Shrinking Populations: A Challenge for Pension Systems

Just as governments struggle to simultaneously address obesity and hunger, the world’s population continues to grow ... and shrink. The United Nations estimates that between 2015 and 2050 49 countries will experience population declines even as the total world population reaches 9.77 billion. Moreover, in all but two countries the ratio of old population to working-age population will increase by 2050, and an estimated 135 countries will experience fertility rates below replacement rates. While demographic changes usher in consequences for businesses and governments alike, in today’s Viz of the Day we explore the implications for government-supported pension programs and related policies. The ratio of retired persons to labor force determines the pressure on pension funds and government budgets. If the contributions to pension funds collected from employees are insufficient to pay benefits to the retired, the pension fund goes into deficit, a deficit generally financed by the government.

A prime example of government efforts to address shortfalls in pension financing is unfolding now in Russia. On June 14, Moscow proposed gradually increasing the official retirement age from 55 to 63 for women by 2034 and from 60 to 65 for men by 2028, adding approximately 10 million workers to the pension contribution base. The draft plan has already been introduced for consideration by the State Duma and the first reading is planned for July.

• According to Russian Prime Minister Dmitry Medvedev, the reform is necessary because the increasing ratio of retired persons to the working population risks an imbalance of the national retirement system that will lead to a failure of the system to perform its social function.
• To Medvedev's point, by 2050, the number of people aged 65+ per 100 working-aged persons will double. In addition, worker contributions to Russia's pension fund are already insufficient; 38 percent of Russian pension benefits—about 3 percent of GDP—is financed currently by the government. 

While in the long run, increasing the size of the labor force by adjusting the official retirement age may stabilize pension benefits and even contribute to Russian economic growth, the Russian public is skeptical and protests have broken out around the country. Approximately 50 applications for public protests were submitted in different regions of Russia in the days after the planned reforms were made public, with one taking place as recently as June 25 in Irkutsk, according to Vedomosti.

• Oppositionist Alexey Navalny announced on June 19 plans for a 20-city protest on July 1, including the capital cities of several regions of Russia—which are also among the 20 most populated Russian cities—such as: Novosibirsk, Krasnoyarsk, Krasnodar, and Izhevsk. No protests are scheduled for cities hosting FIFA World Cup events.
• According to Vedomosti and Kommersant, the government may ease the reform's parameters to dampen protests.