Panel 1

Panel 1 of people older than 65 to those between ages of 15 and 65) is projected to double by 2050 to around 0.5, REY NEW WORLD G : which implies that about a third of the potential vot- EUROPE ON THE ROAD TO ers is older than 65 (Figure 2). The two main causes of aging are increased longevity and lower fertility, GERONTOCRACY? which we examine below.

Introduction Higher life expectancy raises return on human capital

ARJI LANS BOVENBERG* Average life expectancy at birth has increased by Scientific Director, Network for Studies on Pensions, more than two years per decennium since 1950 in the and Retirement (Netspar), Tilburg University G-7 countries and the EU (Figure 3). Life expectan- cy at age 65, which is more relevant for the costs of pensions, rose by about one year per decennium Aging of the population demands major adjustments (Figure 4). From an economic perspective, increased in the way society organizes work and public support longevity is in fact good news since morbidity over the life course. These reforms may be difficult appears to decline in line with mortality. Increased to implement in a , however, because also longevity thus implies that many more people can voters age.After documenting aging and its causes in enjoy healthy and productive lives up to old age. the first section and discussing the required institu- They can accumulate experience and exploit their tional reforms in the second section, this paper abilities longer. In other words, the return on invest- describes the challenges to the political system ing in people rises. raised by aging in the third section. The forth section focuses on how to address increased longevity while Feminization of work implies better use of female the fifth section explores how reasonably high fertil- human capital ity rates may be maintained. The final section con- cludes. As regards the second fundamental demographic trend behind aging, fertility rates have fallen below replacement levels in all developed countries since Aging: its causes the 1960s (Figure 5). Moreover, women bear chil-

The median age in the EU has Figure 1 increased from 31 in 1950 to 39 now, and is projected to rise fur- AVERAGE AND MEDIAN AGE OF VOTERS IN EU-25 ther to 48 by 2050 (Figure 1). In 50 Germany, the median age of 48 potential voters will increase 46 from 47 now to 53 in 2030. The 44 median age of actual voters will 42 40 Mean age rise to even higher levels as Median age older voters tend to actually use 38 their voting power more. In 36 many countries, the old-age 34 dependency ratio (i.e. the ratio 32 30 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 * The author would like to thank Gerardo Soto y Koelemeijer for research Source: European Commission. assistance.

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Figure 2 premium base for financing DEPENDENCY RATIOa) 1950–2050 pay-as-you-go (PAYG) pen- in % sions, lower fertility initially 0.7 frees time and resources for 0.6 Netherlands Italy working-age adults by reducing France the burden of supporting young 0.5 Germany Spain dependents (see Weil 2006). Sweden 0.4 United Kingdom Moderate seasons in the modern 0.3 life course

0.2 Increased longevity and the 0.1 feminization of work are 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 changing the life course. In the a) The ratio of people older than 65 to those between ages of 15 and 65. modern longer life course, Source: European Commission. adults spend considerable time in households without young dren later in life (Figure 6). Lower and delayed fer- children as a result of lower fertility and delays in tility is the result of better schooling of women and both parenthood and morbidity (and mortality). the feminization of work.The latter development is Indeed, in the “spring” of the modern life course due mainly to technological changes raising the (alternatively termed “early adulthood phase” or demand for communication and creative skills in “playtime of life”), young adults first invest in growing service sectors at the expense of raw mus- their own human capital through extensive educa- cle power in the industrial sector. The increased tion. In this period of extended social adolescence, value of female human capital has raised the they also experiment with relationships and jobs opportunity costs that women face when bearing before they take on the responsibility for raising children. Just as increased longevity, the increased children during the “summer:” the family season use of female human capital on the labor market is when parents bear the responsibility for bringing good news. Moreover, whereas it may erode the up children.

Figure 3 Figure 4 TRENDS IN LIFE EXPECTANCY AT BIRTH LIFE EXPECTANCY AT AGE 65 years years 90 24

Males 22 85 Males 20 80 18

75 16

14 70 12 65 10

60 8

90 24 Females Females 85 22 1960 Reihe1 20 1960 Reihe1 80 18 75 16

70 14 12 65 10 60 8 UK UK Italy Italy USA USA Spain Japan Spain EU-25 Japan France France Canada Sweden Canada Sweden Germany Germany change 1960-2005 change 1960-2003 1960 1960

France, Italy, Spain, United Kingdom, USA, Japan: 2002. USA and Japan: 2003; Canada: 2001. Source: Eurostat; OECD (2005). Source: Eurostat; OECD (2005).

CESifo Forum 3/2007 18 Panel 1

Figure 5 time (see Avramov 2002). In the TRENDS IN FERTILITY spring and especially the children per family autumn, in contrast, the climate 3.5 is more moderate. Adults thus 2005 1960 3.0 do not have to care for young

2.5 children and enjoy relatively high purchasing power. 2.0

1.5

1.0 Institutional innovation

0.5

0.0 Both a longer life and the femi- EU-25 Germany Spain France Italy Sweden United USA Japan Canada nization of work require chang- Kingdom es in the way society organizes USA: 1970 and 2003; Japan: 2003; Canada: 1970 and 1998. work and maintains the talents Sources: Eurostat. of people over the life course.

After their children have grown up, parents typically Treasure human capital spend considerable time in good health in the “autumn” season of their life course (or alternative- The first priority for institutional innovation is safe- ly “the active senior phase”).Tomorrow’s elderly can guarding the production and maintenance of human be expected to be healthier, wealthier and better capital. In a modern knowledge-intensive society, educated than ever before. They thus enter later into human capital is the key to personal fulfillment and the “winter season:” the last phase of life in which social inclusion. At the same time, knowledge and people suffer from serious health problems and specific skills age faster on account of creative require care. destruction associated with fierce competition and rapid innovation. The combination of a longer life The summer season in the modern life course is and faster obsolescence of skills demands mainte- quite hot. During this so-called “rush-hour of life,” nance of human capital through continuous learn- people may experience “combination stress.” The ing. Adaptability, the ability to learn and key non- costs of living are high while time is scarce, as par- cognitive skills (such as social and communication ents invest not only in their children but also in their skills, self-discipline, emotional resilience, self-con- careers. Compared to other European household trol) is shaped early in life during early childhood. types, families with co-residing children are least These personal traits undergird the social legitimacy satisfied with living conditions, including their work of a competitive, innovative economy associated or other main activity, income, housing, and leisure with creative destruction. Moreover, an adaptable labor force can embrace risk, thereby raising the supply of Figure 6 risk-taking capital and entrepre- MEAN AGE OF WOMEN AT FIRST CHILDBEARING neurship. 30

29 Human capital is produced not 2003 1980 28 only in schools but also in fami- lies and firms. Reconciliation of 27 work (including workplace 26 learning in firms) and family 25 (including informal care for 24 young children) is therefore 23 essential. It allows parents to

22 form and maintain a supportive Germany Spain France Italy Sweden United USA Japan family relationship in which Kingdom they build the future work- Spain: 2002; Italy: 1996; France: 2001; United Kingdom: 2002; USA, Japan: 1970 and 2000. force’s capacity to learn, adapt Sources: Eurostat; OECD (2005).

19 CESifo Forum 3/2007 Panel 1

and relate, while cherishing their own human capital to support young parents who are in the summer by remaining durably attached to the labor force. season of their lives. In addition to more flexible Through better maintenance of their human capital, career paths that decompress the working life, people can exploit their longer life to combine the public support should thus be gradually shifted pursuit of a fulfilling career in paid work with the away from the fall and winter seasons of life vital task of raising the next generation of workers. towards the spring and summer seasons when By adjusting the allocation of work over the life human capital is produced. In this way, proactive cycle to the biological clock of women (so that social policies that help people to build up and leisure is not concentrated only at the end of life), manage human talents replace reactive social poli- the reconciliation of work and family thus involves cies that provide passive income support to those the way the entire life course is organized. who have depreciated their human capital. Among other things, facilities that allow parents to raise More flexibility in work and careers young children while maintaining their own employability, should substitute for privileges for More flexibility in how various activities are com- full-time male breadwinners (who do not neces- bined over the life course is the second priority for sarily have young children in their households). In institutional innovation in order to contain the order words, public support should be tied to chil- main opportunity costs of becoming a parent, dren rather than breadwinners. namely foregone career possibilities. The feminiza- tion of work is thus reconciled with fertility rates Especially countries with extensive PAYG pension that are large enough to sustain the population. and PAYG health insurance systems should support More flexibility in allocating working time can pre- households with young children. In these PAYG sys- vent stress and excessive time squeeze when work- tems, children who have been reared by others sup- ers bear substantial family responsibilities in the port the elderly without children. By bearing chil- summer season of the life course. Moreover, it dren, parents thus generate positive external effects helps women, who still carry most of the family for the childless. Public support for parents of young obligations, to remain attached to the labor force. children should increase with the opportunity costs Their human capital is thus maintained better so of raising children (due to, e.g., loss of career oppor- that their working lives can be extended and tunities and higher costs of raising children in a com- become more fulfilling. More flexibility can also plex society), the social benefits of investing in the allow older workers with changing private needs to non-cognitive skills of young children, and the keep working. PAYG benefits provided to the elderly.

The challenge for institutional innovation is to cre- More inclusive labor and housing markets ate more flexible workplace cultures that reconcile the needs of employees who balance work with Rather than shielding insiders through employment family and other obligations with the needs of protection, labor-market institutions should enable employers to flexibly respond to fluctuations in parents of young children, secondary workers and demand in increasingly competitive markets. By young adults to easily enter and remain in the labor finding new ways to attune work conditions and market and adjust their working conditions to career paths to the needs of employees who want to changes in family conditions. Condensing the period remain employable despite substantial family oblig- of full-time education, combining learning with ations, changes in their personal lives, and creative work at an earlier stage, and spreading learning destruction associated with rapid innovation, firms more evenly over the life cycle by integrating it bet- can promote themselves as good places to work. In ter with work could also be helpful in shortening the this way, they can remain competitive on an aging period of social adolescence, decompressing the labor market in which labor is becoming increas- working life, and bringing forward parenthood.Also ingly scarce. a well-functioning housing market can reduce the stress that young adults experience in the early Support parents in the summer season reproductive stage of their lives. Among other things, tax facilities for home ownership may have to The key institutional challenge is to exploit the be targeted better at new entrants into the housing spring and especially the autumn of the life course market.

CESifo Forum 3/2007 20 Panel 1

Political challenges Figure 8

EXPECTED YEARS IN RETIREMENT, 1970–2004 As noted above, longevity and feminization of work are good news from an economic point of view. The 30 Men required adjustments in the way society organizes 25 work and public support over the life course, howev- 20 er, constitute a major challenge to the political sys- 15 tem. The danger facing aging societies is that older voters block the needed reforms. In that case, a con- 10 flict arises between the political power of older gen- 5 erations (who depend on public transfers and are 0 risk averse) and the economic power of the younger, 30 working generations (who control the major scarce 1970 Reihe1 25 Women resource that fuels the modern knowledge-intensive 20 economy, namely human capital and entrepreneur- 15 ship). In other words, collides with econom- 10 ics.With politically strong older generations favoring generous passive spending on pensions and health 5 care at the expense of investments in the human cap- 0 UK Italy USA Spain Japan

ital of younger generations, aging societies risk France Canada Sweden Sweden becoming entangled in a vicious circle of early retire- Germany 1970 2004 ment, rapid depreciation of human capital, low fer- tility, slow innovation, and political instability (see Source: OECD (2005). Boeri et al. 2006).

In such self-sustaining equilibrium, workers retire to that of their parents. As a result of a less employ- early because their skills are obsolete, while human able and adaptable labor force, open competitive capital is not maintained because people retire early markets and the associated creative destruction lose and thus feature only a short time horizon.As work- their social legitimacy. Moreover, as workers lack ing lives are being compressed (see Figure 7), the resilience to embrace risk, pension funds shed careers must be made during the reproductive stage risk and prefer to invest mainly in low-risk assets of the life cycle. This raises the opportunity costs of and bonds. This weakens fiscal disci- bearing children – especially for highly educated pline, crowds out productive investments and harms women. Low fertility rates of these high-skilled long-term growth. women damage the quality of human capital, because the skill level of children is closely related The presence of only a small middle-aged generation in the summer of their life course caring for the old and the Figure 7 young constitutes a threat to the LEARNIG, WORKING, LEISURE, 1975–2000 intergenerational contract Women age according to which each genera- 90 tion invests in the human capital 80 of the next and is taken care of 70 leisure at the end of its life by the gen- 60 erations in which it has invested. 50 Indeed, with retirement becom- 40 workning ing a lengthy period of -sup- 30 ported leisure for a surging able- 20 bodied population of retirees 10 learning (see Figure 8), the elderly are 0 increasingly viewed as a liability 1975 1980 1985 1990 1995 2000 rather than a vital resource. A

Sources: OECD (2005). heavy tax burden on a small

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active labor force puts at serious risk solidarity with age of retirement. In this way, younger, active vulnerable elderly, children and disadvantaged cohorts (who exhibit a longer horizon and more flex- adults of working age. Last but not least, civic trust in ibility to adapt) absorb longevity risks, while older a stable social order in which the government generations who have retired and thus have depreci- upholds its promises is shattered, thereby risking ated their human capital are shielded from these political upheaval. risks. The government can enhance the efficiency of intergenerational sharing of longevity risk further by issuing longevity bonds, thereby allowing private Linking retirement ages to longevity pension funds and insurance companies to protect retired generations from longevity risk. Linking the Measuring older age appropriately age at which citizens first receive their public pen- sion to life expectancy makes it in fact more attrac- In order to prevent the emergence of a large inac- tive for the government to issue longevity bonds tive class of older politically powerful citizens because this link reduces the exposure of the gov- depending on public transfers, the age at which pub- ernment’s balance sheet to longevity risk. lic retirement benefits are first paid should be linked to life expectancy.1 One sensible rule, which pre- Automatic link mitigates political risks vents contribution rates for PAYG2 retirement sys- tems from increasing in the face of higher life Automatically linking public pensions to life expectancy,3 keeps constant the proportions of adult expectancy as part of a transparent risk-sharing con- life spent working and in retirement (Turner 2006).4 tract avoids the political costs of discretionary deci- By encouraging young agents to maintain their sions limiting eligibility to public pensions.Agreeing human capital better, such a rule capitalizes the ben- on a risk-sharing rule ex ante also reduces the polit- efits of increased longevity in terms of more durable ical risks associated with collective discretionary human capital and the associated ability to absorb decision-making. Moreover, the government does aggregate risks so that pension funds can continue not offer unrealistic guarantees but is transparent to invest in risk-bearing assets, thereby fostering about how it distributes risk over the stakeholders entrepreneurship, innovation and growth. In this of the public pension. Linking retirement ages to life way, increased longevity is turned into an economic expectancy is also fair: younger generations work opportunity rather than a financial threat. In fact, longer but still enjoy a longer expected period of one can argue that all ages that are used to measure retirement. Moreover, in the face of gradually old age should be linked to longevity so that one increasing life expectancy and retirement ages, actually computes old age from the end of life rather workers and firms can adapt gradually to a longer than from the beginning. In this way, societies working life by better maintaining human capital ensure that social and biological aging do not and adjusting the organization of work to the needs diverge further. Most importantly, the emergence of of older workers. An increase in spending on dis- a large class of inactive older able-bodied people is ability pensions and unemployment benefits is thus thus prevented. avoided.5

Intergenerational sharing of longevity risk Flexible labor markets extend working lives …

Normal retirement ages should be based on the life Linking retirement ages to longevity is credible and expectancy of a cohort as measured at that normal politically legitimate only if a well-functioning labor market for elderly workers ensures that additional demand for older workers matches additional sup- 1 Agents can be allowed to collect retirement benefits earlier if annual retirement benefits are cut in an actuarially neutral way. ply. Together with better-maintained human capital, 2 At fixed retirement ages, increased longevity puts financial stress on not only PAYG schemes but also funded pension schemes. a flexible labor market also allows the speed and Indeed, funded pension schemes may be particularly vulnerable to increased longevity. The reason for this is that the longer life spent extent of phased retirement to act as a buffer for in retirement calls for more financial saving, which depresses the return on capital and thus hurts funded pension schemes. 3 The rule is thus closely rated to so-called notional defined contri- 5 At the same time, the eligibility criteria for passive unemployment bution (NDC) systems, which keep contribution rates fixed when and benefits facilitating early retirement and rapid depre- longevity rises. ciation of human capital should be tight. By discouraging employ- 4 Denmark has implemented a rule that keeps constant the ers and employees from using these schemes as early retirement absolute length of the expected retirement period so that the statu- schemes, encourage firms and social partners to tory retirement age in the public pension system rises on a one-to- invest more in older workers and to adapt work, wages and work- one basis with longevity. place cultures to the needs and talents of elderly workers.

CESifo Forum 3/2007 22 Panel 1 absorbing aggregate risk. This requires adjusting the the interests of insiders at the expense of the out- implicit labor contract according to which workers siders and new entrants. are underpaid when young and overpaid later on. Indeed, increasing the retirement age at which the Link PAYG retirement benefits and child benefits to employer lays off the employee must not put undue fertility strain on the employer. Employees should thus accept more wage flexibility over the life course (so Whereas both funded and PAYG pension systems that they are paid according to their productivity) as are vulnerable to increased longevity, PAYG pension well as flexible working practices (so that labor pro- schemes are especially vulnerable to lower fertility ductivity is maintained at higher ages). because they rely on the human capital of the young to finance the pensions of older generations. This … and stimulate entrepreneurship, risk taking and calls for automatic and transparent risk-sharing rules informal care that stipulate that retirement ages (pension incomes) in public PAYG systems should increase (decrease) With a more flexible labor market, older workers more than proportionally with longevity if fertility bear less unemployment risk and thus depend less declines or remains at a low level.6 Indeed, if genera- on political intervention in the form of public tions invest less in the human capital of the next gen- income transfers. In fact, a well functioning labor erations by reducing fertility, they should invest more market with plentiful jobs for older workers protects in financial capital by saving for their retirement or in these workers against firm-specific shocks and is their own human capital so that they can work thus an efficient insurance device, which relieves longer.7 Indeed, lower fertility may call for gradually pressure from the welfare state. In particular, it nar- shifting from PAYG financing to funded pension rows the differences between the insiders who are schemes (see Sinn 2000).8 Lower public spending on lucky enough to work for a surviving firm and the pensions also creates budgetary room for more pub- outsiders whose firms have not survived intense lic support for households with young children. By competition. Moreover, golden chains no longer tie thus redistributing from people without children to older workers to their employer. Indeed, workers those with children, society avoids becoming entan- can more easily transfer between different states in gled in a vicious circle of low fertility, early retire- the labor market (e.g. entrepreneurship, full-time ment and a dearth of human capital. employee, part-time worker, part-time retirement, etc). The flexibility to change one’s working condi- In the face of low and falling fertility rates, coun- tions to better suit changing needs and to find new tries with large PAYG systems should thus consider 9 challenges stimulates entrepreneurship and can help focusing the public scheme on poverty alleviation extend fulfilling working lives. The positive effect on by gradually reducing earnings-related PAYG ben- efits for those earning higher incomes.10 This would labor-market attachment of enhanced flexibility to adjust working conditions to one’s private circum- 6 Notional defined contribution systems, which adjust the indexa- stances holds true also for women between the ages tion of pension benefits so that contributions remain fixed, provide examples of such rules. of 50 and 70, who often provide informal care to 7 Investment in human capital rather than financial saving is called for if human capital and physical capital are poor substitutes and aging, fragile relatives and friends.This informal care other countries are aging as well or international trade in financial is likely to remain important in the future, due to capital, labor and/or goods is limited. 8 These private savings plans do not have to be individual defined- shrinking family sizes and budgetary pressures on contribution schemes but can also be low-cost stand-alone collec- tive pension plans with restricted individual choice (see Bovenberg formal care provided by the public sector. 2007). Indeed, the government may compel workers to save part of their labor income in order to protect households from myopia or to prevent households from counting on the government to bail them out from old-age poverty. 9 Public transfers for old-age unskilled workers may be in order if Protecting fertility low-income individuals are not able to save or work longer in the face in raising differences in life expectancy and health between low-skilled and high-skilled individuals. A flat public pension may be preferred over means-tested public pensions because means- Voting rights for parents of young children tested benefits may be stigmatising. These latter benefits may also discourage saving and undercut the political support of the middle class for public pensions: targeted programs for the poor may result One radical measure aimed at increasing the politi- in poor benefits. 10 The currently retired generation has not been able to anticipate cal support for families and more inclusive labor and lower public PAYG benefits. Accordingly, a strong case can be made for changing the rules of the game (i.e. reducing PAYG ben- housing markets is to give parents with minors an efits and increasing taxes on the elderly) only gradually. Relative additional voting right for each child. Indeed, the PAYG benefits can be reduced gradually by indexing benefits more to prices rather than wages or by raising the retirement age for political process is often biased in favor of protecting younger cohorts.

23 CESifo Forum 3/2007 Panel 1

yield a better balanced portfolio between funded inducing people to work longer, governments may and PAYG schemes, as workers with middle- and change future preferences and social norms higher incomes substitute private, funded pensions (Lindbeck, Nyberg and Weibull 1999).These insights for public PAYG benefits (see OECD 2001). point to the importance of implementing soon the Workers thus would become more dependent on institutional reforms described in this paper. In this capital markets rather than public transfers for way, we prevent Europe from becoming a gerontoc- their retirement. This strengthens political support racy: a large future constituency is built that is eco- for private property and reduces the scope for nomically active, endowed with sufficient human potential conflicts between labor and capital. capital to embrace the risks associated with a Moreover, the fact that the elderly rely less on pub- dynamic, innovative society, holds a stake in flexible lic transfers averts political conflicts between the labor and capital markets, and exhibits a strong work generations about the level of public transfers. and entrepreneurial ethos supporting the dynamics Indeed, solidarity between older generations and of open markets. Indeed, to enhance confidence and young generations raising young dependents trust in a stable social contract while at the same becomes more symmetric as the state supports not time facilitating timely adjustments, governments only the old (especially the poorer old) but also should announce as early as possible prospective young families in raising children. changes in the social contract. This would allow the large baby-boom generations to anticipate reduced public transfers in retirement by saving more and Conclusions investing in human capital.

We have argued in favor of state-contingent rules for In addition to arriving at new, transparent risk-shar- sharing demographic risks. At the same time, we ing arrangements, the key challenges of aging for must acknowledge that such legal rules suffer from institutional innovation are twofold. In the face of limitations. First of all, in designing state-contingent scarce human capital, the first challenge is to stimu- rules, the government faces a trade-off between late the maintenance of human capital and the flexi- commitment (rules) and flexibility (discretion). In bility of the labor market. In this way, human capital particular, governments may want to create clarity of youngsters, women and elderly workers is exploit- ex ante in complete contracts with regard to how ed better, the working life is extended, the major risks are shared in order to limit political risks.At the opportunity costs facing parents when investing in same time, however, they may want to leave some children (i.e. lost career opportunities) are con- discretionary powers so that they can respond to tained, and people can embrace risks. Indeed, a large unforeseen contingencies. entrepreneurial workforce, empowered with suffi- cient skills, safeguards the legitimacy of a dynamic A second limitation of legal rules is that commit- market, thereby boosting productivity growth. ment in a democracy is always limited. Even though rules are the default if laws are not changed and The second challenge for institutional innovation is defaults can be powerful also in politics, voters can to better diversify the income sources of the elder- always change the rules. Giving rules a constitution- ly. In this way, this politically powerful group al status can enhance commitment to rules because a becomes less dependent on public transfers and larger majority is required to change these rules. relies more on labor and capital income, thereby Even in that case, rules must retain sufficient popu- creating more budgetary room for support of young lar support in order to be credible. Hence, implicit parents. Replacing passive public spending on able- rules embedded in the culture are ultimately more bodied elderly by public spending on young chil- important than legal rules. dren aimed at enhancing their ability to learn pre- vents large one-sided resource flows between gen- Politics, economics and culture (i.e. individual pref- erations, which may be the source of divisive politi- erences and social values) are mutually dependent. cal conflicts. The political structure obviously affects economic policy. At the same time, however, by affecting the Two major economic securities of citizens should be, income sources of future voters, current economic first of all, their employability and the associated policy impacts on which policies will gather suffi- capability to adjust to shocks in labor and financial cient political support in the future. Moreover, by markets and, second, secure claims on pension and

CESifo Forum 3/2007 24 Panel 1 financial assets that help agents diversify risks. is expanding nearly at the same rate as the popula- Schools, employers and unions can play an impor- tion gets older, since such high-quality cars are pre- tant role in helping people acquire the necessary dominantly bought by older, well-off customers. financial competences and life and work skills. Better education may also make voters more aware The next speaker, Klaus Kleinfeld, CEO of Siemens of the fundamental trade-offs in social policy, there- AG, presented the economic significance of health- by enhancing the quality of the political debate and care costs and the business opportunities of health- ultimately improving policymaking (Boeri and care industry in an aging society. In Germany the Tabellini 2005). GDP share of healthcare costs amounted to 10.8 per- cent in 2003 compared to 9 percent in the EU and 15.2 percent in the US in the same year. Furthermore References “around 800,000 people are working in the automo- tive industry in Germany, while ca. 4.1 million are Avramov, D. (2002), People, Demography and , Population Studies No. 37, Council of Europe, Strasbourg. working in the healthcare industry. The relation is even more apparent in the US, with 1 million in the Boeri, T. and G. Tabellini (2005), “Does Information Increase Polit- ical Support for Pension Reform?”, CEPR Discussion Paper 5319. automotive and 14.5 million in the healthcare sec-

Boeri, T., A. L. Bovenberg, B. Coeuré and A. Roberts (2006), Deal- tor.” According to the patent statistics, he assessed ing with the New Giants: Rethinking the Role of Pension Funds, the German healthcare industry as innovative. ICMB/CEPR Geneva Reports on the World Economy 8, London: CEPR. Consequently, innovation-unfriendly regulations

Bovenberg,A. L. (2007),“Frontiers in Pension Finance and Reform: and other legal limitations that constrain the devel- Institutional innovation in the Netherlands”, Netspar Working opment of a more efficient healthcare system also Paper, Tilburg University. have a negative effect on the labour market in Lindbeck,A., S. Nyberg and J.W.Weibull (1999),“Social Norms and Economic Incentives in the Welfare State”, Quarterly Journal of Germany. Economics 114, 1–35. OECD (2001), Ageing and Income. Financial Resources and Reiner Klingholz, Director of the Berlin Institute for Retirement in 9 OECD Countries, Paris. Population and Global Development, reported that Sinn, H. W. (2000), “Why a Funded Pension System is Useful and Why It is Not Useful,” International Tax and Public Finance 7, “after reunification, Germany’s east has for some 389–410. years seen the lowest fertility rates (0.77 children per Turner, A. (2006), “Pension Challenges in an Aging World”, Finance woman) ever observed in a single country. In addi- and Development 43(3), 36–39. tion, the east registered a considerable loss of young Weil, D. N. (2006), Population Aging, NBER Working Papers 12147. and talented inhabitants (more that 10 percent of the former GDR population), mainly young women. Today Germany’s east is the region with the biggest PANEL surplus of young men in Europe. These males with- out partners are often jobless and without education – a mixture barely inviting for females to return”. He The panel was chaired by Georges de Ménil, Profes- added further that in a way this German experience sor of Economics, École des Hautes Études en shows what can happen to many European regions Science Sociales, Paris. Panellists included business in the course of coming changes – mainly in Eastern executives from large German companies. Europe, but also in the high North and in the periph- eral South. Europe, not only by country but also by Norbert Reithofer, Chairman of the Board of region, is divided demographically into a medium Management of BMW AG, emphasised the role of fertility zone, where rising life expectancy and immi- demographic change for his firm’s long-term strate- gration will add up to further population growth, and gy. In order to remain innovative and competitive, he a low fertility zone, where the number of children argued that BMW’s employees should continuously per woman is 1.5 or lower. If the fertility level be highly productive. Its “Today for Tomorrow” pro- remains low for an extended period of time, the lat- ject helps ensure that the employees (1) take pre- ter group of regions might be caught in a serious ventive health measures, (2) engage in lifelong learn- “fertility trap” because having few children might ing, (3) work in a favourable environment, (4) can eventually turn into a social norm. In total, Europe- take advantage of personalised retirement models, 27 will have lost probably 10 percent of its popula- and (5) increase their awareness of demographic tion by 2050, which – among other things – will sure- change. As an important future opportunity for the ly have spatial consequences. company he suggested that the premium car market

25 CESifo Forum 3/2007