Europe, Asia, and Latin America will start running into serious funding problems in a decade or two. Further down the road, some economists fear inadequate retiree savings will lead to lower consumption and asset values. The McKinsey Global Institute predicts that by 2024, growth in household financial wealth in the U.S., Europe, and Japan will slow from a combined 4.5% annual clip now to 1.3%. That will translate into $31 trillion less wealth than if the average age were to remain the same. Higher productivity would help, says McKinsey Global Director Diana Farrell. But without radical changes in labor and pensions, U.S. output per worker would have to be at least twice as high as the 2.6% McKinsey projects for the next decade, in part because workers will be a smaller portion of the population. "You would need numbers way north of what we can reasonably expect," says Farrell.
Wharton School finance professor Jeremy J. Siegel also contends that productivity won't be enough to offset the rise in number of retirees. Most pensions now index benefits to wages, rather than inflation, "and wages tend to rise with productivity," he notes. "As wages go up, people will demand higher benefits, so you essentially are chasing your tail." Siegel, famous for his bullishness on investing in blue-chip stocks for the long run, also worries about what will happen when future retirees try to liquidate their nest eggs en masse. To keep asset values from plummeting, Siegel predicts that heavy investments from newly affluent emerging markets such as India and China will have to flow into U.S. stocks, property, and bonds.
Whether such scenarios play out, of course, is anyone's guess. Aging's impact on financial markets isn't well understood, and predicting what the economy will be like in three years, much less three decades, is hard enough. Some argue that only modestly higher productivity will be able to offset demographic shifts and that worrymongers use overly pessimistic assumptions of medical costs. And, with enough political will, certainly governments can do plenty to ameliorate the social and economic fallout. "Most of the debate now is about benefits and taxes, but other levers can be pulled to make the problem more tractable," says Richard M. Samans, a managing director at the World Economic Forum.
The Future Is Now
From Stockholm to Seoul to Santiago, policymakers are seeking to boost private savings in stock and bond funds, lure young immigrant workers, find cheaper ways to provide elder care, and persuade companies to hire or retain older workers. On their own, none of these approaches is seen as a practical solution: Germany would have to more than double its annual intake of 185,000 foreigners to make up for fewer births, while immigration to Japan, now just 56,000 a year, would have to leap elevenfold. And slashing pensions enough to guarantee long-term solvency would mean political suicide. But a combination of sensible changes might make a big difference.
Developing nations with young and growing populations, meanwhile, face other issues. India is on pace to catch up and pass China's 1.4 billion population in three decades, for example. The trouble is, 40% of Indians drop out of school by age 10. Efforts to greatly expand education could determine whether India is a future economic superpower or if it will be burdened with the world's biggest population of poor illiterates. In Iran, an explosion of educated youth now joining the workforce could fuel a takeoff -- or foment political strife if there are no jobs.
Why the sudden attention to a demographic trend that has been obvious for decades? In part, it's because the future is already dawning in many nations. In South Korea and Japan, which have strong cultural aversions to immigration, small factories, construction companies, and health clinics are relying more on "temporary" workers from the Philippines, Bangladesh, and Vietnam. In reality they are becoming permanent second-class citizens. In China's northern industrial belt, state industries are struggling over how to lay off unneeded middle-age workers when there is no social safety net to support them.
Across Europe, meanwhile, baby boomers such as Jenny François in France are retiring in droves -- even though the first of this generation won't reach 65 until 2011. Most of Europe's state-funded pension systems encourage early retirement. Now, 85.5% of adults in France quit work by age 60, and only 1.3% work beyond 65. In Italy, 62% of adults call it quits by age 55. That compares with 47% of people who earn wages or salaries until they are 65 in the U.S. and 55% in Japan. With jobless rates still high, there's been little urgency to change. "I feel like I am in good enough shape to work, but there isn't enough work to go around," says Uwe Bohn, pouring a cup of coffee in his 12th-floor apartment in a drab Berlin high-rise. Bohn, 61, retired four years ago after losing his civil-engineering job and failing for years to find steady work.
But financial pressures and the prospect of future labor shortages are spurring action. In France, business groups, unions, and the government will begin talks in February aimed at changing early-retirement rules. "We must correct fundamental aspects of that system," says Ernest-Antoine Seillière, chairman of French industrial investment firm Wendel Investissement and head of French employer group MEDEF.
With smart policies, older workers can be a boon to the economy, contends gerontologist Françoise Forette, president of the International Longevity Center in Paris. Research shows that better health care means today's veteran workers can remain productive much longer, especially with training, Forette says. "And if people work longer, there is no pension bomb -- even in Europe." A World Economic Forum study to be released at its annual meeting from Jan. 26-30 in Davos, Switzerland, suggests labor shortfalls are solvable. Europe and Japan could make up for the decline in workers by keeping workers from retiring before 65 as well as by raising participation rates of women and people in their mid-20s to U.S. levels.
Some European countries are making progress. In Finland, new government and corporate policies are boosting the average retirement age. No longer is Italian home-appliance maker Indesit Co. coaxing older workers to retire early to make room for younger recruits. Instead, it's teaching its over-50 staff in its seven Italian factories new skills, such as factory and supply-chain management. So far the program is going smoothly, says Indesit human-resource director Cesare Ranieri. Luxembourg-based steelmaker Arcelor, which until 1991 offered early retirement at 92% of pay at age 50, says it has more than doubled productivity since raising the age to 60. Among other things, it hiked salaries for veterans who agreed to extra training and made it easier for them to work part time. "The policy proved very successful," says Arcelor human-resources manager director Daniel Atlan.
What really has pushed aging to the top of the global agenda, though, are ballooning fiscal gaps in the U.S., Europe, Japan, and elsewhere that could worsen as boomers retire. While U.S. Social Security is projected to remain solvent until at least 2042, the picture is more dire in Europe. Unlike the U.S., where most citizens also have private savings plans, in much of Europe up to 90% of workers rely almost entirely on public pensions. Benefits also are generous. Austria guarantees 93% of pay at retirement, for example, and Spain offers 94.7%. Without radical change, pensions and elder-care costs will jump from 14% of industrial nations' gross domestic product to 18% in 35 years, warns Washington's Center for Strategic & International Studies.
Fortunately, the global public appears to be bracing itself for rollbacks. Polling agency Allensbach reports that 89% of Germans don't believe their pensions are safe, from 63% a decade ago. Surveys of workers 25 and over by Des Moines financial-services provider Principal Financial Group (PFG ) found that just 26% of French and 18% of Japanese are confident that their old-age system will pay the same benefits in the future as today.
Japanese workers such as Yumiko Wada certainly aren't in denial. "Old people today get a quite a good pension, so they don't have a problem," says Wada, 30, an office employee in Tochigi. "But I wonder who will support us when we get old." Shunichi Kudo, 35, a salesman at a Fukuoka map-publishing house, says he agrees with Koizumi's plan to raise premiums and lower retiree benefits. "It's going to be difficult, and I don't like it, but I understand why it's happening," Kudo says.
The basic math of Japan's demographic profile is dire. Already, 17 of every 100 of its people are over 65, and this ratio will near 30 in 15 years. From 2005 to 2012, Japan's workforce is projected to shrink by around 1% each year -- a pace that will accelerate after that. Economists fear that, besides blowing an even bigger hole in Japan's underfunded pension system, the decline of workers and young families will make it harder for the nation to generate new wealth: Its potential annual growth rate will drop below 1%, estimates Japan Research Institute Ltd. chief economist Kenji Yumoto, unless productivity spikes.
Japan's fiscal mess is so serious that it's hard to see an alternative to drastic future cuts. In 1998, Prime Minister Ryutaro Hashimoto hiked pension and social security contributions and the value-added tax, cutting disposable income by about $88 billion, or 2.5%. Japan's economy hasn't been the same since. Shock therapy is a "recipe for recessions," says Jesper Koll, chief Japan economist at Merrill Lynch & Co. (MER ). Now, Tokyo plans to raise workers' burden by a more modest 0.3% of gross domestic product each year until 2017. Will that be enough to enable to Japan to meet its obligations to retirees? Probably not, Koll predicts, but Japanese citizens will endure that as well. "At the end of the day, part of the solution is going to be reduced contractual obligations," he says.
Shoring up public pensions is hardly the only avenue nations are exploring. In developing countries, privately managed savings accounts have been the rage. Two decades ago, nearly every Latin American nation had pay-as-you-go systems like Social Security, but more generous. Some granted civil servants retiring in their 50s full salaries for life. Widening budget deficits changed that. In 1981, Chile replaced its public system with retirement accounts funded by worker contributions and managed by private firms. Urged to follow suit by the World Bank, 11 other Latin nations introduced similar features. The movement also spread through Eastern Europe. The upsides have been enormous: Chile helped plug a big fiscal budget deficit, has mobilized $49 billion of pension-fund assets that make it easier for companies and governments to fund investments in the local currency with bond offerings, and most workers have some retirement benefits. Mexico and other Latin nations have seen similar payoffs.
Privatization alone is no panacea, however. For starters, private managers charge fees that often devour one quarter of workers' funds -- prompting calls for fee limits and greater regulation. Also, private funds are leaving many workers virtually uncovered, either because they don't contribute much or work in the so-called informal sector of small, unregistered businesses. In Mexico, only 38% of the 32.6 million accounts are active, receiving monthly deposits from workers, employers, and the government. Of Brazil's 68 million workers, meanwhile, 56% are in the informal economy and get no pensions beyond their own savings. What's more, the pension system for private-sector workers already runs $9 billion in the red each year. As for Brazil's 1.2 million civil servants, they still collect generous benefits and retire early. Yet the public system runs $10 billion deficits, and civil servants have thwarted attempts to scale back.
Argentina's experience also shows that privatized systems can leave the elderly at the margin in a mismanaged economy. As part of its overhaul of the insolvent public pension system, Argentina in 1994 launched a scheme relying on funds managed by 11 private firms. Some 65% of Argentina's 14.5 million workers signed up for the new system. For many people, the 1990s were like "springtime -- a time of great hope," says Maria Rosa Febrero, 49, a day-care center manager who is thankful she didn't invest in the private system. As a ceiling fan rustles piles of paperwork in her spartan, humid office, Febrero gazes at tourist posters of Patagonia's idyllic snow-capped peaks. "The funds were promising huge pensions and a perfect retirement. A lot of people bought into the dream." Unfortunately, the government obliged funds to invest two-thirds of their assets in government bonds. Their value plunged after the 2001 financial crisis, when Buenos Aires forced funds to swap the bonds for new, discounted paper and then defaulted altogether. The government also cut its contributions to pension plans.
Now, Argentina is trying to encourage higher contributions to private funds by offering another debt swap that would restore part of the funds' assets. Needless to say, Argentinians are dubious. "The whole system is poorly managed and totally corrupt," says Marina Amor, 79, who makes ends meet on the same monthly $104 stipend she has received since her late husband retired in 1989 after paying into the public pension for 40 years. "No one believes them anymore. I don't think there are many people left who believe they will ever be able to retire."
The challenge of providing for the elderly is especially urgent in the world's two biggest nations -- India and China. Only 11% of Indians have pensions, and they tend to be civil servants and the affluent. With a young population and relatively big families, many of the elderly can still count on their children for support. That's not the case in China. By 2030, there will be only two working-age people to support every retiree. Yet only 20% of workers have government- or company-funded pensions or medical coverage.
Pension and medical reform. Later retirement. Higher productivity. More liberal immigration. Around the world, governments and businesses are searching for creative policies in each of these areas as they come to grips with one of the most profound social transformations in history. "Right now all of these issues are being dealt with piecemeal," says Ladan Manteghi, international affairs director for the Association for the Advancement of Retired Persons' global aging center. It all adds up to a big agenda -- one that will determine whether the global economy that achieved such astounding progress in the youthful 20th century will continue to prosper as it matures in the 21st.
By Pete Engardio and Carol Matlack
With Gail Edmondson in Helsinki, Ian Rowley in Tokyo, Colin Barraclough in Buenos Aires, Maureen Kline in Milan, William Boston in Berlin, and Rachel Tiplady in Paris