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Joaquim Oliveira MartinsEconomics Department, OECD

From Ageing to LongevityFacts and policy challenges

European Health Forum GasteinWorkshop 3 – Health and Wealth.

Do healthy and active ageing generate wealth?Wednesday 5th October 2005

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This presentation is based on recent OECD work on Ageing, in particular:

The impact of Ageing on Demand, Factor Markets and Growth by Oliveira Martins, Gonand, Antolin, de la Maisonneuve and Yoo (2005).

OECD Economics Department Working Papers no. 420

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From Ageing to Wealth: What are the links?

Potential Growth

Consumption Capital MarketsLabour Markets and

Productivity

Demographic Trends

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Demographic issues

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The impact of demographics is gloomy: the number of people in working age per

retiree will decrease from 4 to 2…

Table. Increase in dependency ratios, 2000-20502000 2050 Difference

EU15 24.4 50.5 26.1USA 18.5 33.7 15.2Japan 25.2 66.9 41.8France 24.7 51.7 27.0

NB: Dependency ratios=Population 65+/(15-64)

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…and longevity assumptions are on the low side

(A) average gains 1960-2000

(B) projected gains 2000-2050

Difference (B)-(A)

Australia 2.1 1.2 -0.9Austria 2.4 1.4 -1.1Belgium 1.8 1.6 -0.2Canada 2.0 0.6 -1.4Czech Republic 1.1 .. ..Denmark 1.1 1.1 -0.1Finland 2.2 0.9 -1.3France 2.2 1.8 -0.4Germany 2.0 1.2 -0.8Greece 2.1 0.8 -1.3Hungary 0.9 .. ..Iceland 1.7 0.5 -1.2Ireland 1.7 0.9 -0.8Italy 2.4 1.1 -1.3Japan 3.4 0.8 -2.6Korea 5.8 1.7 -4.1Luxembourg 2.2 1.1 -1.1Mexico 4.1 1.2 -2.9Netherlands 1.1 0.5 -0.6New Zealand 1.7 1.2 -0.5Norway 1.3 1.5 0.2Poland 1.5 1.2 -0.3Portugal 3.1 1.1 -2.0Slovak Republic 0.7 1.5 0.8Spain 2.3 0.5 -1.8Sweden 1.7 0.9 -0.7Switzerland 2.0 1.1 -0.9Turkey 5.0 1.6 -3.4United Kingdom 1.8 0.9 -0.8United States 1.7 1.4 -0.3average 2.2 1.1 -1.0

Source: OECD/DELSA Population database and Eco Santé

Table 2.3. Comparison of past with projected gains in life expectancy in number of years per decade

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What is the impact on dependency ratios of indexing the old-age threshold on longevity gains?

5

15

25

35

45

55

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

15

25

35

45

55

65

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Japan

15

25

35

45

55

65

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

5

15

25

35

45

55

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

USA

GermanyFrance

With indexation

65+/(15-64)

With indexation

15

25

35

45

55

65

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

With indexation

With indexation

With indexation

Germany

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Indexing the old-age threshold in line with longevity gains would only contribute to solve the ageing problem if aged workers…

– Remain in good health – Participate in the labour force and are

employed– Pension systems are reformed in order to

remove incentives for early retirement

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Gains in Life Expectancy and in Disability-Free Life Expectancy

In number of years per decade

Males Females

At birth At 65 At birth At 65

LE DFLE LE DFLE LE DFLE LE DFLE

Australia 2.5 -0.9 1.3 -0.7 1.7 -0.9 1.1 -0.6Canada 2.0 0.1 1.0 0.3 1.2 0.2 0.6 0.6Denmark 2.0 n.a 0.8 1.7 1.1 n.a 0.2 0.8Finland 2.5 n.a 1.3 1.4 1.5 n.a 1.1 0.6France 2.3 2.7 1.5 1.2 2.4 2.4 1.6 2.1Germany 2.0 2.6 1.2 1.6 2.0 2.8 1.5 1.9Japan 2.6 3.1 1.6 1.6 3.1 2.9 2.1 1.6Netherlands 1.5 4.3 0.8 1.8 -0.4 4.2 0.3 3.0Switzerland 1.8 1.9 0.9 0.8 1.9 3.7 1.3 2.4United Kingdom 2.2 1.2 1.2 0.6 1.6 0.8 0.8 0.7United States 2.2 1.1 1.0 0.4 2.0 0.6 0.9 0.3

Source: Eco santé.

Does longevity translates into healthy ageing?

- Contrast European vs. Anglo-Saxon countries- Further results from OECD Health Projection Project

Comparison over the period 1980-1990

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Ageing and Labour Markets

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A major change in population structure…(shares by age group in % total population)

EU15 United States

Japan

0.0

2.0

4.0

6.0

8.0

10.0

12.0

04 5910

1415

1920

2425

2930

3435

3940

4445

4950

5455

5960

6465

6970

7475

7980

8485

8990

94 95+

0.0

2.0

4.0

6.0

8.0

10.0

12.0

04 5910

1415

1920

2425

2930

3435

3940

4445

4950

5455

5960

6465

6970

7475

7980

8485

8990

94 95+

0.0

2.0

4.0

6.0

8.0

10.0

12.0

04 5910

1415

1920

2425

2930

3435

3940

4445

4950

5455

5960

6465

6970

7475

7980

8485

8990

94 95+

20002000

2000

20502050

2050

Working age population

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…compounded by the situation in the labour market

Early retirement is a problem

Participation rates of old-age workers are low, in particular in Europe

Participation rates, 2002

0

10

20

30

40

50

60

70

80

90

100

Aged 25-54 Aged 55-64

EU15 USA JPN France Sweden

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(Labour supply, 1970=100)

1. Excluding Czech Republic, Hungary, Mexico, Poland, Slovak Republic.Source: OECD Labour Force Statistics and OECD/DELSA Population Database.

OECD (1)

100.0

120.0

140.0

160.0

180.0

200.0

220.0

240.0

North America

100.0

120.0

140.0

160.0

180.0

200.0

220.0

240.0

EU15

100.0

120.0

140.0

160.0

180.0

200.0

220.0

240.0

Japan

80.0

100.0

120.0

140.0

160.0

180.0

200.0

220.0

With unchanged policies, ageing will induce an absolute decline in the labour force…

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Labour quality may increase:

1. Younger cohorts are more educated than the retiring cohorts

2. Individual age-productivity profiles may stabilise at older ages.

Capital deepening increases labour productivity

Increased labour participation (especially older workers)

…but this decline could be compensated by some factors

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Does the individual age-productivity profiles matter for aggregate productivity?

Flatter after peaking (chap V)

Miles (2003)Flatter

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70

years

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The average age of the labour force is partly recovering from the 'rejuvenating' shock of the 1960s-70s

OECD

35.0

37.0

39.0

41.0

43.0

45.0

47.0

North America

35.0

37.0

39.0

41.0

43.0

45.0

47.0

EU15

35.0

37.0

39.0

41.0

43.0

45.0

47.0

Japan

35.0

37.0

39.0

41.0

43.0

45.0

47.0

In Japan it is already above US/EU in 2050

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Labour quality effects and increased labour participation can compensate the decline in labour supply

Labour supply including quality adjustments and policy scenarios(2000=1)

Unadjusted labour force Adjusted labour force and indexation of the age of retirement 2

Adjusted labour force 1 X X X Burniaux et al. (2003) most optimistic scenario

United States Japan

Germany France

1. Adjusted for productivity (Increasing until 42 and then flat) and education levels.2. Indexed in line with life expectancy gains underlying national projections (see table 2.3).Source : OECD calculations.

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

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How will Ageing affect Saving?

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Population structure affects saving through the life-cycle effects

USA JAPAN

50.0

100.0

150.0

200.0

250.0

300.0

under 25 25-34 35-44 45-54 55-64 65-74 75 and +

Con

sum

ptio

n of

the

unde

r 25

gro

up =

100

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

Post-tax income Total consumption Propensity to save (right scale)

Household survey panel, US 2000

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Ageing is expected to decrease aggregate saving

Coefficients student-t Coefficients student-t Dependent variable: Household saving rate

Control variables: Budget deficit 1

-0.632

-7.5

-0.633

-7.5

Real interest rate 2 0.321 3.4 0.327 3.5 GDP per capita 8.58 10-6 4.4 7.97 10-6 3.9 Inflation 3 0.193 1.9 0.200 1.9 Share of population 25-59 4 0.778 2.8 0.558 1.6 Share of population 60-99 4 -4.267 -7.0 -4.322 -7.0 Share of public health expenditures 5 -0.327 -3.9 -0.335 -3.9 Interaction pension replacement rates & prime-age population

-0.015

-4.1

-0.016

-4.2

Interaction pension replacement rates & old-age population

0.053

5.1

0.054

5.1

Life expectancy at birth -0.400 -0.9 -0.845 -1.4 Time trend .. .. 0.173 1.0 R2 within (country-fixed effects) 0.52 0.51 Observations Period Countries

254 1970-2003

30

254 1970-2003

30

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Ageing, Capital markets and Economic Growth

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1. The “rising contribution rate” scenario: the PAYG system is balanced only by increasing contribution rates.

2. The “gradually increasing age of retirement” scenario: age of retirement increases 1.25 years per decade (as in population projections).

3. The “pension saving” scenario: replacement rate diminishing for new retirees, so individuals have incentives to develop private pension saving.

4. A comprehensive reform scenario: a combination of labour and pension reforms

Alternative pension and labour market reform scenarios

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What are the main drivers of GDP per capita?Projected average growth rates 2001-2050

No-reform scenario: Raising contribution rates to balance pension regimes

USA Japan France GermanyGDP per capita (1) 1.3 1.0 1.0 1.1

Labour productivity 1.6 1.6 1.5 1.5Capital deepening 0.5 0.5 0.4 0.5Total Factor Productivity 1.1 1.1 1.0 1.1

Labour Force 0.5 -0.8 -0.2 -0.5

Comprehensive reform scenario: Pension saving+Increased participation+Indexation age of retirement on longevity

USA Japan France GermanyGDP per capita (2) 1.6 1.4 1.4 1.6

Labour productivity 1.6 1.7 1.6 1.6Capital deepening 0.6 0.7 0.6 0.5Total Factor Productivity 1.1 1.1 1.1 1.1

Labour Force 0.6 -0.7 0.1 -0.1

Population -0.8 0.3 -0.3 0.1

Deviation (2)/(1) 16% 21% 21% 27%

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Ageing may accentuate divergence of GDP per capita…

Ageing and GDP per capita convergence 1

Levels of GDP per capita as a percentage of GDP per capita in the USA

'Rising contribution rate' scenario (2)

60

65

70

75

80

85

90

Japan

France

Germany

Model's projections

'Pension saving' scenario (2)

60

65

70

75

80

85

90

Japan

France

Germany

Model's projections

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Ageing and GDP per capita convergence 1

Levels of GDP per capita as a percentage of GDP per capita in the USA

1. Before 2002, GDP per capita is expressed using PPPs. The dynamics after 2002 reflect only demographic factors.2. Participation rates frozen at their 2000 levels.3. Increasing participation rates at older ages because of rising age of retirement.4. Including effects of recent policies and the most optimistic policy scenarios on future participation rates following Burniaux et al. (2003).Source : OECD calculations.

'Rising contribution rate' scenario (2)

60

65

70

75

80

85

90

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Japan

France

Germany

'Pension saving' scenario (2)

60

65

70

75

80

85

90

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Japan

France

Germany

'Increasing age of retirement' scenario (3)

60

65

70

75

80

85

90

Japan

France

Germany

Model's projections

'Pension saving' scenario with further reforms (4)

60

65

70

75

80

85

90

Japan

France

Germany

Model's projections

… unless this effect is mitigated by comprehensive reforms

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Key policy actions Increase employment rates, in particular of old-age

workers (cf OECD report on Ageing and Employment Policies)

Link retirement age to longevity gains Pension reforms improving the link between pension

benefits and contributions; check interactions with labour markets

Introduce pension funding Create new segments in the capital markets dealing

with longevity risk (annuities, reverse mortgages)

Complementary reforms are more likely to offset the impact of ageing than piecemeal reforms

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Thank you !