Aging Populations and Social Challenges. Paper presented on IIASA's 20th Anniversary

Praag, B.M.S. van, Dalen, H. van, & Lutz, W. ORCID: https://orcid.org/0000-0001-7975-8145 (1994). Aging Populations and Social Challenges. Paper presented on IIASA's 20th Anniversary. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-94-007

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Abstract

IIASA celebrated its twentieth anniversary on May 12-13 with its fourth general conference, IIASA '92: An International Conference on the Challenges to Systems Analysis in the Nineties and Beyond. The conference focused on the relations between environment and development and on studies that integrate the methods and findings of several disciplines. The role of systems analysis, a method especially suited to taking account of the linkages between phenomena and of the hierarchical organization of the natural and social world, was also assessed, taking account of the implications this has for IIASA's research approach and activities.

This paper is one of six IIASA Collaborative Papers published as part of the report on the conference, an earlier instalment of which was Science and Sustainability, published in 1992.

If there is anyone who writes with authority on pensions and the problems that all industrial countries will confront in at most the next 20 years it is Professor van Praag. He has been far ahead of his time in pointing out the fatal defect hidden in the present arrangement of social security. It was introduced and is now maintained and defended less from the viewpoint of long-term workability than for its short term convenience.

The system I refer to is called Pay As You Go (PAYG), wherein no reserve is maintained; each year's tax collections (necessarily from those working) are paid out that same year to those retired. The convenience of PAYG was that as soon as announced it could start to pay retirees almost irrespective of the amounts they had contributed. It necessarily reduces saving in the economy, turns one generation against the preceding generation, and has other incidental ill-effects, but these are not what concern van Praag and Dalen most.

What they fear is its instability in the face of demographic fluctuations, specifically the day when the postwar baby boom starts to retire. Subsequent to the baby boom of the 1950s birth rates went down and stayed down, so that the cohorts to pay the pensions will be relatively small, just as the cohorts coming to collect them will attain record size. Beyond that fact, caused by the changing birth rate, is the decline in mortality, the increased fraction of each cohort living to extreme old age. What happens when these facts require that payroll taxes go up to the 25 percent of all wages that will ultimately be necessary if the retired are to have social security incomes equal to 80 percent of the average wage?

PAYG depends on each generation as it makes its payments trusting that the next generation will continue do the same; once doubt starts to spread the fragility of the whole system is revealed. We are told that the system is supported by a "contract between the generations" but the "contract" is metaphorical, as will be revealed in a few years when the crunch comes.

Effects go beyond the social security system; they create a wholly artificial and unnecessary conflict between the generations. With PAYG a shortsighted younger generation can become alarmed at what is ultimately good news for all - the rapidly growing number of octogenarians and people even older - and be tempted to vote against further use of their taxes for research into and therapy of the chronic diseases of old age.

But you do not require my explanation of the problem of PAYG. You not only have it better expressed by van Praag and Dalen, but they provide a remedy, one that will be the more painless the sooner it is initiated.

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