The World Turns Gray

FROM HIS OFFICE high above Park Avenue, Peter Peterson surveys a booming city of leveraged deals and paper profits that, almost every day, add to his bounty. As the Dow rallies once again beneath the fading winter sky to the south, this son of Greek immigrants can only count his blessings, which range from a summer home in the exclusive Hamptons whose inflating value he can scarcely believe, to a secure position as the chairman of the Blackstone Group, a prestigious New York investment bank. 
Yet Peterson, 72, is worried about the future. These days, as most, he's thinking about aging–and not just his own. The world is going gray, and one day soon, the implications of that trend could unnerve today's boom psychology. "The scenario I see is that one or more developed countries, say Italy, is going to decide that the political cost of reforming their pension systems is just too high," says Peterson. "Then they will try running high deficits–much higher than limits set by the European Union's monetary authorities–in an attempt to finance their way out of the problem. When the financial markets wake up to this news, there will be a broad realization that we have a global aging crisis that is going to be unrelenting in its economic consequences." 

The bull brought to its knees by too many Italian retirees? In some ways, the world should be so lucky. Not long ago, experts worried not about how to finance a world going gray but about a cresting wave of kids. And for good reason. Worldwide, as recently as 1972, a woman gave birth to an average of 5.6 children over her lifetime. Global population, as a result, was doubling every generation. Citing the trend, a hoary group of intellectuals known as the Club of Rome issued an influential study, titled "The Limits to Growth," that told what it all meant. The 21st century, said the club, would inevitably be marked by declining standards of living as human population exceeded the "carrying capacity" of the Earth, leading to mass famine and energy shortages. 

But in the years since this Malthusian prophecy, a change has occurred in human behavior that is as revolutionary as it is unheralded: Around the world, fertility rates are plummeting. Today, women on average have just half the number of children they did in 1972. In 61 countries, accounting for 44 percent of the Earth's population, fertility rates are now at or below replacement levels. 

That doesn't mean the Earth's population will fall anytime soon. Thanks to the high fertility rates of the past, a large percentage of the world's population is still of childbearing age. Life expectancy is also up. Globally, the average life span has jumped from 49.5 years in 1972 to more than 63 years. Consequently, according to projections by the United Nations, the world's population will slowly increase at an average rate of 1.3 percent a year during the next 50 years, and it could decline by midcentury if fertility continues to fall. 

Birth dearth. So there is a new problem for mankind. Global aging. Next year, for the first time in history, people over 60 will outnumber kids 14 or younger in industrial countries. Even more startling, the population of the Third World, while still comparatively youthful, is aging faster than that of the rest of the world. In France, for example, it took 140 years for the proportion of the population age 65 or older to double from 9 percent to 18 percent. In China, the same feat will take just 34 years. In Venezuela, 22. "The developed world at least got rich before it got old," notes Neil Howe, an expert on aging. "In the Third World the trend is reversed." 

And that means trouble. For one thing, the cost of supporting a burgeoning elderly population will place enormous strains on the world's economy. Instead of there being more workers to support each retiree–as was the case while birthrates were still rising–there will be fewer. Instead of markets growing, they will shrink, at least in large parts of the globe. Economists define a recession as two or more consecutive quarters of declining gross domestic product. Yet as Peterson points out in his new book, Gray Dawn, in the world's richest and most productive countries, the number of working-age people will be dropping well over 1 percent a year within 20 years. Even assuming healthy increases in productivity, such a continuing contraction in the work force could mean decades of declining economic output. 

For Selina González, that world has already arrived. In her store in Mieres, a once prosperous town in northern Spain, González sells baby clothes at a discount, but turnover is slow. As she sews a button onto a tiny, lacy blouse, she admits that the garment has been in the shop for some time. "Many young people move away from here to look for work," she says. "And the ones who stay don't have any financial security, so they don't have children." 
Mieres could be ground zero of the global aging phenomenon. It lies in the least fecund province of the least fertile nation on Earth. Spanish women now have an average of just 1.15 children in their lifetimes. In Asturias, the province containing Mieres, the lifetime fertility rate is just 0.79 children. The implications of the birth dearth are abundantly clear. After making allowances for premature death, at least 2.1 children per woman are needed to replace the population. This means that Spain's population will very likely shrink from 39 million to less than 30 million over the next 50 years in the absence of a dramatic increase in immigration. 

Certainly a lackluster economy partly explains why young adults in this part of the world have suddenly become so wary of parenthood. Spain's unemployment rate, long the highest in Europe, hovers around 20 percent. And Asturias, which has been buffeted by the decline of its coal-mining industry, has one of the highest jobless rates in Spain. 

Productivity problem. Yet economics alone are not enough to explain people's reproductive behavior. After all, in general the world's highest birthrates are in the poorest countries. Teresa Castro, a fertility expert at the Spanish government's Superior Council for Scientific Research, points to diffuse cultural factors at work. In Spain, she says, the Roman Catholic prohibition against birth control is now widely ignored. The church, she says, "lost all influence in family matters years ago and now serves only as a setting for rites of passage," such as weddings, baptisms, and funerals. Another key factor is the incorporation of a majority of women into the work force. This change, says Castro, "has come about so rapidly that there are not enough day-care facilities for working women who would like to have children." 
Spain may lead the world in its diminishing fertility, but there are plenty of runners-up. Italy is in the midst of a bambini bust that will cause it to lose more than half its native younger workers with each new generation. The Czech Republic, Romania, and Bulgaria all are producing children at a rate of just 1.2 per woman. Germany, Japan, Greece, Russia, Portugal, Hungary, and Ukraine have similar fertility rates. American women, though still not producing enough babies to replace the population, are fertility goddesses by comparison, with a lifetime average of two children each. 

For the developed world, fiscal consequences of these trends are dire. Over the next 25 years, the number of persons of pensionable age (65 and over) in industrial countries will rise by 70 million, predicts the Organization for Economic Cooperation and Development (OECD), while the working-age population will rise by only 5 million. Today, working taxpayers outnumber nonworking pensioners in the developed world by 3 to 1. By 2030, absent increases in retirement ages, this ratio will fall to 1.5 to 1. In Italy and other places, it will drop to 1 to 1 or lower. 

Of course, there will be fewer children to feed and educate. But most experts agree that while aging societies may be able to divert some resources that now go to the young, the increasing cost of supporting the elderly is almost certain to consume these savings many times over.

Throughout the developed world, total public spending per old person is two to three times as great as public spending per child. And in the future, that gap will probably widen. The elderly consume far more health care resources than do children, and new technologies to extend life are bound to escalate health care costs. 

Who will pay the bills? One option is to raise taxes on the diminishing number of workers. But according to official projections, doing so would require increasing the total tax burden on workers by the equivalent of 25 to 40 percent of their taxable wages, an unthinkable prospect in industrial countries, where payroll tax rates already sometimes exceed 40 percent. Another option would be to cut benefits, but given the political and ethical obstacles, this approach is likely to be put off for as long as possible. 

That leaves borrowing. As aging nations attempt to avoid hard choices, they are likely to rack up mountains of debt. And, at some point, that could destabilize the world economy. For example, with neither tax increases nor benefit cuts, Japan will have to increase its public-debt levels from a little more than 20 percent of gross domestic product today to over 100 percent by 2050, according to OECD. In Europe, public indebtedness would have to rise from under 60 percent of GDP to nearly 110 percent. 
The United States faces less of a challenge, thanks mostly to its comparatively high fertility and immigration rates. But the nation is still woefully unprepared for the coming age wave. Despite today's talk of budget surpluses, the OECD forecasts that population aging will force the United States to increase its national debt from just over 40 percent of GDP today to 70 percent by the mid-21st century. The long-term debts of America's public pension systems come to about $10 trillion. With a savings rate near zero, the United States is already highly dependent on foreign capital. The aging of its population will only make it more so. 

Look to Brazil. But will the world's investors continue to pour money into aging nations with mounting pension debts? A forewarning comes from Brazil, which is currently undergoing a financial meltdown so perilous it periodically scorches Wall Street. "There are important lessons to learn from what's been going on in Brazil," says Bradley Belt of the Center for Strategic and International Studies in Washington. "Quite frankly, a large chunk of their fiscal distress right now is attributable to an overgenerous, one might even call lavish, public pension system." 

The last time most Americans bothered to look, Brazil was a youthful nation whose most pressing social problem appeared to be a growing army of glue-sniffing street urchins. But a recent report by the Ministry of Social Security concludes that the aging of the population is now the nation's most important challenge, and that if the government doesn't take urgent action, "we may be faced in the coming years with the problem of street elders without having solved the problem of street children." 

Like all Latin American countries, Brazil has seen a dramatic decline in its fertility rate over the last generation. In 1960, a Brazilian woman on average had more than six children over her lifetime; today, her counterpart has just 2.3 children. As a result, in a land once known for its celebration of dental-floss bikinis and youthful carnaval exuberance, pension debt has become the public's central preoccupation. 

The growing ranks of the aged have rendered the cost of Brazil's once generous public pensions far higher than the country can afford. "Our social security system was planned for a young country," says Luiz Roberto Ramos, head of the geriatrics department at the Paulista Federal University in S~ao Paulo. "Now it has become unfeasible." 

Global capital markets couldn't agree more. Under pressure from the International Monetary Fund and other creditors, Brazil recently increased the age at which most Brazilians become eligible for benefits and raised contribution rates. Yet the country still faces huge dislocations as it adjusts to its new status as an aging nation. Says Ramos: "The public-health system is not equipped to deal with the problems of the aged, which tend to be chronic illnesses, often involving sophisticated and expensive procedures." 
China also is struggling with pension and health care bills it can't afford. The large generation born in the first half of the 1950s (when Chairman Mao Zedong urged citizens to help build the country by having babies) will become elderly within the next two decades. Yet because of China's one-family/one-child policy, begun in the late 1970s, the number of workers is shrinking dramatically. Increasingly, the typical family pattern in China today is the "one-two-four household," with one child supporting two parents and four grandparents. 

Pension protests. As in Eastern Europe and the former Soviet Union, the failures of communism go a long way toward explaining the dismal plight of today's Chinese elderly. Thousands lost their pensions in recent years when state-sponsored enterprises folded. In some cities, such as Changchun, demonstrations by outraged elders are now a daily occurrence. But even if China succeeds in building a more market-based economy, unfavorable demographics will still hobble the country's productive potential. 

For example, last year the government established a new pension plan designed to force workers to contribute to their own retirement. But that still leaves the problem of how to find the money necessary to pay off today's retirees. To quell protests by pensioners, municipal governments have assumed some of the pension debts of defunct state-owned enterprises, but the central government has refused to bear responsibility for the mess. Increasingly, China's elderly aren't even able to count on care from their children. Says Li Yanhua, a nursing home operator in Changchun, "It's a market economy now, and people have no time to take care of their parents." 

Other parts of Asia are aging even faster than China. Over the next decade, Japan, for example, will suffer a 25 percent drop in the number of workers under age 30. In 1985, only 28 percent of the world's elderly lived in Asia; by 2025, Asia's share will increase to 58 percent. Though many other factors are at work, Asia's current economic woes stem in part from inadequate consumer demand, which is itself largely a function of population aging. Not only is the working-age population growing more slowly, but consumer demand also is constrained by high levels of retirement savings by a middle-aged generation that knows time is running out. 

Aside from the Muslim countries of North Africa and the Middle East, it's hard to find any part of the world that isn't aging. For many Third World countries, the challenge of supporting a growing elderly population is compounded by huge out-migrations of younger people. The nations of the Caribbean, for example, have lost 5.6 million mostly working-age citizens to emigration since 1950. This trend, combined with falling fertility rates and increasing life expectancy among the elderly, has given countries like Martinique, Barbados, and Aruba populations that are nearly as old as that of the United States. 

Even Africa, the world's youngest continent, is more and more burdened by aging issues. Indeed, because of migration and the ravages of the AIDS epidemic, the number of working-age persons in sub-Saharan Africa available to support each elder is shrinking, causing enormous societal strains. 

The plight of Grace Ngondo provides a good case study. Sitting in her thatch-roofed, rondavel hut along a dusty road in Epworth, Zimbabwe, Ngondo reflected recently on the good life she had expected in old age. When her late husband, a farm worker, first retired, Ngondo counted on her children for the same reverence and support she had once given her own aging parents, and for a while she received it. Her eldest son provided clothing and food. There was chicken stewing in the pot and meat hanging from a long wire. "I lived like a white person in those days," she recalls. 
But now the wire is rusty and bare, and like millions of aging Africans these days, Ngondo must work to eat. Two of her sons have died of diseases Ngondo says had AIDS-like symptoms. A third son has moved away. Following the death of her husband and a brother-in-law, Ngondo now finds herself responsible for supporting more than a dozen grandchildren, nieces, and nephews. To make ends meet, she toils in the fields until the heat of the day overcomes her. Then she walks to the local school to sell ice cream to the departing children. 

In Zimbabwe alone, a country of 12 million people, AIDS will leave behind an estimated 910,000 orphans by the year 2005. Most will be raised by their grandparents. To help these grandparents cope, the Zimbabwean government has asked rural headmen in some areas to set aside one plot of land to be farmed jointly by the community. Private charities, such as HelpAge Zimbabwe, are also trying to set the elderly up with small businesses and collective farms. Outside Ngondo's hut is a chicken coop where she and 11 of her elderly neighbors jointly raise up to 50 chickens at a time, a cooperative business started with a HelpAge grant. Every six weeks, when the chickens have been fattened and sold, the group splits its profits of as much as $9. 

Abandoned elders. Even when they are fortunate enough not to lose their children to AIDS, many Zimbabwean elders nonetheless find themselves abandoned. Says Madi Mitchelle, one of Ngondo's elderly neighbors: "When we were looking after our children, we gave them good manners, thinking they would look after us one day, but now it's nothing like that. Either they die or they run away from you." In days gone by, the ties between the generations were strengthened through kupira mudzimu, a ritual of ancestor-pleasing. "If you did not look after your parents, you could be cursed by your ancestors; you might lose your job," explains Edwell Kaseke, who heads the University of Zimbabwe's School of Social Work. But with the widespread acceptance of Christianity, says Kaseke, the threat of such curses has lost its effectiveness. 

Accommodating the new realities of 21st-century aging will take a lot more than ritual incantations; even hocus-pocus trust-fund accounting won't pay the bills coming due. Most senior citizens in the West probably won't have to hoe weeds or raise chickens to make ends meet in the next century. But like their African counterparts, the elderly in even the richest countries will most likely be called upon to work much later in life and to take more of a role in rearing the next generation. That may dash some people's dreams of an early retirement to the golf course or fishing hole, but in exchange for longer lives in a less crowded world, it may be a fair price to pay. 

With Elise Ackerman, Don Boroughs in Zimbabwe, Bay Fang in China, Daniela Hart in Brazil, and Bill Myers in Spain