Rethinking Retirement Ratios

MUNICH – It has been clear for some time that a pension crunch is coming, and that it will be bad news for government spending everywhere. The proportion of old people – and specifically those who are retired – is growing rapidly, especially in developed countries, where the trend is already putting pressure on social welfare systems.

The problem, however, could be even worse than most people believe, because the tools we use to measure the impact of aging are not properly calibrated. As a result, there is a huge disparity between the number of people traditionally counted as being retired and those who actually depend on pensions to live.

The confusion stems from the way researchers have traditionally calculated an indicator called old-age dependency (OAD), which is the ratio of people older than 64 to those of working age. In 2015, the OAD ratio in Italy was 35%, according to the United Nations, meaning that for every 100 Italians aged 15-64, there were 35 people aged 65 or older. By 2050, Italy’s OAD ratio is projected to be more than 60%. The story is similar in Germany, Japan, and Spain, all of which are predicted to double their OAD ratios over the next 30 years.

That figure has important implications. The OECD predicts that increases in OAD ratios will result in significantly higher public spending on health care, long-term care, and pensions. This is a scary prospect, given that public pensions already account for 17% of public spending, on average, in the OECD, making them the biggest budget item in many countries.