1 Joaquim Oliveira Martins Economics Department, OECD From Ageing to Longevity Facts and policy challenges European Health Forum Gastein Workshop 3 – Health and Wealth. Do healthy and active ageing generate wealth? Wednesday 5th October 2005

2 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

3 From Ageing to Wealth: What are the links?

4 Demographic issues

5 The impact of demographics is gloomy: the number of people in working age per retiree will decrease from 4 to 2… NB: Dependency ratios=Population 65+/(15-64)

6 …and longevity assumptions are on the low side

7 What is the impact on dependency ratios of indexing the old-age threshold on longevity gains? JapanUSA Germany France With indexation 65+/(15-64) With indexation Germany

8 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

9 Does longevity translates into healthy ageing? - Contrast European vs. Anglo-Saxon countries - Further results from OECD Health Projection Project Comparison over the period

10 Ageing and Labour Markets

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

12 …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

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

14  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

15 Does the individual age-productivity profiles matter for aggregate productivity? Flatter after peaking (chap V) Miles (2003) Flatter

16 The average age of the labour force is partly recovering from the 'rejuvenating' shock of the 1960s-70s In Japan it is already above US/EU in 2050

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

18 How will Ageing affect Saving?

19 Population structure affects saving through the life-cycle effects USAJAPAN Household survey panel, US 2000

20 Ageing is expected to decrease aggregate saving

21 Ageing, Capital markets and Economic Growth

22 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

23 What are the main drivers of GDP per capita? Projected average growth rates

24  Ageing may accentuate divergence of GDP per capita…

25 … unless this effect is mitigated by comprehensive reforms

26 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

27 Thank you !