As a result of falling birth rates and rising life expectancy, the world population's age structure is shifting. One of every 10 persons is now aged 60 years or older; by 2050, the United Nations projects that 1 person of every 5 and, by 2150, 1 of every 3 will be aged 60 years or older. The percentage is currently much higher in the more developed than in the less developed regions, but the pace of ageing in developing countries is more rapid, and their transition from a young to an old age structure will be more compressed in time.

Source: 2002, UN Population Division

Extended longevity has not been matched by longer working life patterns. On the contrary, workers in most industrial countries are retiring earlier and earlier, and in some OECD countries the average retirement age has already fallen below 60 years. On the one hand, this may reflect a fundamental shift in social values: as societies become more prosperous, the value of additional leisure over additional income increases. On the other hand, public policy again plays a significant role: some countries have encouraged early retirement as a measure to reduce unemployment, and progressive income tax regimes are prone to distort the trade-off between income and leisure. Consequently, the proportion of the population that is employed will start to fall by 2010, according to OECD estimates. This in turn will accelerate the decline in the number of persons employed per person retired. Between 2010 and 2030 that number will fall by almost the same amount as in the preceding 50 years.

Source: OECD

As age structure and work patterns shift, populations are rapidly outgrowing the institutions intended to care for older individuals. In most industrial countries, social security schemes are organized in a pay-as-you-go manner, i.e. they tax today's workers to pay today's retirees. PAYG systems are economically attractive when both productivity and the ratio of workers to retirees grow. Longer life expectancies in combination with changing work patterns exert se-vere pressure on today's PAYG social security arrangements. When retirement was instituted in the United States, life expectancy was three years less than the retirement age; today the average US worker lives 11 years beyond the standard retirement age of 65. As the number of retirees swells and the number of younger workers declines, the burden on the younger group increases. By 2030, there will on average be only about 2 employees for every person over 65 in OECD countries.

There are no easy answers to the pension problem. Simply reducing pension benefits bears the danger of putting many pensioners close to the poverty line, since cuts in most countries would have to be very large, and pensioners have no way of compensating for their cut in income. Simply raising contributions may discourage some people from working at all and encourage business to move to countries with lower contributions. Doing neither will necessitate borrowing. Rising public debt, however, will curb growth and material living standards through its effect on interest rates and long-term investment. Repaying it burdens future generations who must then forego other necessary expenditure. Funded pension schemes on the other hand are more risky, as private pension funds invest their money in financial assets, the values of which are inherently volatile. The transition from PAYG to funded schemes is also problematic. Current workers would have to pay for both the pensions of current retirees and their own.