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From Red to Gray - The "Third Transition" of Aging Populations in Eastern Europe and the Former Soviet Union

Anti-Corruption in Transition 3: Who is Succeeding...and Why?

Lead Authors: Mukesh Chawla, Gordon Betcherman, Arup Banerji
The countries of Eastern Europe and the former Soviet Union are experiencing a third transition, a transition that overlaps with their recent political and economic transitions. In 2025, more than one in five Bulgarians will be more than 65 years old - up from just 13 percent in 1990. Ukraine’s population will shrink by a fifth between the years 2000 and 2025. And the average Slovene will be 47.4 years old in 2025 - among the oldest in the world.

This third transition - from red to gray - is unique. Populations have been aging quite rapidly in many countries; by 2010, populations will start decreasing in such industrial countries as France, Italy, and Japan. Yet the unique conjunction of rapidly aging and relatively poor populations exists only in this region. This report examines the possible impact of this third transition. It analyzes projections and policy outlooks for a whole range of issues, from labor markets to pension policies, from health care to savings and capital markets. It concludes that although aging in the region is occurring in the context of unprecedented weak institutional development, countries can avoid severe economic consequences if they accelerate their economic transition and undertake longer-term policies to meet the aging challenge.

1. The Demographic Transition in Eastern Europe and the Former Soviet Union

Most of the countries in Eastern Europe and the former Soviet Union have populations that are aging rapidly. By 2025, the median age will be more than 10 years greater than it is now in about half of the countries in the region. In 18 of the 28 countries in the region, the population will actually shrink by 2025. The most striking case is the Russian Federation, where the population - which fell from 149 million in 1990 to 143 million in 2005 - is projected to fall to 111 million by 2050. The number of elderly is already high in many countries and will continue to rise during the next two decades. For example, in Poland, the proportion of the population 65 years and older is projected to increase from 13 percent in 2005 to 21 percent in 2025, and in Slovenia the increase is from 16 percent to 24 percent during this same period.

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2. Demographic Change and Labor Markets

Demographic trends can have direct implications for labor markets through three primary channels: labor supply, labor productivity, and labor demand (because of shifts in the structure of aggregate demand). This chapter focuses on the first two. The conventional wisdom is that aging societies will face difficult economic and social challenges because of what will inevitably happen in the labor market - that is, output will be reduced because the labor force will shrink as large numbers of workers retire and because older workforces cannot produce at the level of younger ones. These are legitimate concerns; however, the story is more complex and may be less demographically determined than conventional wisdom suggests.

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3. Aging, Savings, and Financial Markets

A common view is that aging societies can expect reduced levels of domestic savings because older people save less and that low savings will lead to lower capital accumulation, which, in turn, will depress investment and growth. Where aging is occurring in Eastern Europe and the former Soviet Union, will savings decline and thus constrain economic growth?

Different factors come into play in determining the specific financial consequences of aging in the region. Certainly, there are reasons to question whether the impacts expected under pessimistic scenarios in the older industrial countries will necessarily happen. In the first place, it is not clear how well the age-saving profiles that have emerged from research in those countries apply to transition countries. Not only is there very little analysis of this relationship in the region, but also it is far from clear whether the saving patterns of the past 15 years can be extrapolated into the future.

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4. Aging and Pension Expenditures

An inevitable consequence of population aging in many Eastern European and former Soviet countries is that, at current benefit levels, pension spending will have to rise to accommodate the increased number of elderly people. This is an especially huge challenge for countries with unfunded pay-as-you-go (PAYG) social security systems, in many of which pension spending is already substantial. The good news is that a number of countries in the region have begun considering measures to mitigate the impact of imminent demographic changes and are engaging in aggressive pension reform. Other countries have yet to come to terms with the looming pressure of rising pension expenditures as their populations age. Although most of these countries are young, a few older countries have been slow to introduce much needed reforms, and unless they change their pace, pension spending will come to pose a much heavier burden over time.

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5. Aging, Long-Term Care, and Public Expenditures

There are widespread concerns that rapidly aging populations in many countries in Eastern Europe and the former Soviet Union will have significantly higher health care requirements, simply because the elderly have a high demand for ambulatory, inpatient, and chronic care. Another critical issue is long-term care for the very old. Such care becomes costly as the availability of informal (family-based) care declines, and it can have large opportunity costs if younger people spend time caring for the elderly that they would otherwise spend in the labor force. There is, therefore, a real potential for medical and health costs to rise as populations age, especially in countries where levels of health spending are already higher than available resources, though the magnitude will depend crucially on whether longer life spans mean more healthy years or added years of illness and dependency.

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6. Aging and Education

The demographic changes taking place are imposing additional stresses on the region’s education systems. Lower fertility levels in general are reducing the demand for preschool, primary, and secondary education and are shifting demand toward higher education. To the extent that they have already affected education systems, these changes have exacerbated the problem of redundant capacity of staff and facilities at the primary and secondary levels and the problem of shortage of capacity in higher education. Demographic change will lead to further inefficiencies in the use of budget resources for education unless there are fundamental changes in the financing and management of these systems.

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