Fiscal challenges and inclusive growth in ageing societies Dorothée Rouzet Aida Caldera Sánchez Théodore Renault Oliver Roehn OECD Economics Department September 2019
G20 populations are ageing rapidly Expected life expectancy at age 65 1980 Japan France Spain Korea Italy Australia Canada United Kingdom Germany United States Mexico Brazil Turkey Argentina China Saudi Arabia Russia India South Africa Indonesia 65
2015
Old-age dependency ratios
Number of people older than 65 years per 100 people of working age (20-64)
2060 90 80 70 60 50 40 30 20 10 0
70
75
80
85
90
95 Years
Source: National sources; Eurostat Population Projections (2008 revision); UN World Population Prospects, 1950-2050 (The 2008 Revision); United Nations World Population Prospects: The 2017 Revision.
2
The public debt burden is already high G20 advanced economies % of GDP 250
2017
2007
G20 emerging economies
% of GDP 250
200
200
150
150
100
50
0
100
50
0
% of GDP
2017
2007
% of GDP
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
Note: LHS panel: Public debt ratios are based on the national account definitions except for EU countries where debt ratios based on Maastricht criteria are shown. RHS panel: Total stock of debt liabilities issued by the general government Sources: OECD Economic Outlook database, and IMF Global Debt database.
3
WHAT ARE THE COSTS OF AGEING?
4
Ageing will weigh on living standards in most G20 countries Working-age population contribution to annual GDP per capita growth Between 2018 and 2030
Between 2030 and 2060
%
%
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
-0.2
-0.4
-0.4
-0.6
-0.6
-0.8
-0.8
Source: Guillemette and Turner (2018), “The Long View: Scenarios for the world economy to 2060�, OECD Economic Policy Paper.
5
Ageing will increase public pension costs Public expenditure on pensions % of GDP 20 18 16 14 12 10 8 6 4 2 0
2015*
2060**
% of GDP
Note: * 2015 or latest available. **Projections are until 2060 for France, Germany, Italy, Spain and the United Kingdom; 2055 for Australia; and 2050 for the others. Projections assume no further policy changes in the projection period. Source: European Commission and Standard and Poor's.
20 18 16 14 12 10 8 6 4 2 0
6
Ageing will increase health expenditures Public health spending projections % of GDP 18
2016
2030
2060
% of GDP 18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
Note: Public health expenditure includes long-term care spending. Expenditure excludes investments. Source: OECD Health Statistics 2017 database; OECD Long-Term Model; and OECD calculations.
7
The need for long-term care will increase Costs of LTC for people of retirement age or older % of disposable income
Note: Percentages are averages of 13 OECD countries. Low, moderate and severe needs correspond to 6 ½ , 22 ½ and 41 ½ hours of care per week, respectively. The costs of institutional care include the provision of food and accommodation, so are overestimated relative to home care. Source: Muir (2017), “Measuring social protection for long-term care”, OECD Health Working Paper.
8
Increases in taxes will be needed to contain ageing-related fiscal pressures… Change in tax revenue necessary by 2060 to stabilise debt ratios at current levels Health expenditure
Pension expenditure
Other primary expenditure
% of potential GDP 15
Other factors Total % of potential GDP
15
10
10
5
5
0
0
-5
-5
NLD
AUS
FRA
GBR
ITA
KOR
DEU
ESP
JPN
CAN
USA
Note: Projections are based on current policy settings. Based on projected government pension expenditures from European Commission (2018) and Standard and Poor’s (2016), and projected growth in public health care expenditure per capita with the methodology of Marino et al. (2017). Other primary expenditure is assumed to remain constant in real terms on a per capita basis. “Other factors” mostly capture the initial gap between primary revenue and the level that would stabilise the debt to GDP ratio, but also changes in GDP growth rates over the projection period. Source: Guillemette and Turner (2018), “The Long View: Scenarios for the world economy to 2060”, OECD Economic Policy Paper.
9
‌ and avoid a rapid increase in public debt G20 Emerging
G20 Advanced % 400
Without ageing pressure
With ageing pressure
% 400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
2010
2020
2030
2040
2050
2060
Without ageing pressure
0
2010
2020
2030
With ageing pressure
2040
2050
2060
Note: In the scenario without ageing pressures, the cyclically adjusted primary balance as percent of GDP is held constant at the (projected) 2020 level. The ageing pressure scenario includes health and pension expenditures projections; other primary expenditures are assumed constant in real per capita terms. Primary revenues are held constant in percent of GDP. Growth and interest rate projections are based on the OECD Long-Term Model. In the scenarios, the growth and interest rate differential is gradually turning positive over the projection period. Aggregates are weighted averages using GDP at market prices. The G20 Advanced aggregate includes Australia, Canada, France, Germany, Italy, Japan, Korea, the United Kingdom and the United States. The G20 Emerging aggregate includes Argentina, Brazil, China, Indonesia, India, Mexico, Russia, Saudi Arabia, South Africa and Turkey. Source: OECD calculations.
10
Ageing could exacerbate poverty risk Poverty rate by age %
66-75
76+
Whole population
60 50 40 30 20 10 0
Note: 2016 or latest year available. Poverty defined as having incomes below 50% of median equivalised household disposable income, after taxes and transfers. Source: OECD Income Distribution database.
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REFORMS TO ADDRESS AGEING COSTS
12
A combination of policies is needed Reforming public and private pension systems
Promoting labour force participation of older workers and other groups, including women, low skilled, youth and migrants
Containing the increase in health and long term care spending
Lifting productivity and leveraging the “silver economy� for innovation and entrepreneurship
13
Most countries have limited room to increase contribution rates to improve pension adequacy Mandatory pension contribution rates for an average worker % of gross earnings of the worker, 2016
% 35
Public
Private
30 25 20 15 10 5 0
Note: Contribution rates include employee and employer contributions. The rates for both employee and employer are based on the gross earnings of the worker. * indicates social insurance contribution, including non-pension benefits. Source: OECD Pension at a Glance 2017.
14
Retirement ages will continue to increase in some countries Normal retirement age in G20 countries Current
Future
Brazil Indonesia India Saudi Arabia South Africa Russia China Turkey Korea France EU 28 Spain Argentina United Kingdom Mexico Japan Germany Canada Australia United States Italy 40
45
50
55
60
65
70
Note: Retirement age for men entering the labour force at age 20. Future retirement age is for people who entered the labour force in 2016, based on currently legislated provisions. Announced but not yet legislated measures are not reflected. Source: OECD Pensions at a Glance dataset.
75 15
Some recent pension reforms • Link retirement age to life expectancy: Denmark, Finland, Italy, Netherlands, Portugal, Slovak Republic • Automatic adjustments of benefits: • To life expectancy • To dependency ratios or fiscal balances of PAYGO (paying attention to low income earners) • Germany, Japan, Portugal, Spain, Sweden • Flexible retirement (combining work and retirement; retirement age) with adequate financial incentives: e.g. Germany 16
Linking retirement age to life expectancy could mitigate ageing costs Increase in GDP per capita by 2030 if minimum and normal retirement ages rise by at least two-thirds of gains in life expectancy at 65 Relative to baseline
1.6
%
1.2 0.8 0.4 0.0
Source: OECD calculations.
17
Policies need to incentivise private savings Financial literacy
%
% of respondents achieving the minimum target score on financial knowledge
100 90 80 70 60 50 40 30 20 10 0 Note: The minimum target score is reached when answering 70% of the financial knowledge questions correctly. G20 is the simple average of the country percentages for all G20 countries with comparable data. G20 countries that are excluded from this figure do not have comparable data. Source: G20/OECD INFE report on adult financial literacy in G20 countries.
Examples of policies to encourage private pension savings • Introduce automatic enrolment systems • Simplify the contribution process • Improve the structure of incentives • Promote the annuitisation of accumulated assets for the pay-out phase • Make reliable mortality tables available • Improve financial literacy 18
Promoting longer working lives goes beyond the pension system Reducing incentives for early retirement
GOVERNMENTS EMPLOYERS UNIONS CIVIL SOCIETY
Promoting employability throughout working lives
Encouraging employers to retain and hire older workers 19
Highly educated older workers are more employable Employment rates of older workers 55 to 64, by educational group
%
Tertiary education
Upper-secondary education
No upper-secondary education
100 80 60 40 20 0
Note: Data on upper-secondary education or below are not available for Japan. Source: Calculations from the OECD Education Database.
20
Policies need to promote healthy ageing and contain costs in the health sectors Share of people reporting bad health by age and education
Lower educated
• Promote healthier lifestyles, e.g. in curbing tobacco, alcohol consumption or obesity
Medium educated
Higher educated
%
60
Examples of health policies
50 40
• Contain health costs in introducing budgetary caps
30
• Tackle wasteful spending • Promote competition among health care providers
20 10 0
20
25
30
35
40
45
50
55
60
65 Age
Note: “Low”, “medium” and “high” levels of education correspond to International Standard Classification of Education (ISCED) codes 0-2, 3-4, and 5-6, respectively. Source: OECD calculations from microdata on 24 OECD countries.
• Increase the scope of goods and services covered by basic health care coverage 21
In many emerging economies, the priority is to expand coverage Informal employment % of total employment Female
% 100
Male
90 80 70 60 50 40 30 20 10 0
Chile
South Africa
Brazil
Argentina
Indonesia
India
Note: Data as of 2018 or latest available. Employment in the informal sector comprises all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status in employment and whether it was their main or a secondary job. Source: ILOSTAT database.
22
The gender gap has been reduced but remains high in some countries Difference in employment rates between men and women % pts
2000
2018
60 50 40 30 20 10 0
Note: Employment rates refers to employment to population ratios for people aged 15-64 years old. Source: OECD Labour Force Statistics.
23
A better use can be made of migrants’ skills Differences in employment rates between foreign-born and native by level of education 30
% pts
Low-educated
Highly educated
20 10 0 -10 -20
Note: Data for 2015-16.
24
Key takeaways Reforming pension systems in an equitable way and containing the increase in health costs and long term care costs • Link retirement age to life expectancy and allow for flexible retirement with adequate financial incentives • Encourage private savings, e.g. with automatic enrolment and matching contributions, and improve financial literacy • Health systems: contain costs and improve efficiency to ensure fiscal sustainability • In emerging economies, the key challenge is reducing informality to ensure sufficient coverage and financing of pensions, health and LTC
Raising labour market participation and productivity • Tackle barriers to employment of older workers such as mandatory retirement, lack of flexible work arrangements and seniority wage settings • Promote skills development for older workers and life-long learning • Improve labour force participation of women, youth and migrants • Boost productivity, entrepreneurship and innovation with structural reforms
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