Aging Societies and Sustainability of Social Costs: Learning from older societies

We are often told by political leaders that our aging populations will place such demands on social programs – social security, medicaid, medicare, old age security, guaranteed income supplement, chronic and graduated care, etc. – that these programs are “unsustainable” and therefore need to be “reformed,” which usually means reducing benefits. This reasoning tends to be based on projections that program spending will increase as a percentage of GDP, and on concerns that there will not be enough workers paying taxes to support the increasing numbers of elderly who are also living longer.

It occurs to us then, that “developed” countries which have relatively younger populations – such as Canada and the USA – could benefit from the experience of countries in similar economic circumstances but with older populations – such as France, Germany and Sweden. These countries are well ahead of North America, as much as twenty years, in their population aging cycles. That does not mean that the populations of the countries are identical but just in different stages – even the Canadian and US populations are quite different, for example, in their production of children and their overall growth.

The OECD has developed population projections to 2050, along with projected public expenditures for pensions and health care (assuming current program characteristics continue).

To begin, the younger societies: Canada and the USA currently have an “old age dependency ratio” (people 65 and over as a percentage of those 20 to 64) of about 22%. Canada’s ratio will increase to about 44% at about 2050. The US ratio will hit 38% about 2030 and then level off. (The US fertility rate is significantly higher than Canada’s, so their working age population will grow more quickly.)

Now the older societies: Germany is around 33% now, and will hit about 54% around 2030 and then level off or decline a bit. France is just over 30% now and will hit 50% about 2030 and level off a few years after. Sweden is around 34% now, and will level off at about 46% about 2040.

The OECD points out that many public expenditures are sensitive to demographic changes. They include:

programmes permitting early withdrawal from the labour market (long-term unemployment, disability, and early retirement programmes for labour market reasons), health care and long-term care for the frail elderly, family/child benefits and education.

So what about public expenditures on pensions?

The USA currently spends between 4 and 5% of GDP on pensions, and this will increase to perhaps a bit over 6% by 2050. Canada spends about 6% and will add another 5% by 2050 (not clear if OECD adjusted the projection to account for the recently announced change to Canada’s age of eligibility for Old Age Security, from 65 to 67 years).

Germany, however, spends over 12% now and will add another 4-5% by 2050. France is in the same situation as Germany, spending more than 12% now and adding another 4% in future. Sweden is spending 9% now and will add another 2% by 2050. The OECD points out that differences in pension spending are heavily influenced by program design.

Nonetheless, with Germany and France spending as much now as Canada and the USA will need to in 2050, and Sweden also well ahead in the cost cycle, it is first apparent that the economies of these countries have not been brought to their knees. The sustainability threshold, if there is one, does not appear to have been breached. So defining what is “sustainable” appears to be more a political than an economic question.

In future issues, we will explore whether the story is the same for health and social care, and whether there are lessons to be learned from the more rapidly aging societies, especially in program design.

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