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WORLD BANK WARNS OF HIDDEN DANGERS FROM AGING POPULATION IN EASTERN EUROPE AND FORMER SOVIET UNION: ONLY URGENT REFORMS CAN HELP MITIGATE LONG-TERM FISCAL PROBLEMS
Washington, June 20, 2007—By 2025, many countries in Eastern Europe and the former Soviet Union will have populations that are among the oldest in the world, posing a threat to the region’s recent economic success if pension and health care reforms are not adequately tackled and policies are not put in place to promote productivity growth.
Across the world, aging societies run the risks of severe economic consequences. Still, the Eastern Europe and former Soviet Union, comprising some 27 countries from Russia to Albania, is the only regionin the world facing the combined challenges of rapid aging,relatively poor populations and an incomplete transition to mature market economies, according to a new World Bank report. For thesecountries, the problem are heightened by their need to simultaneously accelerate their economic transition and to urgently undertake longer-term reforms addressing demographic consequences, says the World Bank report From Red to Gray: The “Third Transition” of Aging Populations in Eastern Europe and the Former Soviet Union.
“Wealthier and more developed countries such as France, Italy, and Japan, are in much better shape to meet the challenges of aging than the aging countries in Eastern Europe and the former Soviet Union,” explains Arup Banerji, Human Development Economics Manager at the World Bank and co-author of the report. “No aging country anywhere is as poor as Georgia. With a per capita gross national income of just over $1000, it is set to lose almost a fifth of its population over the next two decades. And broader institutional development is still lagging in many countries, even in those that have joined the European Union. It is this interaction of the three transitions – demographic, economic, and political –that makes the region, and its challenges, unique”.
This region is projected to see its total population shrink by almost 24 million over the next two decades. Russia alone is projected to lose 17 million people. These smaller populations will also be much older. By 2025, between one fifth and one quarter of the population in nine Eastern European and former Soviet countries – ranging from Azerbaijan to the SlovakRepublic– will be 65 and older. In 2025, more than one in five Bulgarians will be over 65 years old. The average Slovene will be 47 years old —among the oldest in the world.
The most difficult challenges stem from concerns that the aging populations will exert new – and possibly unaffordable – pressures on public spending, especially for pensions and long-term care for the elderly. These concerns are underscored by the reality that in many of the former communist countries, financing for these systems is already inadequate.
“Implementing sensible policies can ease the spending impact of the aging. Though some increase in public expenditures is inevitable, it is possible to reduce the blow. For that, the countries in the region need to put in policies to make pensionsystems financially sustainable even with more retirees, and to take proactive measures for financing long term care.” comments Mukesh Chawla, World Bank Lead Economist and co-author of the report.
Pension cost pressures are bound to rise as populations age, but the report finds that in all countries where detailed projections were carried out, these costs could be largely offset by changes in policy. The best way to do this would be by reducing retirement ages, which tend to be very low in the region,but savings can also result from changing formulas for how benefit rates are calculated. The precise needed reforms will vary by country – from a combination of both measures in Lithuania and the Slovak Republic, to mostly focusing on lower retirement ages for Albania, Romania, Serbia and Turkey.
The expenditure shock of long-term careraises particular concern; with a rising number of old people unable to take care of themselves, and institutionalization being a costly and often ineffective solution. The key is to design delivery arrangements that are substantially less expensive than hospital services. To achieve this, it is necessary to recognize and support informal caregivers. Cash and service benefits could be incorporated in the care of elderly as a means of maintaining an adequate supply of caregivers. But countries in the region have been slow to realize this, and to begin developing the policies and institutions to lower the potential expenditure shock.
Conventional wisdom says that the kind of demographic change now occurring in this region will halt economic growth. Aging populations would shrink the labor force, and older people would save less – both in turn lowering the labor and capital needed for the region’s countries to maintain their rapid rates of growth.
“This report argues that a low-growth future can be avoided,” says Gordon Betcherman, World Bank Lead Economist and co-author of the report. “If measures are taken to improve labor productivity, this would clearly outweigh the losses due to a smaller labor force. Output in aging countries can also receive a boost from increases in labor force participation through raising retirement ages and encouraging flexible forms of employment. And politics permitting, shortfalls in labor supply can be minimized by interregional migration.”
According to the World Bank, strong productivity will be absolutely essential if the Eastern European and former Soviet countries are to continue growing rapidly and converge to EU incomes and living standards. This will require reforms to deepen financial markets, which will increase saving and investment, and to make labor markets more flexible. Finally, better education and a commitment to lifelong learning and innovation are necessary for the region’s countries to make the most out of their shrinking human resources.
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