Title page

Contents

About the Authors and Contributors 15

Foreword 18

Acknowledgments 20

Abbreviations 23

Regional Classifications Used in This Report 27

Overview: Golden Aging 28

Introduction 28

The Demographics of Europe and Central Asia and Those of the Rest of the World 32

Mixed Economic Consequences 40

A Comprehensive Policy Agenda 48

Notes 57

References 57

Part I. The Demographic Transition in Europe and Central Asia 60

Overview 61

The Demographic Transition and the "Golden Age" 61

The Effects of Fertility Declines on Aging across the Region 62

High Rates of Disease and Disability in Europe and Central Asia 63

Limiting the Rise in Dependency Ratios and Improving Health Outcomes in the Region 63

Migration Affects Demographics More in the Long Run 64

Reference 64

1. The Drivers of Aging in Europe and Central Asia 65

Introduction 65

The Aging Populations of Europe and Central Asia 65

The Effects of Declining Fertility on Aging and Population Growth 68

The Slower Improvement of Life Expectancy in Europe and Central Asia 78

The Contribution of Migration to Aging in Some Countries 82

Toward More Balanced Age Structures over the Next Half-Century 88

Notes 97

References 98

2. Improving Health Outcomes in the Transition to the "Golden Age" 103

Introduction 103

Lengthy Disability for People in Europe and Central Asia 103

Declines in the Health of the Older Population in Some Countries since 1959 105

Women's Unequal Burden of Caring for the Dependent 107

Cardiovascular Disease and Cancer, the Principal Causes of Premature Death in the Region 115

Achieving More Healthy Aging in the Region 118

Notes 120

References 121

Part II. The Economic Consequences of Population Aging Overview 125

Overview 126

Aging and the Economy: Challenges and Opportunities 126

The Economic Impact of Aging in Europe and Central Asia 129

Note 131

References 131

3. The Macroeconomic Impact of Population Aging 133

Introduction 133

The Diverse Effects of Aging on Income and Growth 134

The Effect of Aging on Savings and Labor Force Participation 142

The Links between Aging and Public Finances 160

Annex 3A. Brief Description of the Overlapping Generations Model 175

Annex 3B. Population Aging and the Labor Force 177

Annex 3C. Aging and Public Expenditures in Bulgaria in the Base Case Scenario 182

Notes 185

References 186

4. The Effects of Aging on Productivity: Diverse, Not Alarming 191

Introduction 191

Transient Effects of Aging on the Productivity of the Workforce 192

The Stability of the Human Capital Stock and the Labor Force 194

The Improving Quality of Education 195

The Skills of Older Workers: Shifting, Not Declining 202

How Firms Are Adjusting to the New Comparative Advantages 209

Does Labor Reallocation Become Less Efficient with Aging? 212

Does Aging Slow Innovation and Technology Adaption? 217

Does Entrepreneurship Decline with Aging? 222

The Mixed Impact of Aging on Productivity 229

Notes 230

References 230

5. Aging and Poverty and Inequality 236

Introduction 236

The Extent of Poverty in Aging Societies 242

Does Inequality Rise with Population Aging? 248

The Effects of Reforms on the Ability of Pensions to Limit Poverty and Inequality among the Elderly 260

The Risk of Increasing Poverty and Inequality 268

Notes 272

References 274

Part III. Policies 280

Overview 281

6. Overcoming the Legacy of Expanding Populations 285

Introduction 285

Voters Are Getting Older 286

The Influence of Age and Cohort Effects on Attitudes toward Immigration 295

Conclusions 299

Notes 300

References 301

7. Promoting Healthy, Active, and Prosperous Aging 303

Introduction 303

Supporting the Rebalancing of Demographics 304

Addressing the Economic Consequences of Aging 316

What Priority for What Country? 340

Notes 346

References 346

Table O.1. Country Policy Challenges across Eight Indicators(z-score), around 2012 55

Table I.O.1. Age Cohorts as a Percentage of the Population in Selected Country Groupings, 2015 63

Table 1.1. Global Population Growth, 1500-2060 68

Table 1.2. Dates of Birth of the Largest Age Cohorts, by Subregion, 2010 89

Table 1.3. Disability-Adjusted Dependency Measures in Selected Countries, 2005-50 94

Table 3.1. Effects of Pension Eligibility and Health Status on Employment of the Elderly, Selected Countries in Central Europe and the Baltics, 2011 153

Table 3.2. Characteristics of Pension Systems 169

Table 4.1. Effects of Aging on Various Basic and Higher-Level Cognitive Functions 203

Table 5.1. Change in Income Inequality after a Reduction in Fertility 254

Table 5.2. Aging and Risk of Poverty in Selected Countries 269

Table 5.3. Aging and Risk of Inequality in Selected Countries 270

Table 7.1. Policies to Make the Most out of Migration in Aging Societies 315

Table 7.2. Country Ranking of Policy Challenges across Eight Outcome Dimensions 344

Figure O.1. The demographic drivers and economic consequences of aging create challenges and opportunities 30

Figure O.2. The intensity of policy agendas varies across countries 32

Figure O.3. The fertility transition in some countries in Europe and Central Asia is occurring much more rapidly than in advanced European countries 35

Figure O.4. Rapid aging is expected in Central Asia and Turkey over 2010-60 36

Figure O.5. 60-year-old men in the Russian Federation, the Eastern Partnership, and the Baltic countries "feel" worse today(2009) than they did in 1959 38

Figure O.6. As life expectancy increases, the gap in labor force participation rates between the young and the old narrows, 2005-11 44

Figure O.7. The stock of human capital has expanded more than the size of the working-age population in Europe and Central Asia over the past 20 years 45

Figure 1.1. Total fertility has declined to below the replacement rate in many countries 69

Figure 1.2. The fertility transition in some countries in Europe and Central Asia is occurring much more rapidly than in advanced European countries 70

Figure 1.3. A U-shaped relation is emerging between fertility and level of development 74

Figure 1.4. Life expectancy gains in Europe and Central Asia have been the lowest in the world 79

Figure 1.5. Life expectancy of men in Eastern Europe has diverged from the better performers in Europe 80

Figure 1.6. The midlife mortality crisis continues in Europe and Central Asia, 1970-2010 81

Figure 1.7. What a difference 60 years make: Ukraine's population structure in 2010 if mortality had declined as in France from 1950 82

Figure 1.8. Europe and Central Asia is currently a region of emigrants 83

Figure 1.9. Migrants from Europe and Central Asia are making rich countries younger and poor countries older 84

Figure 1.10. Migration played a role in population decline in many Central European countries 85

Figure 1.11. Migrants are more likely to be active and employed than natives, circa 2000-10 86

Figure 1.12. The larger cohorts aged 20-29 and 45-54 of Eastern Partnership countries and the Russian Federation in 2010 will transition through the population structure 88

Figure 1.13. Rapid aging is expected in Central Asia and Turkey over 2010-60 89

Figure 1.14. Europe and Central Asia is converging quickly to the high share of population aged 65+ in the EU-15 91

Figure 1.15. The working-age population is projected to contract substantially in many countries in Europe and Central Asia 92

Figure 1.16. France's large postwar baby boomers bring a large rise in the 65+ age group from 2010 to 2015; the Russian Federation's share of the elderly will fluctuate over the next 45 years 92

Figure 1.17. A fertility rebound is critical to reviving the working-age population in Poland 93

Figure 1.18. Current migration flows in Europe and Central Asia are not enough to offset the future decrease in the working-age population 95

Figure 2.1. Europe and Central Asia experiences more disability than other regions 104

Figure 2.2. Men have fewer healthy years of life at age 50 than women in Europe and Central Asia and men in other regions 105

Figure 2.3. 60-year-old men in the Russian Federation, the Eastern Partnership, and the Baltic countries "feel" worse today(2009) than they did in 1959 106

Figure 2.4. Informal care dominates in countries in Europe and Central Asia 108

Figure 2.5. Older adults with disabilities have some access to formal care 108

Figure 2.6. Child care coverage is lower in countries in Europe and Central Asia than in other regions 109

Figure 2.7. Social norms place a high expectation on women as caregivers 111

Figure 2.8. Women are more likely than men to give care 113

Figure 2.9. European grandmothers are the "sandwich generation" 114

Figure 2.10. Europe and Central Asia loses more years of life to cardiovascular disease than to any other cause 115

Figure 2.11. Cardiovascular disease is the leading cause of the life expectancy gap between Europe and Central Asia and the EU-15 117

Figure 2.12. In many countries, cancer will rise dramatically in the population aged 65 and older by 2035 118

Figure 2.13. Excess mortality among the less educated in the Russian Federation is due mainly to cardiovascular disease, 2011 120

Figure 3.1. Fertility and mortality reductions have opposite medium-term impacts on GDP 137

Figure 3.2. In the medium term, aging can increase GDP per capita 138

Figure 3.3. By increasing capital-to-labor ratios, aging boosts labor productivity 139

Figure 3.4. Aging countries tend to specialize in capital-intensive production 141

Figure 3.5. Longevity brings increases in saving 142

Figure 3.6. As life expectancy increases, so do saving rates, 2005-11 143

Figure 3.7. Voluntary participation in the labor market of old people increases with the aging of a society, Poland 143

Figure 3.8. Labor force participation peaks at middle age with variation across countries 145

Figure 3.9. Age and educational attainment influence employment 147

Figure 3.10. Age is becoming less important for employment of secondary school graduates 148

Figure 3.11. Among the tertiary educated, the gap in employment between young and old is closing even faster, especially for skilled women 149

Figure 3.12. Employment rates tend to decrease among those receiving pensions, 2011 150

Figure 3.13. A large share of old workers who lost jobs remains permanently out of work 154

Figure 3.14. The probability of working again a year after a job loss is much higher for younger individuals 155

Figure 3.15. Reemployment after involuntary job loss is more difficult for less educated older individuals 156

Figure 3.16. The share of people starting a new job after retirement is very low 157

Figure 3.17. The ratio of inactive to active people can be strongly affected by changes in behavior and policy 159

Figure 3.18. Aging affects fiscal outcomes 161

Figure 3.19. The elderly finance most of their consumption from public transfers 163

Figure 3.20. The revenues that are influenced by aging vary greatly across countries in Europe and Central Asia 165

Figure 3.21. Social security contributions are often less than social protection spending, 2011 168

Figure 3.22. Allocations of public expenditures to pensions are relatively high in many countries 168

Figure 3.23. Public expenditures on health care are also affected by factors other than demographics 171

Figure 3.24. Bulgaria is experiencing one of the most remarkable demographic transitions in the world 173

Figure 3.25. Higher labor force participation will improve employment, GDP, and the fiscal position 174

Figure 4.1. The rates of completed tertiary education are considerably lower for older workers in many countries in the region, 2010 193

Figure 4.2. Older nontertiary graduates work in agriculture more than in services or manufacturing, Poland, 2010 193

Figure 4.3. No significant change has occurred in the occupational pattern of cohorts, Poland 194

Figure 4.4. The stock of human capital has expanded more than the size of the working-age population in Europe and Central Asia over the past 20 years 195

Figure 4.5. The biggest contribution to the increase in the stock of total years of schooling will come from the young countries 196

Figure 4.6. PISA scores of 15-year-olds in the region are mostly below the OECD average 198

Figure 4.7. Younger adults(25-34) perform better than older adults(55-64) in almost all countries, 2012 199

Figure 4.8. The gap in cognitive achievement between older inactive workers(55-64) and young workers(25-34) in elementary occupations is narrow, 2012 200

Figure 4.9. Older workers(55-64) display less learning and willingness to learn than younger workers(25-34), 2012 201

Figure 4.10. Old-high performers display a bilateral activity pattern in brain activity, suggesting that they rely more on experience, less on learning 206

Figure 4.11. Younger people(25-34) do better on measures of extroversion and openness to new experiences, while older people(55-64) do better on measures of agreeableness and conscientiousness, 2012 207

Figure 4.12. Older people(55-64) are better at dealing with hostility than younger people(25-34), 2012 208

Figure 4.13. In Central Europe and the Baltics, the age-appreciating cognitive skills content of exports has been rising, while the age-depreciating cognitive skills and physical ability content has been falling, 2000-10 210

Figure 4.14. The age-appreciating skills content of exports is largely consistent with the idea of age-based comparative advantage, 2010 211

Figure 4.15. The exports of younger countries tend to have a greater age-depreciating cognitive skills content, 2010 212

Figure 4.16. The net movement of workers to higher-productivity sectors raised productivity, 1998-2008 213

Figure 4.17. The net change in employment in low-, medium-, and high-productivity sectors was much lower among the older age group, 1998-2008 214

Figure 4.18. The skill intensity does not differ for less-educated workers, but college-educated older workers use more nonroutine cognitive skills than their younger counterparts, Poland, 2010 216

Figure 4.19. Older adults are less likely than younger ones to engage in start-up activities, 2008 223

Figure 4.20. Older adults are less likely to own and manage a new business, 2008 224

Figure 4.21. Early-stage entrepreneurial activity is especially low among individuals older than 65, 2008 224

Figure 4.22. Many individuals past the age of 55 continue to run businesses established when they were younger, 2008 225

Figure 4.23. Taking into account the cohort effect, the decline in early-stage entrepreneurship in Europe and Central Asia may start among people in their early 40s 225

Figure 4.24. The share of individuals who agree that "starting a business is considered a good career choice" does not fall after the age of 55, 2008 226

Figure 4.25. The share of start-up funding expected to be met out of own funds does not show any age patterns, 2008 227

Figure 4.26. Older entrepreneurs are more necessity driven than their younger peers, 2008 227

Figure 4.27. Older individuals are less likely to plan on becoming entrepreneurs(in the next three years), 2008 228

Figure 4.28. The rate of early-stage entrepreneurship is higher among high school graduates than among those with less education, 2008 228

Figure 4.29. The relationship between educational attainment and entrepreneurship is particularly strong among people 55 and older, 2008 229

Figure 5.1. Aging societies are not necessarily becoming poorer and more unequal 238

Figure 5.2. The elderly are less poor than the young in many countries in Europe and Central Asia, circa 2010 242

Figure 5.3. The elderly are less likely to live with nonelderly in aging societies 243

Figure 5.4. Elderly(65+) living by themselves rely significantly on pension income, 2010 244

Figure 5.5. Transfers from children to their parents tend to be progressive, 2004-07 245

Figure 5.6. Older individuals spend a higher share of their expenditures on health and utilities and less on transportation and education, circa 2012 246

Figure 5.7. Subjective well-being does not change significantly over the life cycle 248

Figure 5.8. The wage-capital return ratio increases as fertility declines 252

Figure 5.9. In a stable population, the young rely heavily on labor income while the old rely more on income from assets 252

Figure 5.10. The young may experience income gains while the old may be worse off as fertility declines 253

Figure 5.11. Households with more elderly are more dependent on pensions, Central Europe and the Baltics, 2010 253

Figure 5.12. Low-skilled elderly have increased their employment, but their employment rates are still below those of their skilled counterparts 255

Figure 5.13. Labor income inequality between high-and low-skilled workers increases with age 256

Figure 5.14. The skill premium for older workers is higher than for younger workers in most countries, circa 2010 257

Figure 5.15. Household savings are concentrated in high-income groups in the Russian Federation, 2012 258

Figure 5.16. Wealth accumulation is greater for the higher-educated group across the life cycle in the Russian Federation, 1994-2012 259

Figure 5.17. Adult children receive a significant part of their income from their parents, 2004-07 260

Figure 5.18. Pensions help reduce poverty in old age, 2011 261

Figure 5.19. Reductions in poverty rates among households with elderly are largely accounted for by increases in pensions, 2005-10 262

Figure 5.20. Pensions help lower inequality among the elderly 263

Figure 5.21. Replacement rates become less progressive after pension reforms 265

Figure 5.22. Pension benefits for low-wage earners are projected to be low in most countries 266

Figure 5.23. Coverage of pensions for the elderly is projected to decline sharply in many countries 267

Figure 6.1. Increasing voter turnout among youth may slow down the aging of the voting population in Europe and Central Asia 287

Figure 6.2. Older people are more likely to participate in voting 289

Figure 6.3. Older people want more public spending on pensions but less on education 290

Figure 6.4. The economy is more important than pensions or health care for European residents: Could this ranking change in aging societies? 292

Figure 6.5. Differences in policy preferences across age groups in Europe tend to diminish if generational changes are accounted for 293

Figure 6.6. Is aging making countries less open to international migrants? 295

Figure 6.7. Positive attitudes toward immigrants decrease with age but increase with income and educational attainment 297

Figure 6.8. The more negative attitudes of older individuals against immigrants are driven largely by generational change, not by aging 298

Figure 6.9. When unemployment increases, positive attitudes toward immigrants tend to lessen in Europe 298

Figure 6.10. Attitudes toward immigrants become more negative during recessions 299

Figure 6.11. Countries in Europe and Central Asia have some of the lowest legal voting ages in the world 300

Figure 7.1. Although many countries in the region have extremely low fertility rates, it may be a temporary phenomenon 305

Figure 7.2. Women throughout Europe have fewer children than they would like 306

Figure 7.3. A substantial gap in life expectancy at birth exists in Europe and Central Asia 308

Figure 7.4. High blood pressure, dietary habits, and alcohol and tobacco use are leading health risks 309

Figure 7.5. Almost all countries in Europe and Central Asia have negative net immigration rates 314

Figure 7.6. Participation rates in the labor market at older ages are low in aging societies 318

Figure 7.7. Productivity and quality of education in Europe and Central Asia lag behind Western Europe 322

Figure 7.8. Debt levels are lower in most, but not all, countries in Europe and Central Asia 326

Figure 7.9. If the effective retirement age were to rise to 65 and benefit levels were to stay where they are today, pension expenditures would still rise significantly, 2050 328

Figure 7.10. Public health expenditures are peaking at old age, with an unexpected decline for the "oldest old" 329

Figure 7.11. The ripples of baby boomers' aging will bring increased deaths in Europe and Central Asia 331

Figure 7.12. The supply of medical technology generates rising demand 332

Figure 7.13. Different models exist for financing long-term care 335

Figure 7.14. In Central Europe and the Baltics, as well as Western Europe, old-age poverty is significantly lower than poverty among the young 338

Figure 7.15. Many countries in Europe and Central Asia face high policy challenges but are already relatively old and have not much time left for reforms 343

Boxes

Box O.1. How to Define Aging? 33

Box O.2. Is Aging to Blame for the Dramatic Economic Slowdown in Japan? 41

Box 1.1. Nearing the End of a Demographic Transition to Stable or Declining Populations in Europe 66

Box 1.2. Have People Had Fewer Children because of the 2008 Economic Crisis? 73

Box 1.3. Why Fertility Is Higher in France Than in Germany 75

Box 1.4. Do Decisions on Having a Second Child Determine Variations in Fertility across Europe? 77

Box 1.5. Lessons of the Age of Mass Migration 87

Box 1.6. Fertility Scenarios: The United Nations Population Division 90

Box 1.7. Do Immigrants Raise Local Fertility Rates? 96

Box 3.1. The Impact of Aging on Dependency Rates due to a Decline in Fertility versus a Decline in Mortality 135

Box 3.2. A Simple Model of Savings and Investment 138

Box 3.3. The Rise of Employment at Older Ages in the OECD 144

Box 3.4. Regression Analysis of Correlates between Employment and Worker Characteristics at Older Ages 151

Box 3.5. How Do Social Security Systems Influence the Effect of Aging on the Real Economy? 162

Box 4.1. The Growing Importance of Innovation in Europe and Central Asia 218

Box 5.1. Estimating Poverty for Demographically Different Households 239

Box 5.2. Recent Trends in Poverty and Inequality in Europe and Central Asia, 1987-2012 241

Box 5.3. The Impact of Aging on Inequality 249

Box 6.1. The Emergence of Pensioners' Parties in Europe 288

Box 7.1. What Is Long-Term Care? 312

Box 7.2. Innovations at BMW and CVS to Improve the Productivity of an Aging Workforce 323

Box 7.3. "Golden" Care for the Elderly in Japan 336

Maps

Map O.1. Populations are aging everywhere 37

Box Tables

Table BO.2.1. GDP Growth Decomposition, Japan, 1960s and 2000s 41

Table B1.3.1. Relationship between Work and Family Life, by Gender, France and Germany, 2011-12 75

Table B1.7.1. The Effect of Immigrant Women on Total Fertility Rates, Various Economies and Years 96

Table B3.5.1. The Impact of Aging on Capital per Worker under Different Unfunded Pension Systems 162

Box Figures

Figure B1.1.1. Europe's population has stabilized after a period of unprecedented growth 66

Figure B1.1.2. Most European countries are at the late stage of the demographic transition 67

Figure B1.4.1. Having two children was most common for women aged 39-45 in Europe, 2008 77

Figure B3.1.1. The change in the population age structure differs depending on whether the aging is due to reductions in fertility or to old-age mortality 136

Figure B3.1.2. A decline in old-age mortality increases the dependency rate permanently 136

Figure B3.3.1. As longevity increases, so does the age at which people retire 144

Figure B4.1.1. In some countries in the region the share of employment in high-technology manufacturing and knowledge-intensive services is similar to that in developed European countries 218

Figure B4.1.2. Some countries in the region are exporting high-technology manufacturing products in significant volumes 219

Figure B4.1.3. Incremental innovation is common among firms 219

Figure B4.1.4. Firm-level innovations are mostly self-developed and new only to the national market 220

Figure B5.1.1. Older individuals tend to live in smaller households in Europe and Central Asia 239

Figure B5.1.2. Food consumption does not decline with age, but the pattern changes, Poland, 2010 240

Figure B5.3.1. Aging affects inequality through multiple channels 249

Figure B6.1.1. A pensioners' political movement has emerged across Europe 288

Box Maps

Map BO.1.1. People in Europe and Central Asia are older than in Western Europe when aging is measured by years of life remaining 33

Figure 3B.1. The size of the labor force in Europe and Central Asia is expected to shrink with aging 177

Figure 3B.2. Aging and the related reduction of the labor force will be different across country groups in the region 179

Figure 3B.3. Projected changes in the size of the labor force strongly depend on how people adapt, 2010-50 180

Figure 3B.4. Projected changes in the size of the labor force strongly depend on how people adapt and will vary across the subregion, 2010-50 181

Figure 3C.1. Without adjustments, the economic and fiscal situation is expected to deteriorate 184