Social Insecurity

Without question, the greatest challenges confronting countries with graying populations are the escalating costs of funding pensions and providing affordable healthcare. Most social security systems throughout the developed world operate on a pay-as-you-go basis—a system of transfers whereby workers support retirees by paying out a percentage of their earnings in the form of payroll taxes. The system was perfectly suited to the demographic patterns of the previous century, when growing populations, large families, and comparatively short life spans worked in tandem to keep the system solvent.

Today, declining fertility rates, longer longevity, and the forthcoming retirement of the baby boomers are turning this pyramid upside down. When the U.S. government first instituted Social Security, the average lifespan was 63 years, although eligibility didn’t kick in until people turned 65. At present, the average lifespan in the United States is 77, yet eligibility has shifted only slightly to 67.

Before too long, there will simply not be enough young people earning enough money to support the growing burden their parents and grandparents will place on social systems. According to projections published by the Center for Strategic and International Studies (CSIS), the average cost of public pensions in the developed world will grow by 7 percent of GDP between now and the middle of the century. The bill will grow even larger among countries that have generous pension plans and are experiencing even more rapid aging. For continental Europe, the additional cost will be 8 percent of GDP, and in Japan, a staggering 10 percent.

But the number of workers available to keep those systems afloat is shrinking. Already, the ratio of working taxpayers to nonworking pensioners in industrialized countries is barely 3 to 1. If current trends continue, that ratio will fall to 1.5 to 1 by 2030. In some countries, such as Japan and Germany, it will drop all the way down to 1 to 1 or lower. In the United States, the retirement of baby boomers will lower the ratio from 4 to 1 to 2 to 1 over the same period. Now factor in rising healthcare costs among older populations—not just medication and visits to the doctor, but nursing care facilities and assisted-living services. Again, CSIS projections offer a startling assessment. Within the next 50 years, public health spending on the elderly could well increase by 5 to 6 percent of GDP in developed countries.

In the United States, the General Accounting Office predicts that twothirds of the entire federal budget could go to medical care by 2050. The combined costs could well ruin the financial situation of many countries that now enjoy fiscal health—and global investors have taken notice. Standard & Poor’s recently warned that country credit ratings could come under intense pressure within the next decade, and that without changes, half of the world’s most advanced economies could slip to BBB ratings (or lower) by the late 2020s.