The implications of aging societies have been rising on advanced economy agendas for a long time. The challenges posed by a shrinking labor force, potential declines in productivity and a growing number of retirees which, in turn, threaten the sustainability of pension systems and public finance in general are cases in point. In the recent past, several middle- and low-income countries have also been increasingly exposed to the aging of their populations. This demographic transition has substantial socio-economic implications and poses significant challenges in different areas. At the same time, it creates opportunities for governments to design innovative policies to adapt to this development.
Against this background, the T20’s Task Force 10 on “Aging Population and its Impact & Migration” has produced twelve policy briefs, which have been presented during the T20 Summit in Tokyo and are freely available on the T20’s website. The recommendations they outline can be grouped in three categories. First, recommendations directly focusing on the reform of pension systems. Second, recommendations on policies that are indirectly linked to pension systems and, hence, also have an impact on their sustainability. Finally, recommendations that have a broader focus and cover issues that are not necessarily linked to pension systems but are, nonetheless, crucial for the success of any strategy seeking to tackle the aging of societies.
Recommendations Directly Related to Pension Systems
Guaranteeing adequate retirement income is vital to ensure that the benefits of economic growth are equitably distributed across society. With this in mind, governments across the world have been taking a variety of steps to deal with the aging of societies and its impact on the sustainability of pension systems. These steps range from specific interventions (including cutting pension benefits and raising retirement ages), to comprehensive reforms (such as the 2008 pension reform in Chile and the 2012 “Fornero Reform” in Italy). Whereas no “one-size fits-all” solution exists, reforming pensions systems is a priority for governments worldwide. Several T20 briefs offered recommendations for steps in this direction, in particular by postponing retirement (e.g. by gradually increasing the retirement age, removing mandatory retirement laws and reducing the use – or increasing the cost – of early retirement), and boosting private savings for pensions as well as eliminating unjustified subsidies such as “privileged pension” schemes. Further emphasis was put on the need to better target the benefits towards the less well-off and to take into account the distributional impact of any policy designed to improve pension systems, e.g. tax incentives to boost pension savings which, in some cases, have been proven to be highly regressive.
Recommendations Indirectly Related to Pension Systems
Reforming pension systems without considering other areas that are strongly interconnected with pension and retirement systems is likely to generate inconsistent policy choices that can jeopardize the overall effectiveness of reforms. For instance, labor force participation (particularly of female and elderly workers) as well as migration and education (financial literacy) are crucial determinants of the sustainability of pension systems, e.g. by directly affecting dependency ratios (the number of persons in active versus inactive age bands). Against this background, several briefs included recommendations to simplify and encourage job seeking for seniors, introduce mandatory and adequate maternity leave as well as paid parental leave schemes. Likewise, in middle- and low-income economies, it is crucial to ensure that the necessary conditions (including level of earnings and job security) for women and elderly workers are satisfied so that the increase in participation rates is not associated with lower wages and worse working conditions. When it comes to migration, some briefs highlighted the critical role for governments to implement flexible immigration policies, as migrants tend to be predominantly of working age and, hence, immigration increases the share of working-age people in the total population.
Broader Policy Recommendations
Finally, some briefs underlined the need of taking a systemic view when it comes to the reform of pensions systems. In this context, several recommendations focused on issues that are not directly related to pension systems but remain vital in order to deal with the aging of societies. For instance, given its significant potential to raise the productivity of healthcare in aging populations, one of the briefs encouraged the use of Evidence-based Medicine (EBM). Other proposals included improving data and analysis on population and economic linkages, tackling informality, increasing public investment in education, housing and (digital) infrastructure as well as boosting foreign direct investment, which is seen as a win-win solution for aging societies and “younger” middle- and low-income economies.
*This ISPI Dossier is a collection of essays that take up the recommendations from the T20, but it is neither a comprehensive reflection nor an official summary of the T20 discussions.