Population Aging and the Welfare State in Europe

by Ronald Lee and Andrew Mason

[Population Aging to 2030, Day 3, Essay 1 of 3]

Many countries in Europe and elsewhere are aging rapidly.  In part this is occurring because of the enormous strides that have been made in reducing death rates at older ages and in part because of low fertility.  Fertility is particularly low in Southern and Eastern Europe where the total fertility rate, the number of births per woman over her reproductive span, is typically around 1.5 or less.  This means that the next generation will be twenty five percent smaller than the current generation unless fertility rebounds.  This is a recipe for both population decline and an old population, one with more elderly relative to those in the working ages.

Population projections are a powerful tool to look into the future.  We can be confident that in Europe the number 65 and older will rise substantially relative to those in the working ages however defined.  Demography can tell us only so much, however.  The economic effects of changes in population age structure in Europe depend on what people do at each age.  This is changing over time and varies considerably across countries depending on health status, values, public policies, standards of living and a variety of other factors.

Figure 1. Consumption (C) and labor income (Yl) by age in Germany, Spain, and Sweden. Source: National Transfer Accounts

The importance of this can be seen by comparing Sweden, Germany, and Spain.  In Spain and Germany labor income declines very rapidly at older ages as compared with Sweden.  Swedes in their late 50s and early 60s are producing much more than Germans and Spaniards at those ages.   Sweden has a different problem, however, which is very high consumption at older ages, largely due to publicly funded health care and long term care.  One could say that Swedes in their 80s are a much greater economic burden, while Germans and Spaniards in their 60s create more strain.

The support ratio, the ratio of effective producers per effective consumer, provides a way of measuring population aging that allows for differences in consumption and labor income patterns.  The support ratio counts people at each age according to what they produce and what they consume as according to the curves in Figure 1.

Figure 2. Percentage decline in the support ratio, 2010-2030.

By this measure, population aging will have the greatest impact in Germany where the support ratio will decline by over 20 percent between 2010 and 2030.  Germany has two factors working against it – low fertility and low labor income among older adults.  The decline in the support ratio in Sweden, the United Kingdom and the United States is projected to be at about half the rate as in Germany.  Spain is roughly in the middle between these two extremes.

The difference between Spain and Germany is primarily a matter of timing.  Germany is aging earlier than Spain because its fertility declined earlier.  Both countries will experience a decline in their support ratio by about 25% between 2010 and 2050, about twice as great a decline as in the other three countries.

A final element in thinking about the welfare state and population aging is that countries differ greatly in the mechanisms on which they rely to meet the needs of the elderly.  In general, countries in Europe rely more on the public sector than in the US or many other countries.

This is clear in Figure 3 which shows the relative contribution of net public transfers, net familial transfers, and asset-based flows to funding the gap between consumption and labor income for those 65 and older.

There is great variation in Europe with Sweden (SE) relying entirely on net public transfer to fund the old-age support system.  In Germany (DE), about two-thirds of the support comes from public transfers while in Spain (ES) it is closer to one-half.  Population aging will place particular strains on the public old age support system in Sweden.

http://ntaccounts.org/web/nta/show/Population%20aging%20and%20the%20generational%20economy%3a%20A%20global%20perspective

Figure 3. Old-age support system for selected countries. Public transfers, family transfers, and asset-based flows as a share of the lifecycle deficit for those 65 and older. Source: Ronald Lee and Andrew Mason, lead authors and editors, 2011. Population aging and the generational economy: A global perspective. Cheltenham, UK: Edward Elgar.

Note that all the European countries that are shown in Figure 3 rely very heavily on the public sector to fund net consumption by the elderly. None relies on help from children, and generally they rely very little on assets, unlike the US. Figure 3 also shows that some but not all Asian countries do rely on families to provide old age support. In these countries population aging will also put pressure on adult children of the elderly.

Ronald Lee is Professor of Demography at the University of California, Berkeley, and Chair of the Center on the Economics and Demography of Aging (CEDA). Andrew Mason is Professor, Department of Economics at the University of Hawaii and Senior Fellow at the East West Center. They are Co-Directors of the National Transfer Accounts Project.

The Sun Has Yet to Set on China

[Population Aging to 2030, Day 2, Essay 2 of 2]

Recent news of China’s economic slowdown has many American defense analysts predicting the end of the Chinese challenge to US dominance in world affairs. These predictions are based, in part, on China’s rapid population aging and signs of internal political fissures, both of which call into question China’s ability to continue to rise.

Such celebrations are premature. For many reasons, China’s economic power could match or even surpass US power in 20 years. Domestic political and demographic trends in China suggest continued growth, while domestic political and demographic trends in the US are concerning.

Seriously considering this contrarian view of demographic trends in China and the US is important because, as many political scientists have shown, the possibility of war becomes more probable when a rising power sees the decline of the dominant power and acts to surpass it. If Chinese leaders see the following picture of demographic and political trends, they will perceive that the US is in decline while their own power is rapidly rising. The outcome could result in a more aggressive Chinese posture.

The Dragon Still Has Fire

Just as it is possible to see the picture of a declining China that many defense analysts have clung to, we can also easily amass evidence to support the argument that China’s trajectory is positive. Long-term demographic trends in China suggest significant opportunities for growing the country’s economy, even if at a slower pace than the last decade.

First, despite the rapid pace of China’s population aging, the leadership has made few entitlement promises to the elderly and health coverage is sparse, meaning that the direct costs of aging are low.

Second, there will be fewer youth entering the labor market each year as the population ages. Even if China’s economic slowdown is inevitable and the supply of jobs is lower, the demand for them will be lower as well.

Third, the concern over so-called “excess males” in the Chinese population may be overblown. Differential growth in the male population could help China increase its national security through mobilizing surplus males for the state’s economic benefit. China has already recruited young men into large-scale public works projects both in its urban centers and its more remote regions. China has also been sending young men abroad to harvest natural resources on other continents for China’s benefit.

Finally, the Chinese political system allows leaders to focus on long-term planning, unlike the US system, which encourages policies that are politically expedient and take into account the never-ending election cycle.

Signs of US Decline

There are serious signs that the United States is actually the country in decline. Health care costs are sky high in the US, when compared with its peers, and particularly when compared with China. The role of interest groups in US policy making means that narrow interests—such as drug companies or organizations focused on protecting entitlements for seniors—have undue political influence. The US political system is sclerotic and polarized, and the country suffers from high national and personal debt.

Demographically, total life expectancy in urban China is only one year less than in the United States and healthy life expectancy (HALE)—the number of years a newborn can expect to live in “full health” (an adjustment of the life expectancy estimate)—is declining in the US. It is possible that Chinese could soon work longer than Americans.

Additionally, while it is true that replacement-level fertility in the US and continued immigration would prevent the country from aging as rapidly as Europe and Japan—and perhaps even China—the generational gap between old and young Americans bodes poorly for the future of US supremacy. Specifically, young Americans today face a host of serious challenges that will affect their long term economic prospects and, when aggregated, mean that the US in 2030 may be worse off than today.

First, the US has the highest rate of child poverty in the developed world.

Second, trends in education, particularly among minorities, are particularly worrisome considering that minorities will make up an increasing portion of the adult population over the next 20 years. Minorities accounted for 92 percent of the nation’s population growth in the decade that ended in 2010, but blacks and Latinos lag far behind whites in earning a college degree. For those that do manage to get an education, student debt is astronomical, while many recent graduates struggle to find employment. How will this generation take care of retired baby boomers when their own needs are so great?

Third, home wealth has been an important safety net for elderly Americans for generations. The current generation of young Americans differs from previous generations because many can’t afford their own homes. Their needs in old age will be greater than today’s elderly and their demands on state higher. As a result, it is entirely possible that today’s youth will be the first generation in a long time that will not be better off than their parents.

Bucking the Trends

Despite the preceding evidence, there is still reason to give credence to discussions about China’s demise and continued US supremacy. Chinese leaders are right to be worried about the divide in living standards between rural and urban inhabitants. There is also much uncertainty as to what today’s Chinese youth will want as adults. How might they be shaped by their greater educational opportunities, and in what ways will this translate to political demands?  Will they push China to adopt a more democratic political system where power is less centralized and interest groups gain influence?

The United States of America still has several aces as well. American creativity and ingenuity have historically played an important role in economic growth. The sheer size of the US economy and the country’s ability to recover from crises may also be important.

There are ample opportunities for the US to cement its place as the world’s most powerful state by turning more attention to domestic matters, specifically strengthening education—particularly for minorities—and balancing entitlement commitments with other national priorities, like defense. But rest assured, the Chinese will be working on their own domestic issues, as well.

Jennifer Dabbs Sciubba is Assistant Professor in the Department of International Relations at Rhodes College, Memphis, Tennessee, USA. 

Urbanization and American National Security

It has long been the case that American foreign policy is most successful when it reaches beyond governments to societies (think Thomas Jefferson and Benjamin Franklin shaping French attitudes).  The diversification of major power centers in other countries will require our government to shift its focus away from making policy in capitols, simply because capitols will no longer be the place where decisions get made in other countries.  We are ourselves emblematic of this diversification, the separation of our seat of government from our financial capital having been a conscious one to prevent centralization of power.  Natural forces further diversified the geography of American society: entertainment centered in Hollywood; literature in Boston and New York; manufacturing in what is now, sadly, the rust belt; computers in silicon valley and Redmond, Washington.
But our foreign policies have not yet adapted to these changes.  It will not be adequate to talk to government ministers, yet that remains predominantly how we conduct our foreign policy.  There are over twenty cities of more than a million people in which our State Department has no representation; where there are Embassies, they are literal bastions of American power inhospitable (because of security precautions) to engagement with civic groups.  The Foreign Service spends nearly all of its resources on language training, yet the overwhelming majority of our diplomats lack the facility to participate in live debates in the native languages of the countries in which they are posted.  This is the result of a system that prizes generalists; the nature of change in the international order demands specialist skills that we neither recruit or develop in our diplomats.
While the Quadrennial Diplomacy and Development Review acknowledges these shortcomings (even if it is somewhat breathless about the newness of developments that are not really new), State has not followed through with spending and managerial effort to redress them.  Moreover, State still treats shaping attitudes in other countries as a special skill — “public diplomacy” — rather than the most important reason for posting diplomats abroad.  As a society, we are predisposed to understand messy, small-ball mosaics of power and organization; as a government, we are typically too lazy or ignorant to operate that way.  That must change.  We must understand the complexity of other societies and navigate them effectively to build public support, not just engage the governments in power, if we want to remain successful in the international order Global Trends 2030 identifies.
A second major effect of urbanization for American national security will be in the area of immigration.  We have long been the beneficiary of other countries’ deficiencies, drawing their talent.  Richard Rosecrance identified in the mid-1990s the importance amidst globalization of winning the competition for talent.  Rosecrance argued that the traditional elements of state power shifted with a country’s level of development, from controlling territory that produced commodities, to controlling trade that created wealth from manufactured goods, to enabling virtual corporations focused on product design, marketing, and financing (Rosecrance, The Rise of the Virtual State, Foreign Affairs, July/August 1996).  States with the highest level of development would compete for intellectual capital, a factor of production that cannot be compelled by force but must be attracted by opportunity and incentive.
Marx famously said that religion is the opiate of the masses; suburban life as practiced by Americans may likewise be an opiate of the masses.  That is, what most people in the world want is the boring pleasantness of their own house, spending their time taking kids to sports practice and discussing traffic or a local eyesore with their neighbors.  It has a pacifying tendency on behavior, but it is predicated on a standard of living, societal and governmental infrastructure that has been beyond the reach of most countries.  If people don’t need to leave other countries to enjoy the benefits we have, we will get less of the world’s intellectual and entrepreneurial talent coming to us.
And immigration has been the way America compensates for our incapacities.  We import much of our scientific and technical expertise, overcoming the paucity of science education in our own children with the attractiveness of our higher education systems and job opportunities.  As the Economist cautioned in its reporting on London, so here: we are making policy choices that disincline people to choose us, whether because of our homeland security policies or nativist “lump of labor” ideas that jobs are limited and must be preserved from export.  As the rest of the world comes to have the urban and suburban advantages we enjoy, we need to end our complacency and get serious about competing for the world’s talent.  And we need to strengthen our own domestic base, most especially in education.
The third effect of urbanization I would note for American national security results from is who is modernizing: it is the so-called developing world.  As Amartya Sen has put it, the greatest beneficiaries of globalization are the world’s poor. Countries that are urbanizing are those that have been poor and are growing wealthy.  This is to be applauded, not only as a moral good, but as an expansion of opportunity for countries that may take a greater interest in global issues and have the resources to participate in shaping them.  The United States needs more countries to share the burden of sustaining the global order that has served and the world so well.  In the 1940s and 1950s, America believed decolonization would produce a wave of new allies for our policies.  On that basis, we refused Churchill’s pleas to sustain their empire, refused to support our closest allies in a war against Nasserite Egypt.  If we welcome the arrival of countries that have pulled themselves out of poverty, remain a voice for the truths we hold to be self-evident, and emphasize accountable governance, the international order of 2030 has the potential to be even more beneficial to American interests than the one we now enjoy.

Kori Schake is a Research Fellow at the Hoover Institution. She has served in a variety of positions with the U.S. Department of Defense, U.S. Department of State, and the National Security Council staff. Her recent publications include State of Disrepair: Fixing the Culture and Practices of the State Department(Hoover Institution Press, 2012) and Managing American Hegemony: Essays on Power in a Time of Dominance (Hoover Institution Press, 2009).

Share this:

Is America’s Decline Really Inevitable?

One of the two “unlikely but possible” scenarios suggested by Peter Feaver in his post below is that of a resurgent United States combined with an implosion of Europe and/or the BRICs. Such an option is not discussed in GT2030, but I would argue that a scenario that challenges the quasi-conventional wisdom in some circles that “the United States’ (and the West’s) relative decline vis-à-vis the rising states is inevitable” (p.82) is well worth discussing in more detail. In this post, I will address some of the factors that might make such a scenario more more probable than the many would expect, and I’ll particularly focus on the US decline side of the equation rather than the possible implosion of the EU or the BRICs.

Several contributors to this blog already highlighted some of the key advantages that the US will continue to have in 2030 relative to China and other emerging powers, and called into serious question the narrative of “decline.”

Among the strategic trends favoring the US, the most often-quoted ones are:

 

1. Demographic trends, where a combination of higher fertility relative to other potential world powers and immigration continues to give the US an advantage over its potential global competitors

 

2. Technological trends, where US advantages in nanotechnology and what The Economist recently called a “Third Industrial Revolution” brought about by digital manufacturing is likely to bring the high-tech manufacturing jobs of the future back to developed countries from developing ones

 

3. Innovation trends, where the uniquely safe and opportunity-rich entrepreneurial environment of the United States continues to remain the breeding ground for the next Apple, Google, or Facebook. Even though China for example invests large amounts of money in R&D, their return on this investment in terms of innovation is questionable. As the consulting firm Booz&Co documented in a series of reportsexamining the world’s top 1000 biggest R&D spenders,

“Money doesn’t buy results: There is no relationship between R&D spending and the primary measures of economic or corporate success, such as growth, enterprise profitability, and shareholder return.

The comparison of R&D investment with economic performance provides a lens through which we can judge the innovation effectiveness of the Global Innovation 1000. Despite significant variation in innovation investment levels, the sheer magnitude of these companies’ spending leaves little doubt that they are committed to innovation. But the disconnect between R&D investment and performance levels demonstrates that commitment is no guarantee of success”

On the other side of the ledger, how about the worrisome trends referenced by the experts who predict a relative decline? First and foremost, there is the economic argument that China’s overall GDP will surpass the US GDP at some point in the next few decades, perhaps even before 2030, at least at PPP values.  There is a large literature dedicated to speculation about whether the Chinese government will be able to maintain healthy levels of growth while addressing the many political, social and environmental problems it faces, and serious skepticism is in order. Moreover, the PPP (purchasing power parity) measure is only one way to look at GDP, and from a geopolitical vantage point it’s very unclear it is the best one. When measured at market values, the Chinese economy even in the best of circumstances will not catch up for a longer period of time. The same is true for the GDP/capita measure, which could be a proxy for how much Beijing could divert money to foreign affairs as opposed to the domestic concerns of providing for their very large population. After all, as Robert Kagan argues, the relationship between economic growth and geopolitical influence is not nearly as straightforward as we sometimes assume: for example, “It is not clear that a richer India today wields greater influence on the global stage than a poorer India did in the 1950s under Nehru, when it was the leader of the Non-Aligned Movement, or that Turkey, for all the independence and flash of Prime Minister Recep Tayyip Erdoğan, really wields more influence than it did a decade ago.”

Another worrisome trend mentioned by GT 2030 is the state of the US education system: the report echoes a common theme of the national dialogue on this topic: “without large-scale improvements in primary and secondary education, future US workers – which have benefited from the world’s highest wages – will increasingly bring only mediocre skills to the workplace.” From business leaders to the Gates Foundation to countless task force reports, there is overwhelming concern about the poor performance of US K-12 students on standardized scores compared to their foreign peers, particularly in math and sciences. While I share some of this concern, I do so to a much lesser extent than the GT2030 authors. First of all, this is not a new concern: as even some advocates of the importance of improving K-12 education admit, the US has always been an outlier of sorts in this area: “The United States has never done well on international assessments of student achievement. Instead, its level of cognitive skills is only about average among the developed countries. Yet the country’s GDP growth rate has been higher than average over the past century.” One possible explanation for this is the superior quality of America’s higher education system: as the same study notices, “By most evaluations, U.S. colleges and universities rank at the very top in the world.” Another reason has more to do with other strengths of US economic system not related to education performance, such as less government regulation, openness to free trade, and perhaps most relevant for this debate, high levels of skilled immigration.

Something that is missing from this debate is an acknowledgement that, even though American students in K-12 may not do very well at math and sciences, the US economy as a whole traditionally addressed that problem in a two-pronged approach: allowing American students to “catch up” and develop in college the skills needed to go ahead and become successful when they enter the workforce, and also allowing large numbers of international students to study, and then stay over, in the US to work as scientists and engineers. Therefore, one of the easiest and least costly ways to maintain US dominance in science and technology is to make it easier for international students in these fields to remain in the United States and work for US companies without having to go through the onerous visa process currently in place.

One last note on this supposed lack of educational achievement in math and sciences. American students, while perhaps not as capable of solving abstract problems as well as some of their peers abroad, still have some intangible advantages in terms of transferring their skills to solving real-world problems and inventing new products and services to a degree unmatched around the world. After all, had  conducted such tests been conducted during the Cold War, it is likely that the Soviet block states, with their education systems heavily focused on test-taking and abstract problem solving, would have outscored the US and the Western world in general. Yet of course the US remained the hub of technological innovation and led the way in the information revolution in the 1990s and 2000s, as it continues to do today in the era of social networks, cloud computing, and, well, iPhone apps.

Lastly, there is the thorny issue of rising healthcare costs and, by virtue of how Medicare and Medicaid programs are currently set up, of so-called “entitlements.” (The third leg of this problem, Social Security, is much more readily “fixable” in economic terms and it represents less of a long-term concern than medical costs.) It is true that high levels of government spending, if continued at the present trend, will hurt the overall prospects for economic growth by contributing to large fiscal deficits, and, incidentally, also make it more difficult to fund national defense.  However, the recent political trends in Washington point to a serious bipartisan concern about this matter, and while one’s enthusiasm for “bipartisan efforts to achieve a grand bargain” should always be firmly under control, it is not entirely unrealistic to assume that the US will find its way out of the current fiscal morass sooner than we may think.

I welcome your comments on any one of these trends, and suggestions for other areas of inquiry on the issue of the “inevitability” of US relative decline.