Which countries face the biggest policy challenges of aging populations in Europe and Central Asia?

Demographically, Europe and Central Asia (ECA) is the world’s oldest region. As such, the 46 diverse countries of the ECA region are at the forefront of addressing some of the many policy challenges related to aging populations. How is ECA faring? We analyzed the 46 countries in terms of their current demographic position (as measured by median age) and evaluated their policy performance in three main areas covering eight key policy challenges:

First, we identified three policy challenges related to demography: (i) healthy life expectancy; (ii) total fertility; and (iii) net immigration rates. Demography is not destiny and can be shaped by policy. Increased longevity is an undisputed achievement of mankind; however, not all old age is equal. What matters is not necessarily an increase in additional years of life, but an increase in healthy years of life. Also, aging societies are not only a result of increased longevity, but are equally influenced by low fertility and high out-migration of younger people. A country’s demography is in better shape when health life expectancy is high, the total fertility rate is well above zero, and if the rate of net outmigration is low.

Second, we identified four policy challenges related to preparing for the economic consequences of aging populations: (i) the adult dependency ratio; (ii) the Program for International Student Assessment (PISA) testing of high school students; (iii) national gross debt as a share of GDP; and (iv) the relative poverty gap between young and old. Arguably one of the most pressing challenges is the changing ratio of workers to those no longer working, whether retired or out of the labor force for other reasons. The best way to measure the extent of the challenge is the adult dependency ratio. Another challenge is the ability of workers to pursue life-long learning and training so they can remain active and productive throughout their entire career. This requires  foundational skills learned during primary and secondary education. In other words, the better school system is at delivering learning outcomes (as measured by PISA), the smaller the challenge for these graduates later in their career. The government, meanwhile, needs to contend with the fiscal challenges of a rapidly aging population. The lower public debt ratios are today, the more room for maneuver governments will have in the future. Finally, aging societies risk exacerbating inequalities that accrue over time and are biggest within older cohorts. Accordingly, we chose the relative poverty gap between young and old as our outcome indicator—the higher poverty among the old relative to the young, the bigger the challenge.

Third is the political economy challenge as measured by the voter participation gap between old and young. As populations age, so do voters, shifting the political fulcrum toward the interests of the older generation, arguably making it more difficult, for example, to reform the pension system or raise education spending. The more young people vote, however, the better their interests will be represented, so we picked the voter participation gap between old and young as another indicator.

Aggregating these eight indicators into one aggregate indicator yields a broad based measure of the size of each individual country’s policy challenge in relation to other ECA countries. Figure 1 plots the aggregate indicator against countries’ median age for the year 2012. The higher the indicator, the bigger the challenge.

Figure 1: Many countries in Europe and Central Asia face high policy challenges but are already relatively old and have not much time left for reforms

Source: Bussolo, Koettl and Sinnott (2015).

Notes:

1. Green: Western Europe; Red: Central Europe and the Baltics; Blue: Western Balkan; Orange: Eastern Partnership and Russia; Yellow: Young countries
2. The y-axis is a simple average of z-scores of eight indicators across countries: voter participation gap between old and young; total fertility rate; healthy life expectancy; net immigration; adult dependency ratio; PISA scores in science; gross debt as share of GDP; and old-age poverty relative to poverty at younger age.

We find that many of the richer Western European countries (depicted in green in Figure 1) are actually doing rather well and fall in the “old, but adapting” category. This is especially true for the Nordic countries, Luxembourg, and Switzerland, but also for some of the Central European and Baltic countries, such as the Czech Republic, Estonia, and Latvia. However, some—most notably Bulgaria, Croatia, and Greece­—fall in the “old and lagging behind” category. The situation is even worse for the Eastern Partnership countries, Russia (orange), and the Western Balkan economies (blue). Moldova faces the biggest challenge overall, by quite a margin, followed by Bosnia and Herzegovina, Albania, and Serbia. Serbia, Bulgaria, Greece, and Croatia, not only face a high challenge, but are already relatively old, so their window for reform will rapidly close. The younger countries in yellow, such as the Kyrgyz Republic and Azerbaijan, face daunting challenges as well, but they still have considerable time left to implement reforms.

The most pressing policy challenges vary considerably across countries, so deriving general policy conclusions is difficult. However, it seems that Western Balkan, Eastern Partnership, and Baltic countries display particularly low fertility rates and low healthy life expectancy, often exacerbated by high emigration. In the economic arena, high inactivity among the adult population, low-quality education, and old-age poverty are the biggest challenges in the Eastern Partnership as well as in Western Balkan countries. The same holds true in some of the younger countries like Azerbaijan, the Kyrgyz Republic, and Turkey. Public debt ratios stand out as the biggest challenge for some of the Southern European countries.

The author has recently co-authored a World Bank book called “Golden Aging. Prospects for Healthy, Active, and Prosperous Aging in Europe and Central Asia.”