How to Deal with Policy Implications of an Aging Population

The Economist has recently published a very gloomy column titled “Shrinking populations mean less growth and a more fractious world - Politicians must act now to avert the worst”. 

The Economist is getting it half right. Indeed, aging is quite possibly bringing havoc to social security systems across the rich World. It is happening slowly, but it is destiny – it won’t go away. Increasing fertility, even if it worked as a policy lever (it does not), it would take 25 years before newborns enter as productive workers. Immigration can work in the short run (expect way more immigration in the years to come), but of course, immigrants will also age. In other words, there is no silver bullet.

Increasing fertility may help in the long run, and more immigrants will help in the short run, increasing productivity is another option, and perhaps the most politically controversial choice: to increase citizens’ working lives. 

These are all policy levers that need to be addressed. But the one forgotten aspect here is the enormous wasted capacity that is still around us and can help us deal with the challenges that come with aging. In Italy, for example, the NEET (not in education, employment or training) is higher than 20 percent. Only about 30 percent enter higher education. 

The complaint I hear from my policy colleagues is that Italy (and many other European countries) suffers a youth human capital crisis, and guess what, they don’t have children when they grow up as adults either. Not surprisingly, many, Pope Francis and Elon Musk included, worry about young adults no longer having children. One can sympathize here, but the more serious worry is that fertility rates may yet become even lower (look no longer than South Korea where the Total fertility rate is now 0.7). 

The elephant in the room here is the educational system. As policymakers are grappling with aging, it would help if we start helping those who are going to deal with the millions of older people – namely the youth of today. Improving inclusion in education, making it easier and cheaper to enter higher education, bring up the skill level across the board. 

If we could do this, it would help. Unfortunately, this is not sufficient: the youth of today must expect to work much longer than the current baby boomers who soon enter retirement. With a working career of 50 years, say, and a World seeing unprecedented technological change, current educational systems seem hopelessly out of date. In the future, it would make more sense if adults entered higher education three times (or more) during their working life. Who is going to pay for this? 

Just like pension contributions, people should perhaps also contribute to their re-training sabbatical from the day they start their working career. Such a scheme would enhance individuals’ resilience tremendously, and it would also make labor markets way more dynamic. 

We might even relax a bit our concerns about the issue of the mismatch between education and labor market needs, which are in any case extremely hard to predict. But clearly, it would imply a radical shake-up of the current educational systems in most countries.

The Norway Way

The political cycle, as The Economist points out, is a challenge: who wants to take on these unpopular tasks when it will end their re-election prospects? The key is that these challenges need to be taken out from the usual short-run political wrangling. Just as climate change, aging is happening. It is a bit like when Reese in the Terminator 1 film explains to Sarah Connor what a Cyborg is: it cannot be bargained with, it cannot be reasoned with, nor does it feel pity or remorse, it will just keep carrying on until you are dead. 

In more plain language, aging is a long-term process and needs long-term solutions – and long-term solutions are not well suited in four to five-year political cycles. Now, this is not as difficult as it may seem. 

There are encouraging examples: Norway is now increasing the retirement age to 72. Imagine if one tried to do that in France. The Norwegian approach is very clever: First, talk to a demographer to get the facts, which brings broad political support, and second, introduce a policy that is digestible for the majority of the population. 

In the Norwegian case, increasing the retirement age is simply done by letting people work as long as they want. Clearly, those with a strenuous working life, may still want to retire at the minimum statutory age. But the fact is that a lot of people would like to work until they are 75 or even older. The result is an expected average age of retirement of around 72. Clever, effective, and with no protests in the street. 

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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