Megatrends and the Future of Social Protection

Andrew Reilly

Population ageing – caused by rising life expectancy and low fertility – is perhaps the most commonly-cited challenge for the future funding of pension systems in OECD countries. But the impacts go beyond pensions – the shrinking labour force will intensify labour shortages and imply lower contributions across social programmes and increases in life expectancy will imply increases in long-term care needs (Chapter 4).

While population ageing is a common trend across OECD countries, its starting point and pace vary greatly across countries. Population declines are the result of the combined effect of persistently low fertility rates and longer lives.

Fertility rates have fallen considerably since the 1960s. In 1960, the average total fertility rate across the OECD was 3.3 on average, more than double its current value (1.5 children per woman, Figure 2.1). The decline was steepest between 1960 and 2000, when fertility rates fell from 3.3 to 1.7. It continued to fall, but less quickly, to 1.59 in 2022 (OECD, 2024[1]). Projections suggest that it will remain at this level, which is below replacement, for the next few decades (OECD, 2023[2]).

Low fertility rates reflect changes in individuals’ lifestyle preferences, in family formation, and in constraints of everyday living, such as those driven by labour market insecurity, difficulties in finding suitable housing and a lack of affordable childcare (OECD, 2024[1]).

At the same time, life expectancy has increased. The remarkable rise in old-age life expectancy is one of the greatest achievements of the last century. In 2022, life expectancy at age 65 averaged 83.0 years for men and 86.2 years for women. On average across OECD countries, remaining life expectancy at age 65 is projected to increase by 4.4 years among women and 4.9 years among men by 2065 (Figure 2.2).

Life expectancy at age 65 increased quickly between the mid‑1990s and the early 2010s, at a pace of around 1.5 years per decade for men and 1.4 years for women (Figure 2.3).

Since 2012, this pace has slowed to 1.0 per decade for men and 0.8 years for women, with the break in the trend magnified by COVID‑19. It is still unclear, however, whether the pandemic has affected the trend increase in longevity.

Rising life expectancy and below-replacement fertility combine to raise the old-age to working-age ratio, putting pressure on pension systems. The future evolution of these ratios depends on mortality rates, fertility rates and migration. On average across all OECD countries, the old-age to working-age ratio increased rapidly beginning in the early 1990s, from 20.4 people aged 65+ per 100 aged 20‑64 in 1992 to 31.3 in 2022 (OECD, 2023[2]). This pace is projected to accelerate, with the ratio reaching 53.8 by 2052 (Figure 2.4).

While old-age to working-age ratios are rising in all OECD countries, the pace of the increase varies considerably. In 1952, Ireland was the demographically oldest country based on this metric, with 20.7 people aged 65+ for every 100 working-age people, while Korea was the youngest at 6.3. In 2022, Ireland’s old-age to working-age ratio had modestly increased to 25.8, while Korea has surpassed Ireland at 26.3. Korea is projected to reach a ratio of 82.3 in 2052, at which point it will be the oldest country in the OECD, and 117.0 by 2082. In contrast, Ireland is projected to age more slowly, reaching an old-age dependency ratio of 51.2 in 2052, and 61.4 in 2082.

While all countries anticipate a sharp increase in the proportion of individuals aged 65 and over, the size of the working-age (20‑64) population is projected to decline in about two‑thirds of OECD countries. On average, over the next 40 years the working-age population is projected to contract by 11%. Overall, only 11 countries are not projected to see a decline in the workforce. Korea is projected to experience the strongest contraction at 49%, in contrast, Israel is projected to see an expansion in the working-age population of 67%, by far the largest increase and a clear outlier, given that the second highest increase will be 17% in Australia (Figure 2.5).

The main policy lever to deal with increasing longevity has been to raise statutory retirement ages. For those retiring today, the normal retirement age – the earliest age an individual can receive a pension without penalty after an uninterrupted career starting at age 22 – averages 64.4 years across OECD countries for men and 63.6 years for women. For those starting their careers today, who are expected to retire in the 2060s, the normal retirement age will increase, based on current legislation, to 66.3 years for men and 65.8 years for women (Figure 2.6). The larger increase for women results from reforms in a few countries – Austria, Lithuania and Switzerland – equalising the retirement ages between men and women, and also Israel narrowing this gap from five to two years. Only Colombia, Costa Rica, Hungary, Israel, Poland and Türkiye are currently set to maintain lower statutory retirement ages for women.

While policy makers have increased retirement ages for those entering the labour market now, the increases fall short of stabilising the split between time spent in work and in retirement. For instance, the retirement age for men across the OECD average is set to increase by 1.9 years over the next 45 years, but the remaining life expectancy of men at age 65 is projected to increase by 4.9 years (Figure 2.2). Hence, the average legislated increase in men’s normal retirement ages accounts for about 40% of the average projected increase in old-age life expectancy.

The normal retirement age of those entering the labour market now will increase in 20 out of 38 OECD countries for men, and in 23 of 38 countries for women. Assuming that legislated retirement-age links to life expectancy are applied, the retirement age would increase substantially in Denmark (from 67.0 to 74.0 years), and Estonia (from 64.3 to 71.0 years). Similarly, Finland, Greece, the Netherlands, Portugal, the Slovak Republic and Sweden are also linking the retirement age to life expectancy, with increases of between 2.5 and 6 years expected over the next 50 years. The lowest future normal retirement age for men is 62 in Colombia, Luxembourg and Slovenia (OECD, 2023[2]).

As past pension reforms have raised retirement ages and educational attainment has risen among workers across cohorts, labour market exit ages have increased over the last 20 years, reversing the downward trend that prevailed since the 1970s. Increased retirement ages mean that individuals have to work longer to access a pension; while improved educational attainment defers the start of the career it raises employment opportunities throughout the career. However, in many OECD countries, early retirement schemes mean that labour market exit ages are much below the normal retirement age.

The average age of labour market exit in 2022 was 64.4 years for men and 63.1 years for women (Figure 2.7). It reached its lowest level around the year 2000 for both men and women, on average across countries. In 1972, the average effective exit age was 65.8 years for men and 64.4 years for women, against 61.8 and 59.7 years, respectively, in 2000. Since then, there has been a steady increase, apart from a minor decline due to COVID‑19.

Because of longer lives and earlier retirement, the duration of expected life after labour market exit has risen significantly over the last 50 years, especially during the first part of this period as the effective exit age was falling. In 2022, on average across the OECD, life expectancy at labour market exit was 18.4 years for men and 22.8 years for women, about six years longer than in 1972 (Figure 2.8). Since 2000, expected life years after exit from the labour market have rather stabilised as continuing life expectancy gains in old age have been offset by increases in labour market exit ages.

Across the OECD on average, 14% of people over age 65 live in poverty compared to 11% in the general population.1 Older people have higher poverty risks than other age groups in around two‑thirds of countries (Figure 2.9), but in most countries differences across ages are minor, and the gap is driven by significantly elevated old-age poverty risks in Korea, Estonia, Latvia and Lithuania.2

Poverty among the “younger old” (aged 66‑75) is less frequent (13%) than among the “older old” (aged 76 and over, 17%). As many benefits are indexed to price inflation, their relative value tends to decline throughout retirement as wage growth tends to outstrip inflation. Older women are more likely to be poor (17%) than men (11%). Women have lower own earnings-related pension income than men. Also, as they live longer, they are more likely to be widowed and live alone at some point in retirement, possibly reliant solely on survivor pensions, which are often considerably lower than the benefit entitlement when part of a couple. Older women are at greater risk of poverty than older men in all OECD countries except Chile, Costa Rica and Iceland.

Population ageing is a major challenge for social protection systems – it squeezes pension systems from two directions, as rising life expectancy typically means more aggregate expenditure on pensions, and lower fertility means fewer working-age people to pay contributions. It is also expected to increase spending in the health and the long-term care system and add to unpaid work obligations, threatening gender equality (see Section 4.1). While immigration can slow down the shrinkage of the working age population, migration at levels necessary to meaningfully counteract the trend might not be politically palpable.

Increasing effective retirement ages seems to be the main lever currently available to limit the pressure on public budgets due to longer lives. Higher statutory retirement ages need to be underpinned by occupational health promotion, life‑long learning and other employment support to enable workers to extend their careers further.

[1] OECD (2024), Society at a Glance 2024: OECD Social Indicators, OECD Publishing, Paris, https://doi.org/10.1787/918d8db3-en.

[5] OECD (2023), “Effective age of labour market exit”, in Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/e4d8d9b3-en.

[2] OECD (2023), Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/678055dd-en.

[4] OECD (2021), Pensions at a Glance 2021: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/ca401ebd-en.

[3] United Nations Department of Economic and Social Affairs, Population Division (2022), World Population Prospects 2022: Summary of Results, United Nations, New York, https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/wpp2022_summary_of_results.pdf.