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Demographers never tire of warning us about the aging of the population. Between now and the year 2050, they say, the percentage of people over the age of 60 will rise by about half in the OECD countries (from 20 to 30 percent ). in sub-Saharan Africa it will double (rising from 5 to 10 percent) and in Asia and Latin America it will triple (from 7 or 8 percent to over 20 percent).

On the basis of such figures, some people tell scary stories about how existing pension systems will collapse under the strain. They say that social insurance systems will become unaffordable, or in pseudo-scientific parlance, "unsustainable" and that they should be replaced by a system in which everyone saves for their retirement on an individual basis. This alternative you may have heard referred to as the "Chilean model", as it was the kind of system introduced in that country by the Pi nochet regime at the beginning of the 1980s. Is such a view justified?

Social insurance systems, generally speaki ng, use this year's contributions to pay this year's benefits - financing system commonly known as pay-as-you-go (PAYG). It is easy to see how they will be affected if there are more pensioners and fewer workers.

In the Chilean model everyone contributes to a personal savings account. The accumulated savings, with the interest they have earned, are then used to purchase an annuity or pension, that is to say your contributions this year are used to pay for yo ur own pension many years later. Now, what some people find attractive about the Chilean model is the idea that if you accumulate savings for your own retirement, you do not have to worry if there are more pensioners and fewer workers.

Well, that idea is a fallacy. For it is based on the incorrect assumption that what is true for an individual will also be true for a large number of individuals. Certainly, there is no problem if one person stops working and lives by exchanging previously accumulated savings for goods and services. But just think what will happen if everyone tries to do so! No goods and services will be produced and their savings will be worth nothing. The fact is: no matter how pensions are financed, pensioners' current consumption can only come out of workers' current production. So demographic trends affect not only PAYG social insurance systems, but also systems of the Chilean type, and indeed other types of funded systems. What is special about the Chilean model is that the contribution rate is fixed. This means that all the risks, including those connected with demographic trends, fall on the pensioners' shoulders. in the Chilean system, future pensioners have little or no idea what rate of income replacement they will enjoy in retirement. A couple of my colleagues in the ILO have estimated that the pension will be 44 percent of final earnings, assuming that contributions are paid without interruption from age 20 to age 65. But a Chilean proponent of the system claims that it will be between 112 and 234 percent. The figure depends mainly on the real rate of return you assume. No one can predict with any degree of accuracy the rate of return that future pensioners will get on their savings. And, even if pensioners had crystal ball showing them how much they would have in their account on the day they retired they would have no idea how much that would yield in terms of an annual pension. Fokr the conversion of a lump sum into an annuity depends crucially on the market rate of interest--and, as you all know, that is constantly changing. So the Chilean model, from the pensioners' point of view, is a very risky proposition. Consequently, it cannot satisfy the ILO's minimum social security standards, as these require that benefits must be a certain percentage of earnings.

A second point to note is that during the changeover from a social insurance system to a system of the Chilean type there is a double burden on the current working generation. For several decades workers will have to finance their own future pensions while at the same time continuing, in one way or another, to support members of the older generation who have entitlements under the old social insurance scheme. This double burden may mean higher contributions, higher taxes, or deep cuts in other public expenditure. You may be sure that governments which are saddled with such a crushing burden will seize every opportunity to reduce the cost of existing pension liabilities. Thus, the Chilean model implies big risks also for people who have entitlements under existing social insurance systems.

A third and most important point is that in many countries in the developing world, large numbers of people enjoy no sort of income protection in old age. Their governments claim that they do not have the resources to help them. Any government that believes it can afford to pay the heavy cost of a changeover from PAYG to a funded system, such as the Chilean model, should be told to use the money instead to provide benefits for its elderly people who are in poverty.

So it can be seen that the Chilean model is in no way a solution to the demographic problem, that it implies enormous insecurity for workers and pensioners, and that its vast cost in the and medium term represents a missed opportunity to reduce or eliminate existing poverty among older people. Nevertheless, that model is being vigorously promoted - above all, of course, by those who will make profits out of it, but also, I am sorry to say, by misguided people in the World Bank, who are more interested in pumping pension contributions into stockmarkets than in providing people with adequate pensions.

A more socially responsible approach recognizes that societies can adjust to demographic trends without condemning people to economic insecurity in old age. Naturally such an approach should build on existing institutions, including social insurance systems. But it does not preclude certain reforms, designed to ensure that they effectively attain the basic objective of providing decent pensions: for example, if there is strong resistance to higher contributions, it will probably be better gradually to raise the standard pension age than to allow benefits to fall. But pension reform measures are just part of the story.

As the population age, it is not only social policy that should adapt, but the economy too. We must remember that what matters for pension systems and their financing is not the percentage of the p opulation over a given age, but rather the ratio of pensioners to active workers. Much can be done in economic terms to hold down the rise in this ratio: about 30 percent of the world's labor force are now unemployed; they will be happy to work if jobs are made available; many people of working age, especially women, are not in the labor at present - but they could be tempted to join, given an adequate demand for labor and the appropriate social infrastructure; many people over age 60 are in good health and would be able and probably willing to carry on work ing -- again if there were a great enough demand for labor; and this of course would tie up with reforms designed to increase the pension age gradually over time.

Other types of economic adjustment are quite conceivable. If, as seems likely, incomes continue to rise in real terms it will be possible to increase the aggregate percentage of income that is transferred from workers to pensioners without reducing the living standards of either.

And we should not forget that as the popula tion ages, the cost of social benefits and services for the young will be relatively l ower, allowing some reallocation if necessary, to expenditure for the elderly. The economy must be made to work for the people, and not vice versa. Social insurance systems which have proven their worth in promoting solidarity and social cohesion must no account be sacrificed on the altar of private profit. Instead they must be improved and strengthened to meet the challenges ahead.