What are the economic consequences of people living longer?
Writing on the wall: Ashok V. Desai
Till a century or two ago, people could be reasonably sure of dying early and in harness, so they did not have to worry about how they would get through old age. The rise in living standards and reduction in sickness have created the problem of a second childhood: people are at risk of living beyond the age when they can support and look after themselves, and of becoming dependent. Luckily, there is a correlation between standards of living and longevity; societies that bear higher burdens of caducity also have greater resources to bear them. The rich countries created a number of mechanisms — public pensions, forced savings for the private sector, old age insurance, etc — to look after the aged. But two old systems — defined-benefit systems, which give an assured pension irrespective of what a retiring man contributed, and defined-contribution systems, where he earns a return on what he himself has contributed — still dominate.
Longevity does not only create financial problems. Old people also require more help in day-to-day living. Rich countries have the resources to afford that. But they are also more short of workers, whose help many old people need to get through life. Longevity-related problems have engaged the attention of governments of richer countries; an essential component of their solution is pensions. The Organization forEconomic Cooperation and Development, a club of rich countries, has done much work on them.
It finds that countries have tried to cope with the rising burden of pensions in three ways. Some have raised the age at which people qualify for pension. That is not a perfect solution, for people may live even longer; so some countries have explicitly linked retirement age to national longevity. Still, contributory pension schemes reward old people irrespective of their age and need. So some countries redistribute incomes between pensioners on the basis of equity, just as with income tax. Finally, some countries have tried to induce or force people to save more for their old age than they voluntarily would, so that they would cost the state less. Universal pensions paid by the state were the ideal amongst industrial, especially European countries. But they provide only about three-fifths of the pensions. The rest of old people’s income comes more or less equally from private pensions and working beyond the pensionable age.