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Diplomacy in Action

Global Aging Trends: Addressing the Challenges and Opportunities

Michael Hodin, Executive Director, Global Coalition on Aging; and Marko Mrsnik, Author, Standard & Poor's Global Aging Report
New York, NY
March 20, 2013




State Dept Image/Mar 20, 2013/New York, NY
Date: 03/20/2013 Location: New York, NY Description: Mike Hodin, executive director of Global Coalition on Aging; and Marko Mrsnik, author of the Standard & Poor's Global Aging Report, brief at the NY Foreign Press Center on ''Global Aging Trends.'' - State Dept Image

3:00 P.M., EDT

NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR

MODERATOR: Hi. Good afternoon. Welcome back to the New York Foreign Press Center. Thank you so much for being here today. We are very pleased to have Mike Hodin, who is the executive director of Global Coalition on Aging, and Marko Mrsnik, author of the Standard & Poor’s Global Aging Report.

As Under Secretary for State Robert Hormats said, those countries that utilize their aging populations most productively and effectively are likely to be those that are most competitive internationally over the course of the next 20 to 25 years. So we’re fortunate to have these gentlemen talk about this seminal issue today, and I will open it up for some opening comments. We will then direct it to questions. Once you do state your question, please also state your name and affiliation.

So, we’ll start with Mike and then move on.

MR. HODIN: Well, thank you. Perhaps I’ll just open up with a general set of comments and then ask Marko to review the analysis.

As was just indicated, we think that global population aging is the seminal topic of our 21st century. The S&P report has made enormous progress in helping to understand what this is and, very importantly, begin to point all of us – governments, public policy institutions, corporations – toward what our own solutions might be. Perhaps I could simply suggest that we think about this in terms of not just the longevity, how we are all living longer, which is one of the great miracles of the 20th century, but the stunningly low birthrates that we now see in country after country around the world, which together make up a different proportion of old to young in the 21st century, which then is what has the consequences with respect to this – these questions around fiscal sustainability, economic growth, social stability even. And it’s really there where the S&P analysis, it seems to us, is utterly central and has been one of the most important voices. Your original report, beginning of the 21st century – the one in 2010 was truly seminal, and now the one today we welcome.

So Marko, please.

MR. MRSNIK: Thank you very much. Thank you, everyone, for joining us today.

What I would like to say at the beginning is that at Standard & Poor’s, we have been following population aging and its impact on the budgets as well as on public finance sustainability at least since 2002. So we have been publishing regularly on the topic, and now this report covers 50 sovereigns across the world, which gives us a very good idea of what is going on in this respect across the world.

Public finance sustainability is not related only to the demographic aging. It’s related to the fact that we live in countries that have established social security systems, that are providing us with healthcare, pensions, services, and that are, of course, facing challenges as the demographic aging takes place and as it will – increasingly kicking in into not only the overall social fabric, but also, of course, into public finances. And from – in this respect, on a no-policy base – I mean, in a no-policy change scenario, we expect budgetary pressures to keep growing. And of course, the sovereigns have the possibility of raising taxes further, but it may be not so desirable to do that further, and it may prove increasingly difficult to do so. So they may be looking for other alternative ways to deal with these issues. And that’s precisely what has been going on since the last report in 2010.

Namely two conclusions that we can draw from this year’s report are the first one, that the budgetary consolidation that is taking place since at least 2010 or 2009 is having beneficial impact on the long-term sustainability of public finances because it aims to fix, say, the current budgetary situation while at the same time, of course, this is then improving the prospects for the future. At the same time, the sovereigns, the countries, have been very active in implementing a number of pension and healthcare system reforms in order to reduce the future pressures on the budgets, at the same time also thinking about how to embed the structural component into the ongoing budget reconsolidation.

So these two prongs have a very important, potent impact on the long-term sustainability of public finances going forward. And particularly in Europe, we saw this trend being – playing out very strongly, in some cases very strongly under market pressures, which also led us to a conclusion that unless countries do change their structure policies well in advance, they may actually need to change them abruptly, which is, of course, negative for the overall social support for such measures, but also it hurts the economy, the jobs, and we are observing that in particular in some of the European countries in the Eurozone.

On the whole, I think we have been observing a very positive trend of countries being actually able to rise to the challenge. That’s why we are publishing this report with a title of Rising to the Challenge as we foresee that future age-related spending is likely to decrease below what we had expected previously, for example, in 2010 report. As we are a rating agency, we are also studying the implications of such trends on creditworthiness, and I can tell you that comparing to 2010 report, we see this time around less rapid erosion of creditworthiness across a large number of sovereigns.

I think I’ll leave it here, and I’m looking forward to a discussion.

MODERATOR: If you have any questions, please state your name (inaudible) and wait for the microphones (inaudible).

QUESTION: Hi. Heidi Skjeseth from Dagsavisen, Norwegian daily. I mean, this is not your quote, but the quote of Hormats has said that these – the countries who utilize the aging population more productively will be among the most competitive nations in 20, 25 years. Could you – is there any countries that you see now that do utilize their aging population in a productive way?

MR. MRSNIK: I think we are observing this trend increasingly in Europe. Europe is, in terms of demographic structure, quite an old continent. That’s why it’s called like that too. And in this respect, what has been happening as the cohorts are – of population are getting older, they’re – of course, they want – would still like to be active. And it’s for the governments to enable them to do so. Sometimes they face difficult times. They may be discriminated against. So in order to do that, many countries have been passing legislation against discrimination of elderly in the labor market.

Then the second issue that’s occurring also beyond, say, barometric or social reforms of pension systems whereby the retirement age is extended – that’s clearly one of the measures – they’re accompanying this measure by designing a number of tax incentives or tax schemes that benefit the elderly in their, say, willingness to keep on working, to keep maintaining active working life instead of, say, taking the pension benefits that they are eligible to.

So accompanying a right set of policies can actually increase significantly the participation of elderly in the economy. And I think this has particularly happened in Germany, that over the period of 10 years they have increased remarkable achievements in reaching 59 percent of elderly actually, I mean, in the population of 60 and 65 being active in the labor market.

MR. HODIN: And perhaps another way to think about that question, which is a very good one, is those countries or regions that are beginning to engage in the best way are those who are understanding truly what this aging population phenomenon is about – namely, structural change in populations, the number of old to young, which is the first time on the face of the earth we’ve ever seen this, a billion over 60 by 2020, 2 billion two to three decades later, more than under 14. So it’s really this structural shift.

And the countries that are doing a good job are the ones that are understanding it’s not only what do I do today, but it’s about – the point about the long-term debt and the long-term political and policy challenges. How do I look at it, as the WHO has suggested, a life course of healthy and active aging? And so you get countries that are putting in place policy instruments, for example age-friendly cities, which China is doing. It’s happening across Europe, it’s happening in the United States. Chicago, the other day, announced they were going to become an age-friendly city. And what that means is an enabler on this fiscal sustainability not just for today, but over a life course, where it matters because of this demographic proportion shift which we’re seeing.

QUESTION: Edvard Zitnik, Television Slovenia. While you mentioned Europe, is there any significant difference between so-called Old Europe and New Europe, ex-communist countries?

MR. MRSNIK: Yeah, absolutely. There is a difference; to start with, for example, their demographic structure. So the countries in Eastern Europe have been – can be characterized by significant deterioration in their demographic profile. Russia, Ukraine, but also Poland or other countries in that part of the region will be feeling significant impact of this phenomenon. Partly that is because of fairly large shift in life expectancy, so life – they live longer, but at the same time their fertility patterns have changed. They have been reduced, so the birth rates are lower. And in many cases, of course, they have been faced with emigration, so people have effectively abandoned their home countries to live elsewhere, therefore amplifying the impact on population aging in terms of demographic structure.

In terms of, say, social security systems, there is – there has been a shift, for example, in countries like Lithuania, Estonia, Latvia, Poland or even Hungary from defined benefit into notional contribution – notional defined contribution system. This is, again, for this part of the countries whereas others have not – like Slovenia, Croatia, Serbia, have not yet moved to that part. Ourselves, we do not have policy advice or which way is better. I think each one of them has its pluses and minuses. It’s really up to the policymakers to decide which way they want to follow.

But it seems that according to these long-term projections of pension spending for the countries that I had mentioned earlier, so the Baltic countries, including Poland, these countries seem to be facing somewhat less pressure on their public purses compared to, say, others that have not done so yet. Even though in countries like Slovenia we are observing changes, finally we are observing some positive changes into containing the long-term challenges related to sustainability of public finances.

MR. HODIN: As you think about that, there are – and it was just referred to, but there are two components to keep in mind. One is: What are the trends that are leading to this demographic shift? And it’s the longevity and then the low birth rates. And in every country on the globe, as modernization, urbanization, the women’s movement, and other trends begin to take effect, whether it’s emerging markets or developing countries in Africa, you’re beginning to see them look more and more like the Europeans, Australia. You look at a Muslim country like Turkey or a Catholic country like Italy, and their low birth rates are equally decreasing.

The second one is the degree to which countries have and have come to rely on the kind of public policy structures that Marco referred to. And some of the countries, particularly in the emerging markets who have not come to rely on public pensions, public healthcare, it may be that they can design different kind of instruments in a 21st century demographic construction. They may find themselves more capable of handling this over the next couple decades.

QUESTION: How are you? My name is Yilber Vega from NTN 24. I want to ask you about the area of Latin America, the Western Hemisphere. How do you see the situation in those countries? If we see that some of those countries like Brazil, Mexico are raising economies that they have – part of the G-20s. So how do you see the region in general?

MR. MRSNIK: Yes. I mean, we have a number of – I mean, a number of findings regarding, say, the emerging economies across the world. And as I mentioned already, some of them in Eastern Europe do not look so good in terms of prospects for long-term sustainability, precisely because of the significant demographic shift that’s taking place there.

This is also the case for Brazil. Brazil is likely to – according to the UN projections, is going to experience a very dramatic demographic shift, however, from a very young population structure currently. So this allows countries like Brazil but also let’s think of some other – Turkey, Chile, or India – they still have very young age profiles, which allows them to benefit from this age demographic dividend going forward, growing. The growth rates in these countries has been – have been relatively high, while at the same time they have not been accumulating a significant burden in terms of debt. This gives them a very good starting point. But given the demographic picture going forward, they will have to apply policies that will – that should contain these type of pressures that we have been observing, for example, in advanced countries.

And I think in that respect, that’s where their advantage is. They can follow what is happening in advanced Europe or in advanced parts of the world, like U.S., Japan, and how is that – how are that parts affected by political preferences or policy preferences that they have undertaken, adopted, and how are they actually able to steer their social security systems through the challenges that are ahead of them.

Regardless of that, the challenges are by no means lesser. I think Mike has just pointed that out very clearly. They have, however, somewhat – some advantage with regards to the timing of being able to adopt their own policies to that.

MR. HODIN: I would add to that, and I can say this – perhaps harder for you to say it – but I truly believe that S&P is serving a – is providing a huge service in raising this kind of topic as it has been doing for a decade now, but particularly for the last three or four years and therefore, at a level of awareness that, prior to that, governments, countries, companies did not have. So you ask about Latin America in particular. Brazil, just in the last – within the last year, and it’s not coincidental – they are now putting in place Sao Paulo – the region of Sao Paulo will have Sao Paulo age-friendly region. There will be a Sao Paulo age-friendly city. Rio is doing the same thing. And Chile, along with Finland, it looks like is – are becoming the first two age-friendly countries.

So you take the emerging markets in particular and you look at a Brazil or a Chile, a Turkey, a China, and the first essential step is to be aware of a kind of issue that is emerging. Population aging is that type of issue. And as a result of S&P’s work, and other activities but certainly S&P’s work, which is focused on this analysis, you’re getting action. And therefore, I remain optimistic about this.

MR. MRSNIK: Maybe just to have a follow-up to your question, when if you look at the Table One on population and old age-dependency ratio, you will see what we mean by this shift in demographic structure, especially the last four columns – five, I’m sorry – indicate the pace of this deterioration. And in the case of Brazil, for example, or China, you have old age-dependency ratio increasing more than threefold – more than three times, sorry – which gives you a feeling of the magnitude of the problem that it’s had compared to, say, other advanced economies where the old age-dependency ratio will – may be increased twice or something like that. It’s a very indicative comparison what is going to happen to the Latin or South American populations.

At the same time, something that I didn’t mention is that the emerging markets currently have relatively lower coverage of pension or healthcare services. So the provision of these services is relatively lower, which means that at the end of the day it costs less. However, as they are growing, there will be increasing demands by the population to the governments to increase the supply of these services, just as it happened in advanced parts of the world. And as such, they will likely increase very structural pressures on their spending from this point of view.

QUESTION: Tim Schaefer, Finanzen Verlag, from Germany. I have a question in regards to the U.S. How is the U.S. prepared for the shift? And is it also a problem for the economy itself? Because, when you get older, you may consume less; when you retire, you need less space to live; maybe you drive older cars, you have an older cell phone, and you go less often to concerts and so on. So what is the impact on the consumption for the U.S.?

MR. MRSNIK: I mean, U.S. in this report, compared to 2010 report, the situation hasn’t changed much. And that’s because we haven’t seen – we haven’t observed, say, meaningful changes to either structural policies that would contain these challenges going forward or to – changes to the current budgetary position. As you know, the medium-term budgetary consolidation strategy is being negotiated. So as it is, U.S. is continuing with its relatively large budget deficits. And by the CBO’s own admission, these are the largest deficits since 1945.

So compared – this compared to 2010, we don’t see a significant shift in that respect, which means that more will have to be done going forward. But at the same time, U.S. has somewhat better demographics, demographic dynamics going forward compared to most of the European countries, for example, or Japan, this respect. And it’s actually posting quite different economic growth rates compared to what is currently Europe going through. This is helping.

MR. HODIN: So I would agree the U.S. is interesting and a little different than others, as we are in so many areas. The first and most important is what Marko said, which is that our demographic structure is different. And at least in the first instance, it’s largely a function of immigration and the fact that immigrants tend to have more babies. And so we’re at about – just at about replacement, as opposed to an Italy or a Japan, which is under 1.5, a China which is around 1.5 or something. So it’s a very different demographic structure, and if its culture continues the way it is, one can expect that it will continue that way.

The second point that I would make, which is – you asked in the context of the United States but I believe is a global phenomenon – is I would say your implied assumptions about spending patterns for people as they are in older categories is exactly wrong, that, first of all, there’s more discretionary spending. But more than that, what we’re finding is that the marketplace itself is transforming to provide for a growing array of needs.

And it’s not only that there’s no indicator that people 60, 70, or even 80 are spending less, but it’s also that there’s a lot of spending aligned to that. Hotel chains are looking at restructuring rooms to align to needs. Travel business is looking at redoing their approach. Consumer companies – Coca-Cola is saying, well, I’ve sort of focused on the youth; well, maybe there’s an adult market over here; I’m going to attend to that. Healthcare companies are transforming what they’re doing. In sector after sector after sector, financial institutions are looking at how to do this and providing instruments that are aligned to an active aging throughout the life course.

So I actually think that the two factors of the growing awareness of this topic, which is driving interest in change that can be a consequence of very important reports like S&P, and the marketplace itself, are going to lead to a very positive opportunity.

MR. MRSNIK: To complement Mike’s remarks on – with some thoughts about what does that do to growth, a population aging, what happens is that in terms of theoretical model, what you have is a production function that’s composed of labor, capital and what we call total factor productivity, which is you have productivity mixed with human capital and so on.

On the labor side, we know that, say, the working-age population is getting smaller. So on that side, there’s – there will be pressure. On the capital side, this is something that precisely will have to be determined going forward, because what will drive investment going forward is productivity. So if you have – if you manage to increase your productivity to substitute for the decline in the labor, because you’re losing working-age cohorts, you will be able to sustain the economic growth potential that you currently have. Otherwise, it may be well difficult to do so in absence of that.

MR. HODIN: And I rarely disagree with my colleague, but --

MR. MRSNIK: Theoretically, I was saying. (Laughter.)

MR. HODIN: Well, and that’s the critical point, because the labor supply – I mean, that’s if you take 20th century notions that everyone retires by 60. And we know what happens in Greece when that happens. And what is going to happen in the 21st century is that people will be working into their 60s, 70s, even into their 80s.

Dr. Sarah Harper, who delivered the Oxford London Lecture last year – she’s head of the Oxford Institute on Aging – remarked that a young girl born in 1990, and she was talking about London and New York but increasingly will be Istanbul and Beijing as well, and even Dakar, is likely to see three centuries. Now, when you’re living to be 100, you don’t retire at 60, or you don’t stop being active. And so the idea – the other thing that’s going to happen here is we’re going to have a restructuring of the labor pool. And it will look differently than the 20th century, due to technology, due to different social habits. People might work 20 hours a week but from home. People might work 60 hours a week but from some resort somewhere in a developed country with some wealth.

But anyway, so I think a lot of the assumptions that we had in the 20th century have to change. They’re already beginning to change, and one of the reasons is precisely because of the analysis that S&P is providing, which, if we keep it the way it was, it’s just fiscally unsustainable. And also, it doesn’t feel good. I mean, who wants to spend 30 years of their life or more sitting around either in an apartment or playing golf? That’s not the world that the 21st century imagines.

QUESTION: Hi again. I was wondering if you had looked into the connection between welfare systems and fertility rates at all. At least in Europe, we – well, I’m coming from Norway, obviously, where we have a high fertility rate and a lot of paid parental leave and these things. And it seems there could be a vicious circle if an aging population puts pressure on – a budget pressure that would eventually take away welfare systems that was encouraging people to have kids. But that’s not --

MR. MRSNIK: Interesting. Interesting. Yeah, we haven’t touched upon this particular policy mix in our report, no.

QUESTION: There’s a big discrepancy between north and south of Europe in terms of --

MR. MRSNIK: Yeah.

QUESTION: -- fertility, but you haven’t looked into that?

MR. MRSNIK: No, because our – we rely on the UN population data or Eurostat population data. So we take that as exogenous variable into our projections.

MODERATOR: Any last questions? (Off-mike.)

QUESTION: Hi. Yes, excuse me. Maybe you can, like, give us an example what could be, like, specific profession for aged people past 80 years in the future. They couldn’t be, like, I don’t know, a policeman maybe, pilot, but how you do see, like --

MR. HODIN: That’s an interesting – so there’s something called the Age Lab at MIT. It’s run by this guy Joe Coughlin. He’s a genius. And Joe’s first grant came from MIT – sorry, came from GM – an they gave him money in order to design – help design what the hundred-year-old woman in the 21st century would be driving. Now, I leave it to your imagination, but he designed that and it was based on technology.

And so I guess my answer is that, again, 20th century assumptions, if we apply policy instruments aligned to 21st century technology advance, medical advance, two or three of the things that often lead to inactivity are loss of mobility, vision deterioration, other kinds of healthcare challenges. With today’s innovative therapy and technology, vision deterioration or loss of mobility do not have to be automatically connected with aging. And so an 80 year-old in 2025 or 2030 may have all kinds of possibilities.

MR. MRSNIK: They say 40s are our new 20s.

MODERATOR: Here’s John Piecuch.

MR. PIECUCH: Hi. I’m John Piecuch. I’m director of communications at Standard & Poor’s and I work with the sovereign analytical team that Marko is part of. And so we just also wanted to – thinking about this report and, really, the rich sort of sources of data that underpin this report, maybe even more so than some of the other studies that S&P provides, and there was so much there, and there’s – you’ll see there’s a lot embedded in the report.

But what we also wanted to do, because of the interest in the topic and, really, the importance of the topic, we also wanted to be able to sort of help people unlock the data that was there. And so in this case what we’ve done is, and what you see behind me on the screens and in the back of the room, is an interactive tool that’s available on our website. I’ll give you the URL for it, et cetera, but it’s available to everybody. And it really is an interactive tool that helps kind of really bring the different points that we’re talking about in the study alive.

So I’ll just go over a very brief demonstration of it and you can feel free to go back and look at it at your leisure and come back to me with any questions you might have about it. I think – but the first part that you’ll just sort of see, obviously, is the map. And so what we’ve done here is really display in sort of a visual way – you’ll see the different gradations, but this is really the percentage of budget of really total age-related spending that you’ll be able to visualize here. And then you can also adapt that – you’ll see as I just changed it – to the percentage of GDP represented by the old age-dependency ratio.

And another thing that you’ll probably want to do is – we’ve taken the different countries, the 50 countries that are – whose data are making up this report, and so we’ve made it available that you can sort of look at the different projections over time for the different countries. I’ll just choose a country here. We’ll say, for example, Denmark. And so what we’re looking here is, under the different scenarios that you’ll see in the report, a no-policy change scenario. In other words, if nothing were done from today onward through 2050 to really plan for and account for the aging of the population, you’ll see the changes in – you’ll see for the individual country the changes in net general government debt in this case, and also versus the whole sample. You can also look at it in comparison to different country groups, whether it’s the whole sample, whether it’s advanced economies, emerging economies, BRIC countries, different rating levels, the G-20, et cetera.

So this is just an additional way we really wanted to try to unlock this – again, there’s just such a rich source of data that underpins this report – and sort of make this a bit more really accessible to people to kind of understand – really understand this. So this and some other supporting information about the report are available on our website, and the website is www.standardandpoors.com. And then this special tool is standardandpoors.com/globalaging. And that’ll get you to a page that has some additional information about that. So, certainly encourage you to browse.

And as I mentioned, I’m the – on the communications team working with the sovereign analysts. And the kits that you have that have the report and also a related report that Marko prepared last year focusing on the G-20 countries. You also have my contact information in there, so I certainly encourage you now or any point in the future, if you do have any questions about this or want anything further, you can certainly come back and ask me about it as well.

MODERATOR: Thanks, John. Are there any other questions?

Well, with that, I want to thank you again for being here. It’s been very informative and helpful. If you do have any follow-up information, ask me. Thank you for being here.

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