IMF: Population Aging Calls for Ambitious Reforms

By Lucia Muchova | April 19, 2012

http://www.telegraph.co.uk/health/elderhealth/9042267/How-to-help-the-aged.htmlThe most recent issue of the IMF’s World Economic Outlook reports that despite some positive outcomes of fiscal consolidation, long term prospects for many industrialized countries remain worrisome. Unless countries put in place consolidation measures for long term stability, their public finances may be put under substantial stress.

Why do countries face this fiscal unease?

Among other important factors such as the Eurozone sovereign debt crisis and declining economic growth, aging population plays a crucial role.

Higher life expectancy is certainly reflective of positive developments in healthcare, technology and increased quality of life. At the same time, however, rapid population ageing we are witnessing in economic giants such as Japan, South Korea, China, Germany and Britain brings with it many social, economic and security challenges.

The Telegraph reports that until recently nearly every pensioner was supported by 4 people of working age. Given the below-replacement fertility rate in many countries, Europe is getting closer to the Chinese 4-2-1 paradigm where one child supports 2 parents and 4 grandparents.

The pressure on government to use deficit financing grows along with the increasing portion of the budget allocated to pensions and health care. The IMF estimates that people worldwide are living 3 years longer than expected on average. Without reforms, advanced economies would have to put in 50% of their 2010 GDP to cover the shortfall in pension savings for those extra 3 years if they were to cover the shortfall now. And these figures do not even cover expenditures on health care.

To be fair, countries are already putting in place fiscal rules to address the demographic challenges of aging population and reform their entitlement programs (e.g. Germany). Russia and Hungary have already embarked on a reform path to encourage fertility growth. Some European countries, such as France and Sweden, have adopted some family friendly policies, increased tax breaks and government bonuses for children. However, more needs to be done to restore a sustainable demographic profile.

This is not to say that falling birthrates are to be blamed on the government but at least the government should make sure that its policies do not actively discourage marriage and family.

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