Growing old: going broke?

Jacques Barrot, Minister of Labour and Social Affairs of France · Michael J. Boskin, Professor of Economics, Stanford University, USA · José Piñera, Chairman, International Center for Pension Reform, Chile · Donna E. Shalala, Secretary of Health and Human Services of the USA · Tony Tan Keng Yam, Deputy Prime Minister and Minister for Defence of Singapore

Moderated by: David M. Abshire
President, Center for Strategic and International Studies, USA

1997 Annual Meeting
Davos, Switzerland: 30 January - 4 February

Saturday 11.25-12.35
90 growing old

Demographic changes mean that social security and healthcare systems in many developed countries are not sustainable in the long term. As in other countries, ageing American baby-boomers are placing pressure on the government entitlement system. According to David Abshire, the number of Americans over 60 will triple by 2030. The US social security system will move from a cash surplus to a cash deficit by 2012. If the current social security and medicare systems are not changed, payments to these systems will eventually overtake all government spending. Donna Shalala addressed two of the most important issues facing the US. The debate should not be about numbers, a fundamental change in thinking about entitlements is needed. Private citizens would shoulder a greater share of the costs associated with ageing if the administration were to create incentives for Americans to increase their rate of savings. The social security systems in Europe will reach a crisis stage sooner than the US. In Germany, there will be only one worker for every pensioner by the year 2050, said Michael Boskin. However, it will be difficult for Europeans to change the current system, as those with entitlements have great voting power.

Not if you follow the Chilean example

In Chile, it seems that getting old is getting rich. The private Chilean pension system is based on individual capitalization rather than the pay-as-you-go system of other developed countries. A compulsory deduction is taken from worker salaries every month. Workers chooses the private, competitive, retirement investment fund in which to deposit their money. They have immediate access to exact money in their individual retirement account. The government provides the regulatory and supervisory framework for the pension system. In the transition to the private system, the government guaranteed that the elderly would receive their pensions and gave every worker the option of remaining in the government system: 93% of the population switched to the private system.

Currently, the annualized return on Chilean retirement investment funds is 12% after inflation. José Piñera noted that many economists credit the Chilean pension reform with providing the stimulus needed to grow the Chilean economy. Since its implementation in 1980, many Latin American neighbours have followed suit: Argentina, Colombia and Peru also have private pension systems and Bolivia, El Salvador and Mexico are expected to implement them this year, said Pidera

Singapore has the most rapidly ageing population in Asia. Today 7% of the three million Singaporeans are over the age of 65. By the year 2030 it is estimated that the elderly will comprise over 20% of a population of four million. The three main areas of policy concem to be addressed are financial, healthcare and taxation, said Tony Tan Keng. The Singapore govemment believes that government and community should share responsibility for savings and healthcare. There are compulsory deductions from income to fund retirement and healthcare funds. Medishield, a government administered insurance programme has a system of co-payments and deductibles. Finally, because the population is ageing, the government realizes that it must reduce reliance on taxation of income and increase indirect taxes such as consumption taxes.

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