The argument fails to convince the French, who refuse to accept the explosive situation that awaits them in a few years. However, according to the UN and all the international social welfare organizations, life expectancy on the planet will go from 71.7 years in 2022 to 77.3 in 2050. And this reality, added to the considerable reduction in the birth rate in the last half century, will force the retirement age to rise throughout the world.
“If nothing is done quickly to extend the length of working life, we will see declining living standards in the coming decades. Due to aging populations, there will be fewer and fewer people of working age to finance the pension of more and more elderly people”, warns the Organization for Economic Cooperation and Development (OECD) in a report.
Look: New protests in France after forced adoption of pension reform
Since the Second World War, the world has witnessed an accelerated aging of the population, especially in industrialized countries. The segment of the 65 years doubled in advanced countries, culminating in 22.7% of the total population in Japan, 13% in the United States and Canada, and 16% in Europe.
Based on the persistence of the current demographic advance, according to the most probable scenario, the UN estimates that the number of people over 60 years of age will total 1.2 billion in 2025 (15% of the total population) and 2 billion in 2050 (22% of the total).
For their part, demographic giants such as India and China, which account for 38% of the 7 billion humans on Earth, will propagate that shock wave that is the “globalization of aging”. By 2050, one third of Chinese people will be 60 or older, a consequence of state policy of wan xi shao (late marriage, spaced and few births), combined with the coercive measure of the only child decreed in 1979, and whose annulment seven years ago does not seem to yield any results.
It is not necessary to have much imagination to anticipate the magnitude of the consequences generated by the dizzying aging of the South. Versus endemic problems that have dragged on for decades, the prospects of the most fragile countries to create the necessary social protection systems or, otherwise, assume the consequences, seem more worrying than ever.
Globally, close to half of the people who are over the legal retirement age do not receive any pension. And for many who receive it, the level of it leaves them below the poverty line. Under the current texts, only 42% of people of working age can expect to receive a pension in the future.
In recent years, many low- and middle-income countries have begun efforts to expand the coverage of contributory pension schemes or install non-contributory pensions to ensure basic security for the elderly. In the same period, the countries that make an effort to improve their public finances, reform their pension systems to reduce expenses, especially increasing the retirement age, limiting benefits and increasing contribution levels.
In any case, for those governments that really care about their administrations, the retirement systems —whether by distribution or by capitalization— have become a major concern. And although the great evolutions of the population constitute a common problem, the situation in each country has a particular dimension that depends on two factors: the degree of intensity of the demographic transformations and the existing pension systems. In certain cases, relatively modest adjustments will be enough to perpetuate the system; in others, more radical reforms will be necessary.
A retirement system is generally a puzzle. Originally, there were two large retirement models, one based on the contribution of workers, invented in Germany at the end of the 19th century. (known as “Bismarck”) and another inspired by the English economist William Beveridge, which is based on a principle of universal insurance financed by taxes. (called “Beveridge”).
Today the systems have evolved and are generally based on mixed financing, both by the workers and the State. In France, as in most European countries, the pension is financed through the distribution system: the contributions of the assets are used to pay the pensions of the retirees. On the contrary, in a capitalization system, workers save for their own pension. The sums saved can fructify through pension funds, as happens, for example, in the United States.
The European model
“The pension reform is essential when we compare ourselves to the rest of Europe,” the president stated in January Emmanuel Macron. Since he presented his bill, comparisons with one or another European country regularly enter the debate, to justify or criticize it.
But is it really pertinent to try to compare the British New State Pension, founded on a strong dose of capitalization, with the French system, which favors distribution? Or the Baltics, for whom more than a third of the pension is made up of income from post-retirement activity, and the French, who work the least in Europe once they retire?
In any case, all European countries have a distribution system… dotted with capitalization at different levels. In Great Britain and the Netherlands, the amounts managed by pension funds or private retirement funds account for more than half of the total retirement costs.
The subtleties and differences are so many that perhaps it is better, as the OECD does, to limit itself to comparing the average net income of those over 65 years of age with that of the total population. Then they appear, in front, Luxembourg, France, Italy and Portugal. While at the end of the peloton, the Balts and the Czechs suffer a significant lag in relation to the rest of the population when they arrive at the pension.
China, population in decline
If there is a country —much more than France— that will have to strengthen its pension system at a forced march, it is China where, for the first time, its population decreases: 850,000 fewer people in the last 12 months (nine million births; just under ten million deaths). And that, without counting the Covid pandemic.
Although the negative demographic balance is also valid for its Japanese or South Korean neighbors, in China it is unprecedented since 1961. And this time it is structural. The reversal of the trend occurs much faster than expected: the UN imagined it from 2031. And as life expectancy increases at the same time, approaching 80 years, demographic aging is inevitable. In other words, at the current rate, the Chinese population should be cut in half. -yes, half- at the end of the century.
This represents a huge problem for pensioners, although Beijing does not say so. In the near future, the country will lose three million assets per year. In a decade, those over 60 years of age will be equivalent to 30% of the population. And the cost of retirement could represent 20% of GDP, when in France it is barely 14%.
At the moment, China’s pension system is both generous and unfair. Generous because it is advantageous for the beneficiaries: retirement at age 60 for men and 55 for women. Unfair because in the countryside, pensions are non-existent.
But, with the current demographic trend, the system will soon be insolvent. Power knows this and has begun to reform, opening the possibility of individual complementary retirements by capitalization. Even so, China will not be able to escape a more structural reform of progressive increase in the duration of contributions.
Transition in Latin America
Latin America does not escape the demographic transition of the rest of the world. Their populations will increasingly live longer, making the pension systems more and more expensive. According to a 2015 ECLAC report, countries such as Uruguay, Argentina and Brazil allocated 10% of their GDP to pension payments, while the others were below 5%.
Regarding total public spending, what was allocated to pensions was between 25% and 40% in cases such as Colombia, Brazil, Argentina and Uruguay, while in the rest of the region the proportion was less than 20%, and did not even reach 5% in Peru.
But it is estimated that, in the next 50 years, the cost of pensions in Latin America will practically double, while those expenses in OECD countries will only increase by 20%. This implies a huge challenge for the entire region. How to finance their systems, taking into account that, in general, the debate takes place in contexts of scarcity of resources, without the possibility of proposing alternative schemes to obtain income that make it possible to deal with these situations?
United States, limited reserves
In the United States, a country that is generally considered the kingdom of private pension funds, these are extremely controlled by the representatives of savers: unions of civil servants or professionals. In any case, the main financier of 61% of the pensions paid to American retirees is the public system, Social Security.
The United States will, however, face the same problem as France in order to keep that system afloat. Even though Social Security is much less generous than European regimes —with a pension that represents 51% of the last salary, against 74% in France— its costs have already started to exceed its revenues in 2021. According to all studies, unless new ways of financing are found, the reserves will be depleted by 2035.
The Mercer CFA Institute publishes its index every year Global Pensions (MCGPI), result of an exhaustive comparative study of retirement systems around the world. It makes it possible to identify weaknesses and define the paths for reform to guarantee a sufficient level of pension and a permanent financial balance.
In its 2022 edition, Mercer compares the pension systems of 44 countries. Iceland obtains the highest value (84.7), followed by the Netherlands (84.6) and Denmark (82). youThailand comes in last place (41.7), while Argentina is third from last (43.3), well below the average.
Among the Latin American countries, Chile obtains the best score (68.3), ranking 16th and surpassing the United States (63.9), which comes in 20th place. In relation to the previous year, the report notes that “it was Mexico that made the most progress, thanks to its pension reform, which improved people’s living conditions and retirement regulations.”
By Luisa Corradini
I am Jack Morton and I work in 24 News Recorder. I mostly cover world news and I have also authored 24 news recorder. I find this work highly interesting and it allows me to keep up with current events happening around the world.