Reform Allows Adjustment to Looming Age Wave

October 15, 2003

In a Boston Globe op-ed, Peter G. Peterson, chairman of the Federal Reserve Bank of New York, explains the unavoidable "age wave" phenomenon, which can be attributed to a worldwide increase in life expectancy and decrease in birth rates. Claiming that "voters have become habituated to pay-as-you-go schemes," Peterson hints that a solution to the fiscal and economic costs might be investment-based reform of pensions. Excerpts of "Facing Up to the Global Age Wave," follow:

"A demographic iceberg looms in the future of the largest and most affluent economies of the world—the challenge of global aging. What's visible above the waterline is the unprecedented growth in the ratio of elderly to working-age people. What lurks beneath the surface are the wrenching fiscal and economic costs that threaten to bankrupt even the greatest of powers, the United States included.

"Global aging is what happens when people start living much longer. Global life expectancy has grown more over the last 50 years than the previous 5,000. Over the next 30 years, it is projected to rise by another seven or eight years—which alone will increase the number of elderly by roughly one-third. If the U.S. Social Security retirement age of 65 had been indexed to longevity since 1935, today's workers would be waiting until age 73 to receive full benefits and tomorrow's workers even longer. In reality, workers throughout the developed world have been retiring earlier, not later.

"Global aging is also what happens when people start having fewer babies. Thirty years ago, the typical woman worldwide had 5.0 children over her lifetime. Today, the global "total fertility rate" has fallen to 2.7. In the developed countries, it has fallen all the way to 1.6—which is 25 percent beneath the 2.1 'replacement rate' needed merely to maintain a fixed population from one generation to the next. There are now fewer babies born each year in Germany than in Nepal, with a population one-quarter as large.

"The central issue is not whether the developed countries will change course, but how and when. If reform happens sooner, the changes can be made with deliberation and foresight and in a way that strengthens our economies, gives families time to prepare, and secures the safety net for those who really need it. If it happens later, the changes may be sudden and painful—and arrive in the midst of financial crisis and political upheaval.

"Timely reform won't be easy. Indeed, the politics are absolutely toxic. Voters have become habituated to pay-as-you-go systems that bank every generation's future retirement on the next generation's resources, rather like a giant Ponzi scheme. People find it hard to believe that a system that worked wonderfully for their parents (who signed up early) won't do nearly as well for their kids (who are signing up late).

"Unlike many predictions about the future, global aging is not a mere hypothesis. It is as close as social science comes to a certain forecast. Absent a Hollywood catastrophe—a colliding comet or an alien invasion—it will surely happen. What remains to be seen is whether humankind can gracefully accommodate the new realities it brings in its wake. Global aging will not adjust to our visions. One way or another, we will have to adjust to it."

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