Our options are few: We must consume less, work more, or both. There are four basic approaches for adapting to the new economic landscape created by an aging population, and for providing the resources to support the consumption of households in their later years:

  • Workers save more (and consume less) in order to prepare better for their retirements.
  • Workers pay higher taxes (and thus consume less) in order to finance benefits for older people.
  • Benefits (and thus consumption) for older people are reduced so as to bring them in line with current tax and saving rates.
  • People work longer and retire later, raising their earnings and total output.

Higher saving rates for the working age population would reduce their current consumption but enable them to rely less heavily on public benefits for pensions and health care in the future. Of course, higher saving rates for the young will not help pay for the benefits of the current elderly. (For some basic definitions, see Box 2-1.) Raising payroll taxes would reduce consumption by the working age population, making it possible to pay more benefits to the current and future elderly. Alternatively, costs could be shifted to the elderly by cutting their benefits or raising their taxes as a condition for receiving the benefits. A final option is to increase the size of the

BOX 2-1
Basic Definitions

There is increasing recognition that the term “elderly” is an inadequate generalization that obscures the diversity of a population age group that spans more than 40 years. Nevertheless, for purposes of comparison—over time, across countries, and sometimes over different variables—some chronological demarcation of age categories is necessary. This report uses the term “elderly” to refer to people aged 65 and over.

The “developed” and “developing” country categories used in this report correspond directly to the “more developed” and “less developed” classification used by the United Nations. Developed countries comprise all nations in Europe (including some nations that were part of the former Soviet Union) and North America, plus Japan, Australia, and New Zealand. The other nations of the world are classified as developing countries. While these two broad categories commonly are used for comparative purposes, it is increasingly evident that they often do not accurately reflect developmental differences between nations.

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