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Thursday, March 20, 2003

Ageing Vulnerability Index

The Washington based Commission on Global Ageing has developed an Ageing Vulnerability Index whose purpose is to measure and compare the magnitude of the ageing burden in different countries and, by extension, the "vulnerability" of those countries to demographic ageing. The Index is calculated by combining country scores on eleven separate indicators. Without totally endorsing the methodology employed in this study, it is nevertheless to interesting to consider what they find. This is after all an index of indexes and this is an area where we have few reliable yardsticks to go by. Let's start by taking a quick look at the what the Index reveals about where some of the key countries are heading.


Aging faster today than any other developed country, Japan will have in 2040 one of the highest old-age dependency ratios in the world. It finishes ninth on the benefit-level and net-transfer indicators, eleventh on benefit growth and budget room, and twelfth on borrowing room. So how does Japan manage to rise to the middle of the overall rankings, with an Index score of exactly 50? For one thing, Japan's public pensions are relatively stingy and its public sector is relatively small. This keeps the overall cost of old-age benefits from rising even higher than it does, while allowing Japan a fourth place finish on tax room. Over the long term, moreover, the social and political reform environment in Japan appears surprisingly favorable. Japan ranks number three in the elder-affluence category. And it ranks number one in the benefit dependence category, with a first place rank on family ties, a first place rank on poverty impact, and (due to very high rates of elder employment and a broad-based private pension system) a third place rank on benefit share. No other country with comparable demographics and a comparable public burden enjoys as many offsetting advantages.


By 2040, Italy will have one elder for every working-age adult putting it in a dead heat with Japan and Spain for the developed world's worst demographics. On top of that, Italy's pension spending as a share GDP is the highest in the Index countries, and the Italian elderly are among the least likely to be employed or to receive a private pension. Moreover, Italy's overall eleventh-place ranking in the Index comes despite a series of pension reforms enacted in the 1990s (the "Amato" and "Dini" reforms) that are scheduled to make steep cuts in future benefits. Without these reforms, Italy would surely be in last place. The open question is whether Italy is likely to make good on its reform promises. Its second place ranking in the benefit dependence category (with family ties second only to Japan) gives some hope. Yet Italy comes in last in the elder-affluence category, a reflection of how seriously these future benefit cuts threaten elder living standards.


Spain might be described as Italy without the reforms. These two countries face a very similar (and dire) demographic future. They both have generous public pension systems that support elders who have little employment or private pension income to fall back on. Unlike Italy, however, Spain's pension generosity is due to continue unchecked into the indefinite future. Spain comes in in last place (number twelve) on all three public-burden indicators, and on the net-transfer indicator it does so by a wide margin. Aside from its runaway pension projections, however, Spain hardly fits the stereotype of the bloated welfare state. Its public sector is still relatively small. Its net debt is modest. And to judge by its average rankings in the elder-affluence and public-dependence categories (it has the third-strongest family ties after Italy and Japan), reform may not be beyond its grasp.

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