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FEATURE STORY

Learning about the Unknown: the Economic Impacts of Aging in Europe and Central Asia

April 25, 2014

STORY HIGHLIGHTS
  • Population aging is becoming a key global challenge that will have profound economic, social and cultural implications for decades ahead.
  • Many countries in the Europe and Central Asia (ECA) Region have rapidly aging populations, yet significantly less income and wealth than other regions to deal with the adverse economic consequences of aging.
  • Economists from the World Bank Group recently met during a workshop in Munich, Germany to discuss these challenges, share ongoing work on a forthcoming report, and exchange knowledge with international experts.

The demographics of Europe are changing. Fertility rates across the continent have fallen to between 1.3 and 1.4 - below the replacement rate of 2.1 children. Recent demographic analysis predicts that the average age in Europe will be 42.2 by 2020, compared to 39.8 in 2010. Life expectancy rates will also significantly increase in the coming decades - from 75.34 in 2005-2010 to 77.84 for 2020-2025.

The combination of these three trends means that soon we will be living longer, have fewer children and the number of middle age and elderly people will be much greater than the number people in their 20s and 30s. For many countries around the world this demographic transition will be a defining feature of the economic landscape over the next few decades.

In some countries this process is particularly fast. Poland, for example, has one of the fastest aging populations in the European Union but had a fertility rate of just 1.30 in 2012. Furthermore, the ratio of the country’s population over 65 as a percentage of the population aged 20-64 (the old age dependency ratio) is expected to increase from 20.9% in 2010 to 58% in 2050 and 70.7% in 2060 while the share of the working age population (15-64) is projected to drop from 71.3% in 2010 to 53.4% by 2050. All of these trends spell potential economic trouble for Poland.

While the trend is clear, the story behind this trend is not. The fact that aging across the globe will have an impact on economies, healthcare systems, retirement policies, culture, lifestyle and virtually every other aspect of society is undeniable. What is not known, however, is how big this impact will be and how we can prepare for this aging world.

Open Quotes

Political economy plays a large role when it comes to designing responses to the challenges of aging. Any response should take into consideration the realities of an individual country or region – avoiding the trap of a ‘one size fits all’ model. Close Quotes

In order to address these problems, a team from the Poverty Reduction Economic Management (PREM) and Human Development (HD) Departments of the World Bank Group – led by Hans Timmer, World Bank Chief Economist for the Europe and Central Asia (ECA) region – convened at a regional aging workshop in Munich on March, 31 – April, 1, 2014. The From known knowns to unknown unknowns” workshop – jointly organized by the World Bank and the Munich Center for the Economics of Aging – offered participants a chance to learn from international experts and exchange views on the questions of aging and the potential impacts on the economies in Europe and around the world. The Workshop was financed through innovation grant in the Europe and Central Asia (ECA) region and represented an opportunity for experts from the World Bank to share knowledge and experience with external partners.

The primary macroeconomic implication of aging is a shrinking supply of labor resulting from a declining working-age population. The structure of working age population will change as well, with potential implications for labor productivity due to loss of dynamism and less job reallocation across occupations, sectors and locations. This has significant implications for economic growth - which depends on the supply and productivity of labor. Furthermore, aging populations tend to save less, what can have negative consequences for investment and capital accumulation and thus further slowdown economic growth. Population aging will increase demand pressures on public services, most importantly the provision of health care and long term care. Finally, increasing expenditure on pensions and health care will affect long term sustainability of public finances.

In the face of these daunting challenges, how do we move forward?

This was the question that the panelists tried to answer in the final session, also offering their views on how the World Bank Group already is and can be engaged in assisting our clients in these issues. According to Hans Timmer political economy plays a large role when it comes to designing responses to the challenges of aging. Any response should take into consideration the realities of an individual country or region – avoiding the trap of a ‘one size fits all’ model – and importantly, should have strong analytical underpinnings to have a good understanding of underlying demographic processes and factors. He also found that in ECA strong cohort effects may be at play - low labor market participation rates in old age may be a transitory phenomenon, which may reflect specific education and work experience background gained during the communist period. Looking ahead future generations of old age workers may show much more open and active mindset. What should be further analyzed is the impact of aging on dynamism and labor market outcomes, the impact on asset prices and the impact on environment.

As many of the challenges that countries in the ECA region face mirror those in more advanced countries in Western European, broader cooperation and increased knowledge transfers with these countries would be beneficial to all involved partners.

In keeping with the title of the workshop, the group was able to address some key challenges of the “known knowns” of aging. Areas where further analysis is needed – the “known unknowns” – were also discussed. At the heart of the issue, then, according to many of the participants at the workshop are the “unknown unknowns” – the areas and impacts that we do not currently see and have not yet analyzed. By continuing to convene high-level workshops like this one, however, it is hoped that more can be learned about these unknowns – unlocking both the questions and their answers.