Author: Seung Hyun (Luke) Hong, Lead Specialist; Tanyasorn Ekapirak, Researcher
By 2050, the world’s population aged 60 years and older is expected to reach about 2 billion, more than doubling from 900 million in 2015. In the past, discussion on population aging has been mainly among advanced economies, but developing countries are experiencing a quick demographic transition with their populations aging at an unprecedented speed. In fact, by 2050, approximately 80 percent of people aged 60 or older are projected to live in what are now low- or middle-income countries. The impact of population aging could be more detrimental in these developing countries as they are often unprepared to cater to the needs of a rapidly aging population, which was highlighted in a policy brief that we submitted to the Group of 20 meetings this year.
A risk to macroeconomic stability and growth potential
Realizing how an aging population can jeopardize the long-term sustainability of the social security system, advanced economies with well-established social security systems have extensively discussed potential policy measures to mitigate the fiscal stress on their systems. In contrast, developing countries that have been reaping demographic dividends for decades, tend to be less concerned with the fast-looming issues of population aging.
Nowadays, most developing countries have social security systems that were introduced in the course of their economic development. Although often underdeveloped as compared to those in the advanced economies, their systems have been expanding rapidly to meet the growing demand for better social protection from the public. Given the rapid speed of population aging and fast expansion of the social security system, developing countries will need to address quickly the fiscal sustainability of their social security systems. Moreover, economic and financial institutions are less developed so that individuals are less prepared for the effects of increasing life expectancy. Without being addressed properly, these can pose a risk to these countries’ long-term macroeconomic stability and growth potential.
Building an effective and sustainable social security system
According to the International Labour Organization (2017), only 45 percent of the world’s population is effectively covered by at least one social protection benefit, and only 29 percent has access to a comprehensive social security system. To better address social issues such as old-age poverty and inequality, policy efforts to expand the social security system should continue. However, an expanding social security system, coupled with rapid population aging, poses a big challenge in maintaining the long-term sustainability of the system. In particular, the policy environments in the developing economies are often too complex and policymakers too myopic to implement the reforms required for long-term benefits in a timely manner. In addition, social security systems in low-income countries are found to be relatively more costly and less effective than those in high-income countries. According to the World Bank (2018), high-income countries spend 1.9 percent of GDP on average to provide social protection to 81 percent of the population, while low-income countries already spend 1.5 percent of GDP on average to cover only 18 percent of the population. Therefore, greater and more timely efforts are needed to design a more cost-effective social security system.
Moreover, it is imperative to establish an assessment framework to assess the sustainability, effectiveness, and efficiency of the systems. Given that many developing countries have limited institutional and human resource capacities, advanced economies, with decades of experience, can help developing countries develop their social security systems based on the proper assessment framework. However, the adoption of this framework also requires capacity constraints to be resolved first; in particular, extending the fiscal policy time horizon with appropriate institutional and human resource supports. Although the policy focus may be different across countries, advanced economies’ support will greatly improve developing countries’ institutional capacity to properly approach the issue from a long-term perspective. In addition, the authorities’ reform initiatives can be better supported by promoting public awareness of the importance of not only the adequacy of the social security system but also the financial sustainability of the system, so that policy discussions are properly guided with appropriate public pressure.
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