14 September 2010
Last updated at 07:09 ET
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Ageing populations and fewer workers strain pensions
By Andrew Walker
Economics correspondent, BBC World Service
Governments around the world are faced with the task of funding more old people’s retirement with less money
The world is getting older. In most countries, the population is ageing.
That inevitably has dramatic consequences for pensions and other arrangements for supporting older people.
There are two factors behind the trend. The first is clearly, in itself, good news. People are living longer.
A child born in 1960 could expect to live for 52 years. Today, the figure is 69 years. By the middle of the century, it is likely to be higher still, well over 70.Continue reading the main story
At the same time, people are having fewer children. In 1960, there were 33 births for every 1,000 people. The number has fallen to 20, and it is expected to decline further as people in the developing world have fewer children.
That, too, is arguably good news. It should lead to the global population stabilising, although at a substantially higher level than it is now.
These are all global averages, and the picture varies between countries. Some countries have actually seen life expectancy fall in the last two decades because of the impact of HIV/AIDS. That has especially hit Southern Africa.
But the general pattern is one of longer lives and fewer children.
Desirable though both trends are in themselves, they create a new problem. There are fewer people of working age for every older person.
Decreasing birth rates mean there will be fewer workers to pay for old age pensions
In 1950, 8% of the population were over 60. Now it is 11% and by the middle of the century it will be 22%, according to United Nations projections.
In some countries – Japan, Macau and South Korea – it will be over 40%.
So for those countries with well-developed pension systems, there is a long-term problem from these population trends.
Many state pensions come from contributions made by current taxpayers – it’s an arrangement called Pay as You Go. So on current policies, there will be fewer taxpayers to pay more pensions.
Private pensions are different, but some economists think a smaller working population will tend to depress the value of financial assets and that will in turn affect pensions.
Then there is the financial crisis. It has hit many people retiring in its aftermath, by reducing the value of the financial assets they use to buy a pension.
And because interest rates are so low, the pension you can get for any given amount of savings has also fallen.
In the long term, it might be that developed economies are going to grow more slowly as a result of the crisis. If so, that would undermine the value of pension funds’ assets.
As for public provision, lower incomes and higher unemployment have affected contributions to state pensions.
The story in developing countries is different. Fewer people have any kind of formal pension arrangement. In much of Africa, less than 5% of the current workforce are building up pension rights. In many Asian countries, including China and India, it is between 5% and 25%.
As more people migrate to cities, old people in villages have fewer relatives to take care of them
In developing countries, provision for old age is often informal and based on the family. That arrangement faces its own pressures from population ageing.
A typical older person will have fewer children to rely on. That kind of support works better if families are close at hand. But those links, too, are undermined by younger people migrating from rural to urban areas in search of work.
There are some important variations in how countries are affected by these developments. But it is a global trend and almost all countries will be affected in one way or another.