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Which countries face the biggest policy challenges of aging populations in Europe and Central Asia?

Johannes Koettl's picture
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The Europe and Central Asia region is the oldest region on the planet. This means that the 46 countries of the region are also at the forefront of addressing some of the many policy challenges that aging populations bring. How is the region faring with its heterogeneous group of countries?

We have looked into this policy challenge and analyzed the 46 countries in terms of their current demographic position (as measured by median age) and evaluated their policy performance in three main areas covering eight key policy challenges that countries need to address as their populations age.

First, we identified three policy challenges that are related to demography itself, namely: 1) healthy life expectancy; 2) total fertility; and 3) net immigration rates. Demography is not destiny and can be shaped by policy. Increased longevity itself is an undisputed achievement of mankind; however, there are qualitative differences. What matters is not necessarily an increase in additional years of life, but an increase in healthy years of life.

However, aging societies are not only a result of increased longevity, but equally influenced by low fertility and high out-migration of younger populations. A countries demography is in better shape the higher health life expectancy is, the higher total fertility rate, and the lower net outmigration.

Second, we identified four policy challenges that are related to preparing for the economic consequences of aging populations, namely 1) the adult dependency ratio; 2) the PISA testing of high school students; 3) the gross debt as a share of GDP; and 4) relative poverty gap between young and old.

Arguably one of the most pressing challenges is the changing ratio of workers to those who do not work - whether they are in retirement or out of the labor force for other reasons, and the best way to measure the extent of the challenge is the adult dependency ratio.

Another challenge is the ability of workers to pursue life-long learning and training in order to remain active and productive throughout their entire career - the basis of which are foundational skills learned during primary and secondary education. In other words, the better the learning outcomes achieved by a basic school system (as measured by PISA), the smaller the challenge for these students later in their career. The government, on the other hand, needs to be able to contend with the fiscal challenges of an increasingly old population.

The lower public debt ratios are today, the more room for maneuver governments will have in the future. Finally, aging societies risk exacerbating inequalities that build up over the lifecycle and are biggest within older cohorts, posing the challenge of increased inequality as the size of older cohorts increases. Accordingly, we picked the relative poverty gap between young and old as our outcome indicator - the higher poverty among the old relative to the young, the bigger the challenge.

Third is the political economy challenge as measured by the voter participation gap between old and young. As populations grow older, so do voters, shifting the political center of attention to the interest of older generation, arguably making it more difficult, for example, to achieve important reforms in the pension system or higher spending on the education system. The more young people vote, however, the better their interests will be represented, so we picked the voter participation gap between old and young as our indicator.

Aggregating all these eight indicators into one average indicator yields a broad based measurement of how big each individual country’s policy challenge of aging populations is in relation to all the other countries. The graph below plots the aggregate indicator against countries’ median age for the year 2012. The higher the indicator, the bigger the challenge.

 
Graph: Many countries in Europe and Central Asia face high policy challenges but are already relatively old and have not much time left for reforms (Click graph to enlarge)
Source: Bussolo, Koettl and Sinnott (2015).
Notes:
Green: Western Europe; Red: Central Europe and the Baltics; Blue: Western Balkan; Orange: Eastern Partnership and Russia; Yellow: Young countries. The y-axis is a simple average of z-scores of eight indicators across countries: voter participation gap between old and young; total fertility rate; healthy life expectancy; net immigration; adult dependency ratio; PISA scores in science; gross debt as share of GDP; and old-age poverty relative to poverty at younger age
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What do we find? Many of the richer Western European countries (depicted in green in the graph) are actually doing rather well and fall into the “Old, but adapting” category.

This is especially true for the Nordic countries, Luxemburg, and Switzerland, but also for some of the Central European and Baltic countries, like the Czech Republic, Estonia, and Latvia.

However, some of them, most notably Bulgaria, Croatia and Greece fall into the “Old and lagging behind” category.

The is even worse for the Eastern Partnership countries, Russia (orange), and the Western Balkan (blue), with Moldova standing out as the country with the biggest challenge overall, by quite a margin, followed by Bosnia and Herzegovina, Albania and Serbia.

Serbia, together with Bulgaria, Greece, and Croatia not only face a big challenge, but are also already relatively old, so their time for reform is running out quickly.

The younger countries (yellow), on the other hand, partially also face big challenges (like the Kyrgyz Republic and Azerbaijan), but they still have considerable time left to implement reforms.

The most pressing policy challenges vary quite a bit across countries, so deriving general policy conclusions is difficult. However, it seems that the Western Balkan, the Eastern Partnership, and the Baltic countries display particularly low fertility rates and low healthy life expectancy, often exuberated by high emigration.

On the economic dimensions, high inactivity of the adult population, low-quality education, and old-age poverty are the biggest challenges in the Eastern Partnership countries and the Western Balkans, but also in some of the younger countries like Azerbaijan, the Kyrgyz Republic, and Turkey. Public debt ratios stand out as the biggest challenge for some of the Southern European countries.

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Johannes Koettl is co-author of the World Bank report “Golden Aging. Prospects for Healthy, Active, and Prosperous Aging in Europe and Central Asia”. Follow Johannes on Twitter: @johanneskoettl

This post was first published on the Brookings Future Development blog series as Which countries face the biggest policy challenges of aging populations in Europe and Central Asia?
                                                                               

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