In all developed countries, the increase in life expectancy -almost three months a year at the current rate- coupled with the fall in the fertility rates has resulted in an inevitable demographic ageing. By the year 2050, a quarter of the French population, for example, will be over 65 years compared to 16 per cent today. The decline in the proportion of active population to inactive is a major economic challenge. Francis Mer, Minister for Economics and Finances of France from 2002 to 2004, analyses the consequences of an ageing population.

ParisTech Review – How are political leaders all over the world addressing the question of demographic evolution?

Francis Mer - The world today is characterized by two major developments: population increase and population ageing. Today, we are at a turning point. Over the last century there has been a four-fold increase in the world population, something which has never happened before in history and which will never happen again. All the continents, except for Africa, have either finished or have gone through this demographic transition. In most of the countries –Germans are very concerned about this – the fertility rates are such that the ratio between the active and inactive population will become a major cause for concern. So, given the new demographic conditions, how can countries continue to be as productive as before?

I am reminded of a conversation I had with my Chinese counterpart. He said to me: “The only real problem that we are facing in China is the consequences of Mao’s single child policy, which we continue to follow. We are aware that in the coming decades we will have an active population which will not increase, and an inactive population which will go up considerably. China has to produce as much as it does today in order to ensure the same standard of living and health when there is an explosion in its inactive population.” This is China’s strategy. Everything that it does is guided by the need to take care of this coming elderly generation. It is worth asking ourselves, what it means for us that China has this ability to think so far ahead.

Does Europe have any specific long-term vision about this?

In Europe, the democratic system makes it very complicated to take decisions regarding problems which are likely to have an impact over a period of 20-30 years, even though it is almost certain that these problems will occur. This time period is not compatible with the length of electoral terms in our countries, that is our political cycles. That is why there is so much concern about pensions. That is why we may come to a consensus in France over an increase in the length of the contribution period and other measures that will enable our pay-as-you system to remain viable.

At present, life expectancy is increasing by 2.5 months per year in most of the developed countries. Some people think this increase should be used to adjust the retirement age with two months per year added to one’s working life and half month per year added to retirement. What do you think?

I am sure that one day many people will work till the age of 70, given that it will also take much longer to complete our education. That means we will in effect have to make contributions for at least 45 years or else we will be heading for disaster. It must be remembered that when Bismarck introduced social security, the average life expectancy was such that most of the people died before their retirement age! The situation in France in 1945 was the same: the ratio between active and inactive populations was such that retirement schemes could be financed without any problem. That is not the case today. The system is therefore in danger. Whether the system is a pay-as-you-go scheme as in France, or a funded pension system does not matter. The only difference is that in a funded pension system, the tax payers’ money can be “invested” outside the country concerned: the funded scheme in effect “buys” the work of active foreign population for its national population. In the process, this has a negative impact on the development of the “younger” country, so this system is also far from perfect.

In effect the problem is only being moved sideways, either regionally or internationally, but ultimately, it is the volume of work of the active population globally that will finance the retirement of the inactive population. So the first question is: how does one manage the active population such that it is more and more productive though it is working less? Secondly, in a free democratic society, how does one convince this active population to continue to pay – and actually to pay more and more – for the retired population?

How is this economic dilemma addressed in the political debate?

At the political level, the problem is all the more worrying since the ratio of electoral participation is much higher among senior citizens than the younger generation. This conjures up a dangerous scenario where the majority — the old people with the electoral clout — forces the young to pay more for its retirement. In the end, the younger generation might take to the streets saying “we no longer want this system”. I often think there is a real risk that one day we might have to face this situation, and this would threaten democracy. A part of the young population might then choose to exercise its individual freedom and migrate to countries, which do not have this system of inter-generational dependency, for example the United States. This would further drastically reduce the ratio of active to inactive in the population and the imbalance would create even more tension between generations.

I am purposely pushing the logic to the extreme to show that all this carries the seeds of major political consequences. France has gained a reprieve thanks to a pretty high birthrate, mainly due to the immigrant population. All around us, though, the problem is much worse. The situation in Germany is almost disastrous, but it is managing its demographic problem in a much more responsible manner than France. The Germans have taken decisions regarding the retirement age, which we will, I hope, take a few years from now. And still, these decisions do not ensure complete compensation for the imbalance between the active and inactive populations…

The dramatic increase in the population of seniors has its positive aspects too. Do you think it will generate employment?

Of course it will, but these will mainly be unproductive jobs. However, the increase in the number of very dependent old people is such that it will require massive infrastructure investments. You must remember that for an individual, the last year of his life alone accounts for, on average, 20 to 25 per cent of the total health expenses of his entire life. Take a look at the current hospital costs. It is inevitable that old people will progressively spend more of their savings on themselves instead of passing them on to the next generation to give their children or grand-children help at the start of their lives. The demographic transition has brought about a real revolution in the idea of family: in the past parents had children so that they could provide for them in their old age. This model has been swept away … But the question of solidarity between generations is still valid, however, if not at the family level at least at the level of society.

And what about technological progress? Will it allow old people to be looked after better?

It is true that technology should improve this situation. The exponential increase in what we know today is for me a major reason for optimism. If we can use these technological revolutions – and particularly the revolution in information technology– we might have a real chance of solving the problems mentioned above. For example, how does one make the active people more productive? By educating them better. Therefore, it is a top priority to develop an education system that enables a smaller number of active people to be as productive collectively as their predecessors. There should be a greater effort to improve the education of the younger generation today and this is not yet happening.

In this virtuous circle, what is the role of business?

We must help business understand that their most precious asset is their personnel. In the future, employers who have relied on the market to provide them with young, well-trained people will have to take charge of the education and training of their employees. Companies cannot hope to prosper if they shift this responsibility on to the community. If, however, companies create conditions that encourage and provide training for employees to continue to learn on the job, we will have an unlimited resource of productivity and innovation. Man’s genius is his flexibility and intelligence!

As regards older employees, companies can no long expect them to reach 50 and then wait to retire. And as of 1st January 2010, an employer now cannot retire an employee before the age of 70.

And what about immigration?

When we are talking about improving the productivity of the active population, the subject of immigration is inevitable. Even though the Germans did not really succeed with their policy of “selective” immigration for software engineers, Europe must rethink its immigration policy and continue to develop of new ideas. In the United States or even Canada, 30 per cent of the people who get green cards are educated, qualified people. .In Europe, this proportion is 10 per cent because our traditional policy of right to asylum takes precedence over bringing in qualified people. Moreover, the only increasing pool of manpower is in Africa, and at present most of these people lack qualifications. The technological revolution may change this in the future.

Your arguments rely heavily on technology. But the ability of the political classes to “plan ahead” is also necessary. Do you think this is failing?

We need to change the way we think about politics and politicians. A political career should not be a full-time profession for those at the very top. It should be considered public service. This change could happen over time. For example, a politician could be elected for two mandates and then go back to the private sector knowing that he or she will receive a state pension for the years spent in office. All elected representatives would be eligible for a pension. Switzerland has a system something like this at the level of the canton but not at the state level. Now that would be a real revolution. People would see politics as public service not as a career so they would more likely look after the long-term needs of the country rather than their own.

We can also try to convince the electorate that they must elect people who think on a long-term basis?

That would be a Utopia!

With the Internet the concept of “wisdom of the masses” has taken shape; that is, the idea that collective thought bears more fruit than individual thinking, even though it might be experts deliberating.

It is true that this “wisdom” exists. Personally, I have seen the first manifestation of this wisdom of the masses in the realization of global warming. It has forced politicians to solve a problem that the general public perceives demands a solution. This is not the usual way things happen. Even though Copenhagen is a failure, and predictably so, the existence of this summit and this process shows that we realize that we all belong to the same world and this discovery will eventually lead to a shared commitment to collective responsibility at the level of humanity, and perhaps, to some form of world governance, as yet to be determined.

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