OECD projections, in fact, point to a reduction in saving rates of between 5 and 12 percentage points of GNP over the period 1980 to 2025. Such a contraction could lead to a vicious circle, as the resulting higher interest rates reduce investment, adversely affecting economic growth and, in turn, the ability to finance social security commitments. Ageing could also have a negative impact on financial markets. Pension funds are at present major players in most stock markets. As the baby boom generation retires during the current decade, most of these funds will have to gradually liquidate their assets, probably leading to downward pressures on share prices. This would in turn create a negative wealth effect, as declining asset prices dent the purchasing power of households and give rise to a reassessment of consumption patterns. The simultaneous decline in fertility rates, meanwhile, is expected to adversely affect the supply of labour and its quality. A smaller labour force would act as a drag on potential output growth, and impact negatively on competitiveness by tightening labour market conditions, leading to upward pressures on wages and inflation. An older work force is also likely to be less mobile and flexible, albeit more experienced. Policy measures to address the challenge In economic terms, population ageing is tantamount to a negative supply shock, of which the fiscal impact is but a manifestation. More fundamentally, the ageing phenomenon undermines the economy’s productive base and its competitiveness.
The adverse effects of the reduction in output are meanwhile compounded by higher consumption, which tends to crowd out investment expenditure and exert adverse pressures on price levels and the external balance of payments. The desirable outcomes of policies intended to meet population ageing are, therefore, not hard to identify. Such policies must aim at producing an increase in productive capacity and output, and stimulating saving and investment, thereby alleviating pressures on inflation, fiscal resources and the external account. Indeed, these outcomes are desirable independently of population ageing, but are rendered even more urgent by the onset of the phenomenon. It is the way in which this strategy is to be implemented that is often subject to contention. Opinions tend to diverge because it is not always appreciated that any course of action chosen, including a passive stance, involves sacrifices. An increase in resources devoted to pensions must imply higher taxation, a reduction in funds allocated to other equally worthy causes, or burdens on society as a whole in terms of higher inflation and interest rates. On the other hand, reforms that should engender a win-win situation in the long run could perhaps impose sacrifices on a number of individuals in the short term. It is, therefore, important to promote an informed debate which takes account of the costs and benefits involved in any course of action, with a view to reaching agreement on viable solutions.