As our societies age and our workforces shrink, the economy will feel the impact and both governments and citizens are forced to take action. They are reforming labor markets, overhauling healthcare financing and reforming pensions, for example by raising retirement ages and contributions.
Health care is typically organized at the national level, so the challenges and approaches vary from country to country. However, regardless of their specific approach to paying for health care, all countries need to manage their budgets and consider how patients can access care. And they all need to figure out how to keep people healthy to reduce the pressure on health systems.
This will require drastic measures. For example, to keep people healthy, governments are considering steps to reduce the availability of unhealthy foods and make them more expensive. Some governments are also working on policies to make sharper choices in the treatment room, allowing providers to focus on the care that adds the most value and is most needed.
Governments are making various changes to their pension systems to cope with aging societies. For example, many countries are gradually raising the retirement age to reflect longer life expectancies. The UK, for instance, plans to raise the state pension age to 68 by the late 2030s. Some governments are changing the formula for calculating pension benefits to reduce future liabilities. And to supplement public pensions, governments are also encouraging private retirement savings through tax incentives.
One important reform is the shift from a defined benefit to a defined contribution system. In a defined benefit system, pension funds provide a fixed payment upon retirement. A defined contribution system is based on fixed contributions made by the employee, the employer, or both. The retirement benefit depends on the amount contributed and the investment performance of the account. This creates more uncertainty about retirement income, which in the US, for example, has led to more people feeling the need to save extra money for their retirement.
Beyond health care and pensions, governments are also intervening in the labor market. The impact of a smaller workforce is being felt across all sectors and industries, so governments are looking at ways to encourage people to work more, such as through longer workweeks and higher wages. Immigration is also a potential solution. And technological innovation could be another way to improve productivity. However, none of these solutions will have a significant impact in the short term.
