NCPA - National Center for Policy Analysis


May 16, 2005

The developing world is rapidly ageing and there will soon be more retirees than ever before. The Economist reports that this changing demography will create severe challenges for the pension systems of developed nations.

Furthermore, age-related spending will wreak havoc on government budgets if policies remain unchanged:

  • In Germany, America and France, public debt will balloon from about 65 percent of gross domestic product (GDP) now to over 200 percent in 2050.
  • In Britain, it will rise from about 40 percent to over 150 percent.
  • This would cause credit ratings to tumble in the 2020s: solid sovereign debt would turn to junk by 2035.

The rise in public-sector debt is not a certainty, because governments can change their policies. However, drastic changes are needed to avert a serious situation, says the Economist.

The problem with serious change is that current workers are already getting a poor deal from their pensions. A report from the Organization for Economic Cooperation and Development (OECD) analyzes how much today's young workers can expect from their pensions when they retire in around 40 years time, after accounting for taxes:

  • British citizens will receive roughly 80 percent back in pensions of what they paid in taxes.
  • Many developed economies have already pared this rate to below 70 percent.

The Economist recommends that governments extend working lives by increasing the retirement age and reducing the benefits of early retirement. While workers may not like working longer, it may be the only way to avoid a public finance disaster.

Source: "Debt threat -- Aging and public finances," Economist, March 26, 2005.

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