American Enterprise Institute

December 3, 2007

[Edited transcript from audio tapes]

5:15 p.m.	Registration
5:30	Speakers:	Nicholas Eberstadt, AEI
		Hans Groth, M.D., Pfizer Switzerland
	Discussant:	Jim Kolbe, German Marshall Fund
	Moderator:	Megan Davy, AEI
7:00	Adjournment and Wine and Cheese Reception

Proceedings:

Megan Davy:  I think we are going to go ahead and get started.  Thank you for your patience.  We had some technical difficulties up here, but I think that we are ready to go ahead and get started.

My name is Megan Davy.  I’m a research assistant here at the American Enterprise Institute, and I work over here with Nick Eberstadt.  I’m really excited to present the speakers today.  It has been a long time coming.

One of the nice things about demographics, and aging for that matter, is that demographic change and aging are slow-moving and fairly predictable, so we can think far in advance, but one of the problems with that is it is really hard to get people’s attention that something important is happening.  I think that is what we have today. 

It is no surprise, I think, to anyone in this room that the aging issue in Western Europe and also in the United States, but especially in Western Europe, is going to be a big problem with regards to a shrinking workforce and aging population and especially with regard to pension, but because it is so slow-moving, it is really hard to get policies to take care of that.

I think we are lucky timing-wise in that Sarkozy has taken this on both in his platform as president.  I think his election was a clear mandate for change with regard to pension and labor policies on behalf of the French people.  He appears to be starting to take that on most notably with the transportation strikes which, it appears, he successfully ended.  Although he was taking on a small sector, namely transportation and railway worker sector that had especially low retirement ages; in fact, it is a larger message for the rest of, certainly, public sector labor in France.  So it is an important message.

Today, Nick Eberstadt and Hans Groth are going to be presenting their book, Europe’s Coming Demographic Challenge: Unlocking the Value of Health, where I think they will make an even stronger case with a strong background of the demographics but also talking a little bit the policies and what this means, basically making the case that, demographically, what is happening, and, basically, making the point that it is important for Europe now to start reversing policies that discourage work at older ages.

Forecasting the demographic future for Western Europe, Nick and Hans showed that a shrinking workforce is inevitable if current labor conditions continue.  They go on to suggest that some of the pronatalist and pro-immigration policies that some countries are pursuing with the hopes of preventing this, that there are just not enough to reverse this trend.  Instead, Western Europe has a healthy older working force, and the region’s true key to sustain economic growth is reversing labor and pension policies that encourage retreat from paid work at older ages.

You have everybody’s bios in your packets so I will not go through the entire biography, but I do want to quickly introduce our speakers.

Nicholas Eberstadt is the Henry Wendt Chair in Political Economy here at AEI.  He focuses on demography, international development and East Asian security.  For over twenty years, Nick served as a member of Harvard University’s Center for Population and Development Studies, and he has served on the Board of Scientific Counselors for the National Center for Health Statistics in the U.S. Center for Disease Control.

Dr. Hans Groth is director of health care policy and access for Pfizer Switzerland.  He is also Pfizer Global Health Fellow and a member of the board of directors at Pfizer Switzerland.  His seventeen years of extensive industry experience in numerous European and overseas markets include the areas of clinical research, medical marketing, global product planning, as well as sales and negotiations with government agencies.

To follow-up on their presentation, we have former Congressman Kolbe who is now a senior transatlantic fellow at the German Marshall Fund.  He advises on trade matters as well as issues of effectiveness of U.S. assistance to foreign countries, on U.S.–European Union relations, and on migration and its relationship to development.  No stranger to our own efforts to reform social security here, we hope that he is uniquely positioned to comment on Western Europe’s demographic challenges.  Prior to joining the German Marshall Fund, he served in the U.S. House of Representatives.

With that, I’m going to go ahead and hand it over to--I believe Dr. Groth is going first.

Hans Groth:  Good evening, ladies and gentlemen.  I’m particularly proud to be here tonight in Washington and I just arrived fifty minutes ago.  We are even happier to have all our slides organized by the minute.  You might ask why somebody from the industry and somebody from academics or a think-tank work on such a theme together.  There is always a story behind this.

Nick and myself, we met, I think, nine years ago when he invited me for a talk about North Korea.  At that time, I did not even know where North Korea has been or was.  At that time, we started a collaboration on economic development in various markets where I worked in.  Based on this, we looked more and more how these countries evolved, how they developed and under which circumstances.  In research, we developed an interest in Russia and the HIV catastrophe going on there, and from then, our story started.

My theme now for the demographic realities for today--I would like to start with this special slide which gives you an idea what has happened in Europe in the past decade.  You will see here that in the eastern part, the population is going down, and in some other parts, the population is increasing without--and I will tell you later where this is coming from.  There are some other very prosperous areas where there is no change at all in terms of population.  Based on this, we started to think, “What is going on there?”

What you see here, we had a vision--and everything has a vision.  And at the end of the vision, we will have here today our book with our recommendations. 

This is a very nice piece of Swiss history of business or engineering.  It is basically the plan to build the railway system up on one of the highest mountains in the Jungfraujoch.  This was the basic plan which the engineer had at the end of the Nineteenth century.  There is a saying about this nice drawing.  Number one is, you have to have a vision, but you never get to the top where you want to go.  It is the same with this railway; it never made it up to the top but very close.

That is the same with our book.  We will not have the final solution but we will have a solution, and you can later decide how close it is to the top.

Demographic realities--it is quite a new area in the more or less popular arena because there are no academic centers, at least in Europe, dealing with this, and so far, not a lot of attention has been made, particularly in the media.  But I think it is very important for you to know when we talk about demographic change, when we talk about demography, there is very much behind this, and demography will impact a lot of areas in our society.

We wanted to address or to start the discussion on these four topics I have raised here.  “How does demography impact the power and influence of nations?”  I think this is very important.  I will give you later a very tiny little example, one of many.  The next one, “How will new alliances emerge, and how will old alliances become less important?”  “What becomes relevant and what becomes irrelevant?”  And then, the fourth point where we will, as well, give an answer to is, “What needs to be done to make out of the demographic change an opportunity for those nations who tackle it best?”

I promised you one example how demography might change power politics.  What you see here, it is a map of Russia and, as well, you see the Russian-Chinese border.  You might have heard that there is a tremendous decrease in the population due to the health catastrophe in Russia.  The Russian population is going down about close to 1 or 0.5 percent on an annual basis.  Even more dramatic in Siberia where, I think, in the last decade, more than 40 percent of the population left.

You will see here on this map, in Siberia and at the Russian-Chinese border, about 8 million people are leaving, and on the other side, 110.  You also know that there is a huge amount of resources in the Siberian deserts.  Now, you can speculate what is going to happen or might happen.  You do not even need an army for any change here.

Nick and I have traveled a lot in these areas.  I have learned a lot about what is going on there, particularly on health issues.  This, as well, inspired us to look closer on the triad between health, wealth and demography.

Now, let me go a little bit more to detail what is going on in Europe.  If you compare what is going on in Europe, there is one huge big difference.  The population in the United States will continue to grow.  You will also have an aging challenge, but in addition, what the Europeans will not have, you have still a growing workforce.

What you will see here is that you will have--all over the developed European countries--the working population will decrease.  The question is, only among the various countries, “At which speed and at which time,” because each country has a different demography pattern.  So this is a huge transatlantic difference.  To bring this more in detail, I will give you four case studies about demographic realities; what is going on either in Europe or, in this kind, for Poland, China and Russia and Switzerland.

What happened in Poland?  Poland has 30 million population.  Health indicators are quite good, could be better.  The population is no longer growing, but what happened since Poland entered the European Union, 10 percent of the working population left there, gone forever.  You can speculate what this will have an impact on the social balance or the productivity or the capability to compete for this country.  I just learned, believe it or not, that the latest news is that German workers are going back to Poland, not vice versa, because there are no Polish left to do the work.

China is another very interesting example.  We postulate that the workforce will level off, and due to this very forceful pursuit of a one-child family, they will be exposed to huge cultural challenges to manage this.

Russia, I briefly mentioned.  Russia has very, very bad health indicators, and life expectancy is lower for men than in Bangladesh.  In addition, the population is shrinking.  At the same time, they have an economy growing between eight to nine percent per year, and this is going to happen or continue in the next years.  Then, the question is, “Where will they get the workforce from,” because Russia has no policy to integrate people from foreign countries.  Could you imagine that, all of a sudden, the Russians will ask 10 or 20 or 30 million Chinese to come to Russia to work there?  It will be a huge challenge for this country.

Now, my home country, where I’m coming from as well,   Switzerland is very small.  Switzerland has the oldest direct democracy in the world since 1291.  They had another policy; they never made any major alliances with any countries.  So as such, the country remained very prosperous; but again as well, it happens now that the population is stagnating.  Any change in the population is more or less managed by immigration.  This, as well, is a huge challenge for a particularly small country to make this possible in a coordinated and peaceful way in addition to remain competitive in a global economy.

To summarize, we talked about demography going on all over the world.  In Europe, in particular, it is for me like a small revolution where everything will change, what, in Europe, has been built up in the past 100 years in terms of systems, in terms of social security and pension funds.  The driver of this revolution is, according to our assessment, the tremendous advances in health, which at the end of the day will induce a major change in these societies.

I would like to close with this provocation.  I do not want to say goodbye to you, but I want to say goodbye to the pyramids.  The pyramids or the systems of the societies and the relationships in these societies are based on pyramids about 100 years, and one of the first promoters was Otto von Bismarck who developed these social security systems, who have been afterwards copied in many other countries.

Speaking as a medical doctor, speaking with limited experience in demography and looking at the figures, what we can see, and under the assumption that we will have continued peace, there will be a movement from the pyramids to some kind of population shapes like this right angle.  Those societies and those states who will manage this challenge in the most creative way, these are the ones which we speculate will be the most successful ones.

As you can read later in our book, we are not arguing for forced migration.  We are not arguing for working forever.  But we are arguing for a system where the change is tackled in the most creative way.  Nick will later go into this in more detail.

Thank you very much.

Nicholas Eberstadt:  Meg, can I take up twenty minutes to run through--looks like a PowerPoint.

First of all, I would like to thank you all for coming here.

Hans, you have come the longest way.  Thank you very much.  This is not our first collaboration together, and I trust it will not be our last either.

Meg, I would like to thank you for all of your help in this research here.  You have been a full partner in this.

I would like to thank the German Marshall Fund on two accounts:  One, for the generous grant that helped produce this monograph; and secondly, for lending Congressman Kolbe to us this evening.  I’m really honored that you could be here, congressman.  I’m very happy to have you here with us.

Hans and I thought that we would write this particular study because so much of the news that one hears about Western Europe and demography today happens to sound so very grim.  Walter Laqueur wrote a book earlier this year, Die letzten Tage von Europa, The Last Days of Europe.  One hears a great deal about population implosions, about immigration problems, and all of the rest.

Without trying to gainsay some of those reports, what we wanted to argue was that this does not show the entire ledger.  There are some opportunities; as well as, some big problems that Western Europe has on the horizon.  If Western European societies, if citizens and their governments tried to capitalize upon some of the demographic opportunities facing them, the outlook could be quite different from what some of the discussion today suggests.

You can probably read faster than I can talk, so I just want to show you the outline of the argument we have given in this book that I’ll give you in the next few minutes.

In the spirit of a picture being worth a thousand words, this slide is a comparison of Western Europe’s population structure and the U.S. population structure as of about the year 2005.  The blue rectangle is the U.S.A.  The bulgy thing on the outside is the population structure of Western Europe.  By Western Europe, we mean all of the old EU-15 plus Norway, plus Iceland, plus Switzerland, more or less the never communist portions of Europe.  It is an arbitrary but not an unreasonable definition.

Remember what these two shapes look like, and I will show you what 2030 is imagined to look like.  Okay.  This to this--and we have the same scales here, you see?  Okay.

We used here, of course, the U.S. Census Bureau’s projections because that is, of course, what we use, but if we had used the United Nations’ Population Division projections or Eurostat, it would not have made too much difference.  The pictures, the shapes anticipated would be quite similar.

As you can see, over this generation of time, Europe’s younger population, its children are hollowing out.  It is anticipated to be fewer children in the under-fifteen in the future in Europe than today.  There is a great population explosion but only among people aged eighty or over.  In between the conventionally defined working age population, they are shrinking quite substantially over this period of time; whereas, more or less now, European cohorts are larger at almost every age than in the United States.  Not so far in the future, we anticipate that there will be more Americans than Western Europeans up to about the age of twenty-five. 

Europe’s working age population, as I mentioned, will be shrinking.  Its population of older, presumably pension-aged, people will be growing very rapidly.  This demographic divergence that Hans spoke about will be proceeding quite rapidly.  There has been a great deal of discussion about this already, about the dependency burden and so forth, the population aging, but there are a few aspects which I think deserve an additional attention. 

If you take a look at what is happening for the age groups fifteen to twenty-nine, these groups in here, this group is shrinking very dramatically over the coming generation.  Traditionally, this is the group of people who have the highest level of educational attainment coming into the labor force.  This presents a practical problem for traditional economies that count upon new entrants into the labor force to improve overall educational attainment.

By the same token, the thirty to forty-five group here--just trust me on this--is going to be smaller, we believe, in 2030 than it is today in Western Europe, not in the United States.  Why is this a problem in particular?  Because if you take a look at the age distribution of innovation over the past century or so, most of the innovations for which people have won the real Nobel Prizes in medicine and physics and the like, and the heart of--that is right, not for letters or for peace, yeah--most of the science Nobels and most of the big patents have been awarded to people, not necessarily when they were between ages thirty and forty-four, but for work they did in those ages.  Without being a biological determinist about any of these, a declining size of the thirty to forty-four group may make for problems with innovation and entrepreneurship in societies.

I think there is some good news on the horizon for Western Europe.  The good news is that, when one looks across the world or if one goes back slightly in history, one sees a very robust association between health and wealth, between life expectancy and economic potential.

This particular scatter plot shows that for one particular year internationally, of course, the relationship is very complex.  It goes in both directions, and there are a lot of interactions, but it turns out that health is a pretty good predictor for economic potential.

From Western Europe’s standpoint, we know that the Western European populations have enjoyed a blessing of a health explosion over the past four decades.  Indeed, if we compare different metrics of health in the United States and Western Europe, almost all of the Western European societies can come up more favorably.  This particular metric is healthy life expectancy.  We could use other ones, but you see that the United States is lower than almost all of the countries in Western Europe by this particular measure.

Let me show you another measure here which I think is quite significant.  These are the odds of not making it, if you are a man, of not making it from twenty to sixty-five, and the odds of not making it are unfortunately, at the moment, most unfavorable for the United States.  Your chances of making it from twenty to sixty-five are better at the moment than in all of the rest of Western Europe.

Why is this significant economically?  Not just for the lost work that is implied there, but also for the implications of survival functions, on investments in human capital.  The people who are less likely to survive have a different cost benefit calculus for investment in higher education.  The lower your odds of perishing over this period of time, the more favorable the implications are for investment in human capital and higher education and productivity-enhancing skills.  To this respect, Western Europe is fairly favorably poised.

Our argument, in essence, is this.  We take this graphic from some work that the American demographic economist, Ron Lee, has done on earnings and spending over the course of the life cycle in the United States.  This graphic comes from the United States in the year 2000.  Lee and his colleagues are working on doing comparable graphics for Western Europe.  They have not completed that work yet.

We can use this one to illustrate.  You see that in the United States, this red line here shows total consumption by year of life--in your teens, your twenties, your thirties and so forth.  The green line is personal consumption.  The red line is personal and public consumption, total consumption.  Of course, here, this gap is educational expenditures.  Later in life, the bigger gap is public health expenditures.  There is only a relatively small period of the life cycle in the United States between one’s twenties and one’s fifties in which labor earnings consistently exceed expenditures.

It is in this area of what we might call surplus that investment and improvements in living standards are financed.  Okay.  This is the surplus upon which growth and living standards improvements are derived, leaving capital income aside.

What we are arguing in this book is that, with the boom in health in Western Europe, with the healthiest older population that the European continent has ever known, with the best educated older population the European continent has ever known, the potential is there for capitalizing upon healthy aging by additional work at older ages, so that there might be an additional surplus here that could be used either for investment and growth or for improvement in living standards or both in the Western European circumstances.  But what has happened?

Here, we show male life expectancy versus male average retirement age in France.  We picked France because it is always so much fun to pick on France, but we could have picked any other country in Western Europe as well.  It is just that the tendencies in France are slightly more extreme than in some of the other countries.  The graphic is a little bit of a trick because it is not true that there were only about two weeks of retirement time in France and a great big gap now, but it is true that life expectancy has risen in France by about eight years over the last four decades while average retirement age has fallen by about six years.  You do not have to be a demographer or an actuary to understand where this gets you over time.

This is probably the more proper metric to use - expected years in retirement.  You will see that the non-European OECD countries, which are quite prosperous, by the way, tend in general to have much lower life expectancy in retirement than the European states today.  What has happened in Europe is that, as in France, all 100 percent of the improvement in life expectancy has been translated into retirement and then some.

This is what one sees with males.  It is the same pattern for females.  The reason for this is because apart from a couple of fascinating exceptions like Iceland and ---sorry to say, Hans--Switzerland, for the most part, Western Europe has low and declining average ages of retirement, much lower average ages of retirement than comparable affluent OECD societies outside of Western Europe.  The same point is made with women.

The retreat from work at older ages, I think, is really illustrated in this slightly confusing graphic here, which I believe was for the year 2004.

Megan Davy:  [Off microphone]

Nicholas Eberstadt:  Yeah.  Okay.  You will see that there is something like a 30-percentage point spread between labor force participation rates for Italy and for the United States for people in their late fifties.  I understand that not everybody who is retired in Italy is truly retired in Italy, but that does not make up for the whole difference here.

As you go through, you see just an enormous gap that has opened up in labor force participation at older ages between the major Continental European economies and affluent OECD economies that are not in Europe.  These are big differences, and they are significant differences arithmetically; whereas, almost every age group in the United States between twenty and seventy-four stands to increase in size over the next generation.  These are the blue increases.  The only part of the prospective workforce that stands to have any growth at all in Western Europe is the fifty-five-plus group.  That is the only part where one sees arithmetic increases.

We are not suggesting in here, this is not a modest proposal to make great-grandmothers go to work at bayonet point.  It is, however, a question for Europeans of whether European societies might be better off if the labor force participation patterns that were common as recently as 1980 or 1975 might not bring prosperity, growth, and greater wealth to Europeans. 

So we do not make any recommendations per se.  I’m certainly not placed to make a recommendation.  I have no standing.  I’m an American citizen; perhaps what Hans and I tried to do is to indicate some areas of policy relevance that Europeans themselves may wish to investigate, to visit, and to discuss.  These are, of course, the three major ones.

What we have to mention to begin with, with regard to pensions and labor markets, at the moment within Western Europe there are dramatic and perverse disincentives for remaining in the workforce after about age fifty-five.  This little regression done by OECD is intended to indicate that.

Down here on the bottom is OECD’s calculation of what it calls the implicit tax on continued work between the ages of fifty-five and fifty-nine, not even into one’s sixties but in one’s late fifties.  What they mean by the implicit tax is the continued payment of pension taxes whether or not there is any increased benefit to the worker upon retirement.  They calculate this.  In some places like Luxembourg, their calculation is that the implicit tax on staying in the workforce, just for this pension phenomenon, is an incredible 85 percent.  Okay.  Guess what?  Which country has the biggest drop-off between ages early fifties and late fifties in labor force participation?  Well, what do you know?  It is Luxembourg.

If there were less discouragement on working through the pension arrangements, one can imagine that people might well work at higher levels of participation at older ages in Western Europe, but it is not just the pension system.

This graphic here which was produced by Alberto Alesina and his colleagues show the almost steady downward trend in hours worked in continental economies in Europe over the past four decades or so.  At this point, the estimate is that there is something like a 400-hour a year difference per worker in work between the United States and Germany.  This is not simply pensions, and it is not only a German pension for dolce vita.  It is structural rigidities and problems with barriers of entry in European labor markets.  One has to bear this in mind as well.

Related to this is the question of education.  If one is going to look at education as a genuinely lifelong process, it has to be more than a slogan.  Along with the emergence of the underworked European in modern time, one also sees a phenomenon we might describe as the undereducated European.  I am by no means suggesting that the American secondary or primary school system is a model of perfection.  I’m simply indicating that there is an interaction between lower levels of education or educational attainment and ability to stay within the workforce and to earn continuing returns at older ages.

Finally, we can mention healthcare policies.  At the moment in Western Europe, as in the United States, healthcare policies for understandable administrative reasons focus upon containing medical costs.  We suggest that if one is going to look at supporting work at older ages, a better template for this might be thinking about health and medical policies as investments in reducing the economic cost of disease and illness.  That would be very different. 

It is very ambitious and a very different way of looking at medical care but, at least, we would say that in Europe or in the United States, we should not be afraid per se to see a rising share of health and medical services in GDP.  We do not get scared when we see the share of vacation travel in GDP rising.  We do not get scared when we see the level of the investment ratio rising.  This is not to say that every medical expenditure or innovation should be automatically blindly embraced.  They have to be evaluated much as any other project would be evaluated, but with a different approach to medicine and health as an investment in sustaining healthy aging and productive contributions to society, we might have more scope for wealth and health generation in Europe.

Just to emphasize once again, these are not specific recommendations.  We have not come out with a 10-point plan for Europe.  We simply wish to bring to attention what we see as some great opportunities for European societies.  It is Europeans themselves who will have to look at these, debate about these, and choose about these.

Thank you very much.

Jim Kolbe:  Well, thank you very much.  It is a pleasure to be here today.

Hans, thank you for making a trip across the pond to be with us.

I guess when it comes to talking about think tanks, it depends.  This is an example of whether the glass is half full or half empty.  If you think it is half full, you would say this is a good example of think tank cooperation between AEI and the German Marshall Fund.  If you think it is half empty, you would say it is the incestuous relationship between the think tank community here in Washington that you are seeing at work here today.  I prefer the former and to think of it as a good example of cooperation.

I have been saying for some time now, because I have been so interested in this topic with social security and migration which both have tremendous components of age demographics and population demographics to it, that in my next life, I’m coming back as a demographer.  So I’m just waiting happily for the day when I can return to earth as a demographer of science in that great arcane science here.

Megan mentioned in her remarks right at the outset that demographics is interesting because it is slow-moving, and it is far removed so it is hard to get people’s attention.  I think that is a very sound and solid point, but of course, the flip side to that is that the policy implications as a result of it are even greater, are huge.  The policy makers have a responsibility not to ignore that.  Despite the fact that it is slow-moving, and they may think it is inexorable what is happening, they still have a responsibility to respond to that.  So I think, we, as citizens in a country, whether it is in this side of the Atlantic or on the other side, have a responsibility to push our policy makers to be thinking very seriously about some of these issues and what we ought to be doing about them.

I’m not going to make long remarks because I think we want to get into the discussion with all of you, but I think that there are some really interesting things that are in here.

To me, one of the takeaway points from this is that most of us have been going around saying that, generally speaking, Europe has a problem on its end -- it does have a problem on its end.  That was made plain here, but it is not entirely a problem.

There are some positive things that are happening in Europe when it comes to the way the demographics are being dealt with and the possibilities for dealing with that because Europe has a healthy population, a population that lives a better quality of life, particularly at their older age and happens to survive longer, have a greater life expectancy, the possibility of younger people getting through life.  All of those things contribute to the possibility of dealing with this problem in a way that may suggest that the United States and some other countries have real problems down the road.

I was interested in the picture about Russia and China and that border because I have been doing a little bit of studying on this.  It is an incredible issue, and you just know that something is going to happen here.  The Chinese population--China itself with its insatiable demand for resources--is going to see a need for doing so, and as he says, it is not a question about an army taking over; they are just taking it over by population moving across the border. 

There are millions and millions of people living on the Russian side of the border who are Chinese.  In fact, there are whole areas along that border, along the Trans-Siberian Railroad now where you can go, and there is no Russian at all that is spoken, it is all Chinese.  I am sure Putin and some people in Russia have some real concerns about this.  They are not speaking out much about it, but it is an example of the kind of issues where demographics overwhelms the problem and takes concerns over that.

Again, I thought of this case study.  I thought there were some interesting things to think about there--the very fact that China is really unprepared for its aging.  I just led a CSIS delegation to China in June looking at the NGO sector, the civil society sector, and its role in healthcare in China.  Again, more of this incestuous think tank relationships here in Washington.

It is very obvious that, at the time that policy of “one family, one child” was promulgated, nobody really thought about what the implications down the road of this would be.  Now, maybe they would have the same conclusion because the problems of an overwhelming population growth were just so magnifying and so huge that they felt they simply had no choice but to try to deal with the slowdown of the population, but the fact is that it really was not thought of.  Now, they are thinking and looking at just almost staggering problems that are going to come about to the healthcare system and to the workforce as China’s population ages very dramatically in the next 40 to 50 years.

That gets translated into the kinds of things we are experiencing worldwide.  We have lived in for so long, at least, certainly since the advent of the industrial revolution with the concept of an increasingly rapidly growing population that nobody has really dealt with the problem of a declining world population.

Now, the demographers are saying that somewhere around 2050 to 2060, there will actually be a stable population in the world and then, something that we thought this planet was just going to get more and more overcrowded until there was some kind of Malthusian explosion or something that would happen that would cause it to adjust the population.  But instead, societies themselves have done this, and this is taking place not just in the most developed countries, although that is the most rapid where it is occurring, but it is now occurring in countries all over the world.

The one factor, though I did not hear mentioned here today--but the one factor that I find, perhaps, one of the most fascinating little facts is that the most direct correlation between population growth and society is when women enter the workforce.  That is the biggest single factor in changing population growth.  Women decide, at that point, they have some independence; they decide to limit the size of their family and they do so.  And families come down in size, so even in countries that are still relatively poor where women are now entering the workforce.  This is something that is happening because of rapid urbanization taking place even in the poorest parts of the world. 

Rapid urbanization that is taking place, this is another factor which needs to be thought of in all of this.  As a result of that, you are seeing a decline in the rapidity of population growth.  It is still in these developing countries above the replacement rate, but coming down fairly dramatically.  A country to the south of us, Mexico, is perhaps one of the better examples of that.

Perhaps, another one of the key takeaways for me is the pyramid versus the rectangle.  I noticed in the data that was shown a little later when you were showing your figures about the U.S. and Europe, it really looks almost like an inverted pyramid if you noticed.  It is not really a rectangle.  It is almost an inverted pyramid.  The numbers--the next one there, yeah, look at the red; they are for Europe.  It is really almost an inverted pyramid there, and the number is over 80 are just mind-boggling when you look at that.

Who is going to be around to take care of all of these people in countries like Japan?  Who is going to be there to look after all these people over eighty if there is nobody being born?  The answer is, of course, migration at some point.  All of which I find terribly amusing given our great debate that is going on in this country.  Not great debate, it is not an edifying debate--the debate on immigration that is going on in this country.  As though we are being overwhelmed with people from other countries, that is to say Hispanic countries, countries to the south of us, who are taking away jobs from Americans.  We are going to be begging for those people and for other people very soon in our society just to fill some of the jobs that are absolutely essential and needed for.

Lastly, I thought also of the graph, on consumption and earnings, was a highly significant one.  To me, for a policy maker, this is the key.  If you just drew a circle right around the inner section of that purple there, that is the area the policy makers need to be looking at, because if you can extend, add to that labor earnings area at that end, you have a significant chance, a way of dealing with some of these problems. 

If I were to take one slide up to members of Congress that would be the one I would take up and say, “This is what you have to be thinking about.  Whether you are thinking about tax policies, whether you are thinking about social security and retirement policies, pension policies or whether you are thinking about the educational system or the healthcare system, whatever you are talking about, it has to be focused around what you can do to make that area of the blue stay above the others for a bit longer if we are going to solve some of these problems.”

With that, let me just stop and open it up for some comments and questions.

Megan Davy:  All right.  We are going to get ahead and get started with questions and answers.  I’m actually going to abuse my post, and I hope to start us off, hopefully, in the right direction.

One of the things that I wanted to ask about--and I still have this question because I do not understand this concept after reading the book and doing all the work--is--

Nicholas Eberstadt:  You do the work and you do not understand?

Megan Davy:  I know.  This was the part I did not do so much, and I suspect that this is the Hans part of the book.  But I’m curious as to what you two both mean.  Nick, you mentioned this explicitly - the idea of policy-wise when talking about policy options for healthcare and thinking about healthcare as investment instead of treatment.  I want to know what exactly “policy wise” you mean by that.  I assume this is not an accounting trick where we simply take it from one area and now, we call it investment.  I know that is not what you are talking about.  So I’m wondering, what does that mean, and what types of changes does that mean to current healthcare policy in Europe?  Also, do you think it is politically feasible?  I guess is also the real question.

Nicholas Eberstadt:  I think we have a congressman here with us who can tell us whether it is politically feasible much better than I can, but I’ll try to explain the concept here.

We tend naturally to look at the price of treatment, and it is obvious why people look at the price of treatment because it is an out of pocket or an out of public pocket expenditure of private or government resources.  What we do not necessarily consider nearly so much is the cost of poor health, the economic burden of morbidity and mortality.

Some of the work by people like Kevin Murphy in Chicago and Gary Becker, that Hans and I cite in this book talk, they have tried to estimate what the economic value of increased life expectancy and health has been for the United States over the past generation.  Their ballpark estimates are in the tens of trillions of dollars.  If one looks at the improvements in health and well-being and productivity from that standpoint, one can see that health and medical expenditures may be a very good investment.  Now, if one wants to make it a better investment, perhaps one wishes to have a more prevention-oriented beginning point.

Hans has a lot of experience and perspectives on some of the Swiss interventions there, and Switzerland is more innovative than some of the other European countries.  Hans, how would you take that?

Hans Groth:  I think one of the key findings we postulate in this book is part of the solution is to bring more intensively the people above fifty or fifty-five to work, and to longer work or more intense work, and work where they pay taxes and make contribution and not burden the systems.  Now, this is not easy to say.  You can only continue to work if you are in good health.  If you look at your lifetime health balance, you start to run into troubles when you become, let’s say, from 50 on, your joints, you have heart problems, you have diabetes, et cetera.

So to turn it around--Nick, maybe you can show one of my last slides.

Our suggestion is if we manage through a better public health approach that people stay much longer without any disability, then the question is easily answered.  They are willing to work, they can work, and they can contribute.  So if you have a public health system which starts or that teaches people from the young ages, “What is my individual policy, to stay healthy as long as possible,” and you pay a little bit in front but your return continues to be very high.

Just to tell you what we are going to do as a next step with the Swiss University Institute, we will look, for example, at the Swiss population and modulate if we improve health, maybe, in the decade from forty-five to fifty-five by 10 percent, what is then the economic implication?  What is the implication if we are better in cancer prevention?  We all know cancer is likely to happen when you are fifty and above.  Can we prevent the burden of cancer in the age from fifty and above?

You might ask why we are so intensively working on this in Switzerland.  We have indeed a huge problem because we are running out of people to do the work.  I’ll give you one case study where we will start with. 

You might know that the Swiss has a very good railway system.  I think you know this, because every train runs every minute everywhere and always on time.  Their success story will not continue to stop.  We are building huge tunnels through the Alps.  The longest one will be now fifty kilometers, which means that we will have even more traffic and engineers.  The Swiss railway system with about 20,000 employees, they are running now with a huge problem.  What can they do proactively to keep their engineers work longer because if they do not work longer, the trains will not go anymore?

Therefore, this demographic change intersects with economic realities, and part of the solution is to make possible that people remain healthy and as well, feel healthy.  On the other hand, you have to convince unions that is possible, et cetera.  But we have to modulate and we have to make these examples. 

If we fail to do this--Nick, you can give me the last slide--then this is the other option.  Yeah, that is the option.  I think we all do not like to freeze in these waters.  So let’s try to do this with one of the three postulates.

Jim Kolbe:  Is that the Loch Ness monster?  [Audio glitch]

Let me just comment on this because I do have a couple of thoughts.  What Nick was talking about, we do not think of the cost of poor health, and that is absolutely correct.  But you could say that about virtually any policy issue that we face in this country.  We do not think about the cost of ignoring our infrastructure and what that is going to mean over the long run.  We do not think very much about what the cost of having poor education system is. 

We just think about, “Oh, my gosh.  What are we going to invest in this education system?”  We do not think about what the cost of not having that education system improved in terms of our competitiveness in the world and elsewhere.  We tend not to--if you just give me a second here to finish my thought here, I would be happy to pass it to anybody else.  So I think that is true of almost anything, but it certainly is true here in this case. 

Hans, I never articulated this before so this is a first here, but I have always been a little puzzled when we come to healthcare and we all say, “An ounce of prevention is worth a pound of cure.”  Yeah, it makes sense.  We have all been told that since we were kids.  It must be true, but unless I’m missing something, we still all are going to die eventually.  So there is going to be healthcare cost.  The fact that we are living longer has certainly added in one area to healthcare cost, and that is long-term healthcare cost--maybe not.  I might be wrong on that.  Certainly, here in the United States, you did not have nursing homes really fifty years ago.  People were not living long enough to have this.

I was told this anecdotal story of Bismarck going to the kaiser and saying to him, “I have this great deal for you.  We are going to have this public pension system, but do not worry, it is not going to cost anything because it is not going to kick in until sixty-five.”  By the way, that is basically where we are today in most of the pension systems.  “It is not going to kick in until sixty and nobody lives until age sixty-five, so do not worry about this being a cost.”

Well, here we are today, so we do have those kinds of costs down the road.  There are [audio glitch] costs, are there not?

Hans Groth:  But can I give you one reason with one --

Jim Kolbe:  Yeah, of course.

Hans Groth:  -- one sentence.  Healthcare will be extremely expensive if you have some levels of morbidity forever.  You see?  If you have your first disease at 40 and then, you become old till ninety-five.  These people are extremely costly.

Jim Kolbe:  Well, that is true.

Hans Groth:  But on the other hand, if you have a better lifestyle or prevention of somebody who was more or less healthy till their late eighties, they are really cheap.  And at the end of the day, the cost of dying is always the same.

Jim Kolbe:  So if we can all just stay healthy until we drop on the golf course, it would be perfect there.

Hans Groth:  Yeah, then you are really cheap.

Jim Kolbe:  Finally, let me just answer the question that was basically poised and not posed.  That is, “Is it possible?”  I do not know whether this is politically possible.  If you are going to do it, you are going to have to take something away somewhere else in the system.  Basically in this country, that means entitlements have to be reformed.  I do not see too much will in Congress to deal with entitlements just for the reason that was posited at the beginning.  That it is long-term, it is down the road.  It is always, “Let’s let the next Congress deal with that tough question.  I do not really want to have to deal with that one.”

Megan Davy:  Can I follow-up and ask?  Hans, do you see this change in how we perceive health?  Does most of that come from increased education and technology or do you think that will also change service provision?  I see that some of this will be--more education when you are young, more technology with new drugs, et cetera.  Does this also mean that we have to change the type of services that we provide as well, and the cost associated with it specifically?

Hans Groth:  It is a combination of both.  The pattern is not uniform.  In one country, it is more health.  In one country, it is more education.  In one country, it is added tax on pension funds.  It is all about finding the golden mixture.

[Audio glitch]

Nicholas Eberstadt:  What do you think about this?  There is work that has been done in Switzerland by some of Hans’ friends and colleagues including Peter Zweifel and other people about the so-called cost of death.  This is work mainly in Switzerland, but not only in Switzerland that may have some positive implications for the United States and the rest of Western Europe.

What they have found is that whether one perishes at age fifty or at age 101, about half of your healthcare cost tends to fall in the last two years of your life.  If this pattern is replicated in work seen in other countries, it might have some cost moderating implications for extended longevity.

[Audio glitch]

Megan Davy:  Can I go ahead and turn to the floor?  Let’s start with Ben Wattenberg.  If you could please identify yourself, wait for the mic, identify yourself and --

Nicholas Eberstadt:  Even if we know you.

Megan Davy:  Even if we know you.

Ben Wattenberg:  Ben Wattenberg at the American Enterprise Institute.  Let me make two points.  One is that all the problems you described rooted in demographics are on the one hand, real, and I have written about it for about 100 years.  On the other hand, wealth is increasing so rapidly.  In the United States, we have a gross domestic product of about US$13 trillion.  By the year 2025, it is going to be US$25 trillion.  So Congressman, it may be that all those gloom and doom scenarios about raising tax [audio glitch] you may not have to do it because you are going to have an extra US$12 trillion which is a lot of trillion dollars.  So that is number one.

The other thing that I would like to bring up is that, accordingly, the human problems that you described here; the people getting older and not having enough money.  It seems to me, while real, is much more minimal in terms of the human costs.  On the other hand, if you look at this in another dimension, particularly from the point of view of great historical nations, Western Europe, Russia, Japan, a free-fall in fertility rates and birth rates is so dramatic and so counter geometric or de-geometric [sounds like]--whatever the word, Nick, there is a word, depopular [sounds like] or whatever it is, it is geometric.  You have the United States going, according the UN projections, from 300 million people to 400 million to half a billion people in this century, so the next 90 years; at the same time, the European countries, Japan and Russia, the phrase the demographers use for a lot of countries is, “Estonia, they are going out of business.”

It is a little harsh to say Europe is going out of business, but just turn the crank another century or two and the UN has done very strange but very fascinating projections out to the year 2300, and there is nothing particularly in sight that says fertility rates in Western Europe, which are about 1.5 or 1.6, or in Japan or in South Korea which are 1.1, which are literally unfathomable, and these rates for the most parts have been falling for fifty years, and this is an unprecedented situation, and even I do not have an answer.

[Audio skips]

Nicholas Eberstadt:  That is why we ended the book in 2030.  [Audio skips]

Dave Torgerson:  My name is Dave Torgerson.  I’m with USDA, but I’m on my own time.  I just finished a fifty-year projection that I did for the Forest Service.  One of the things that occurs to me based on the presentation here is, if you want to extend longevity, cover all the kids, put them in Medicare because we are spending an obscenely large percentage of our money on healthcare and benefits to people over sixty-five--very large unintended consequences, very contrary to social equity.  Just throw them in, make sure everybody is covered, and emphasize prevention, and you will probably get a real good payoff down the road, and it is cheap.  Cut the suicide rates in half--anyway, that is just one of my thoughts.  I think we could soup up our population so we would have even a greater and healthier population than the Europeans do.

Jim Kolbe:  Response.

Nicholas Eberstadt:  That is beyond my pay grade, but I’m not sure it is beyond Congressman Kolbe’s pay grade.

Jim Kolbe:  I think the [audio skip].

Rachel Soloveichik:  Hi.  I’m Rachel Soloveichik from the Bureau of Economic Analysis.  What I really loved of your presentation was the regression of work effort in fifty-five to fifty-nine on the pension system.  Have you done something similar with work effort on social health?  Do people work more in the healthier countries?  Yeah.  Is there anything similar on disability rates?

Nicholas Eberstadt:  Well, actually, we did not do this.  We stole this.  This was done by the OECD--a long footnote.

Jim Kolbe:  You did credit that.

Nicholas Eberstadt:  Yeah.

Jim Kolbe:  You did say it was OECD data.

Nicholas Eberstadt:  Is there work that we could look at that would compare length of healthy life with output or--Rachel Soloveichik:  [Off microphone] Yes.  It seemed the argument that you want to get people more healthcare so they will work longer.  It only makes sense in--healthy life expectancy has something to do with work.

Nicholas Eberstadt:  Well, part of what healthy life expectancy has been translated into in Western Europe, e.g., vis, to wit, “La Belle France” is wonderful vacation.  So we could make the argument of what the implications would be if it were translated into work.  We have come up with a couple of various simple calculations in here where we show that even without a radical change in working at older ages and returning to patterns of 1975 or 1980, this could turn around the manpower situation in Western Europe for a generation.  It would make about almost a percentage point a year difference on per year on labor force availability and make, maybe, a difference of 25 percent per capita output over the period of a generation which [indiscernible].

Hans Groth:  Just to respond with one sentence, if we postulate that people should work longer and we say that they have to be healthier.  We have to do this because we have to convince policy makers, and that policy makers or the public is really convinced that they are healthy and thus, capable to work because you should as well remember that an enormous power of the unions in Europe which is a huge difference. 

I’ll give you an example from Austria which is quite funny.  Austria has, as well, a history that they go very early in retirement.  Then, the government said, “We cannot afford this anymore,” and then they cut or changed the law.  So as a consequence, you could not retire anymore.  What is the balance after five years?  It is true that the retirement rate in Austria has dropped significantly, but retirement due to disease, whatever disease it means, has gone up significantly, and the balance of this reform is close to zero.  It is just another bank account.

Jim Kolbe:  That is truly fascinating to me.  What you say is absolutely true, but all the incentives we have in this country certainly go in the other direction.

I find it fascinating that just twenty-five years ago, back in 1980, two-thirds of all Americans retiring retired at full retirement age of, then, sixty-five.  Only a third of them took early retirement.  Today, it is the exact opposite; two-thirds take the early retirement.  They ran the numbers, and their accountants and everybody else says, “Get your retirement now.  Your life expectancy and everything, you are going to be much better off taking your retirement starting at age sixty-two.”

It is also true, but it is a different perverse thing that has happened in this country.  It is also true that the number of people on disability here in the United States has just soared, quadrupled, in the last few years.  And the reason--states finally figured out--if they can get all those people moved into disability, they are qualified under Medicare--100 percent federal dollars instead of Medicaid half and half.  So the states are aggressively hiring all these people, aggressively push all these people, and qualify them for disability.

So that is the reason.  It is not that we suddenly become four times the numbers.  Actually, I think it is a quadruple now--I believe I’m correct--of the number of people on disability.  It is not that we have four times more accidents or people that are disabled.  No.  It is just that we are much more aggressive about pushing people into that category there.  States are not dumb.  They have figured out what the cost of this thing is.

Armin Fidler:  Thank you for a very inspiring presentation.  My name is Armin Fidler from the World Bank.  Just a couple of comments and questions on the retirement--I’m from Austria, by the way, so I’ll be interested to continue this discussion--but one thing that is interesting that--one of the differences between, for example, Austria and the United States, is that you can legally retire and start another job, and that is fine, you can keep your pension.  In Austria, for example, there is a huge disincentive, and in some areas, even outlawed that once you are in retirement, you are not allowed to continue to work.  Now, if you, for example--for your analysis, you consult official numbers, those folks all show up as retirees.

However, many, if not most of them, have a happy side business which is just in the underground economy.  So from a market perspective, these people are economically active.  They produce, they consume, you just do not capture it if you only look at the official, let’s say, OECD data.  I do not know how big this effect is, but just anecdotally, what I know, it is big.  You see these people retiring from the postal service at age forty-nine and they--well, I’m exaggerating a little bit but not that much--it is not that they are then hanging out in a hammock, they are actually producing and doing something but you might just not be able to capture that.

My second point/question was on this more macro picture of migration.  Again, if I look at my own country, in the last 30 years, this country has been absolutely transformed.  You have much more of a semblance now for multicultural, multiracial society, and that happened in a very short time period.  I’m just wondering whether we are missing some macro trend or simply--in one of your slides, you mentioned the Poles are gone, but for the Poles, the Ukrainians came.  You see the Chinese migrating into Russia perhaps as a day job until now, and as you predicted, some of them might stay.

So the question for me is, “Where is really the problem if this is a peaceful transformation?”  Think about the southwest of the United States.  It will be Hispanic however high the wall is, and that is fine.  As long as there is a peaceful process, there should not be a problem, right?  So what is the problem if the Chinese infiltrate Siberia in a peaceful way?  The same effect would happen, like, in the southwest of the United States.  Or do you disagree?

Hans Groth:  If I can make a brief comment for European migration.  We looked at this as well very carefully, but the dimension of migration you need in Europe to manage the ongoing demographic change, leaving everything as it stands, is so huge that migration is not a real solution.

I’ll give you one example.  Germany has about 80 million people living there.  If Germany wants to keep his demographic ratios, the elderly ratios, et cetera, they need to have, by 2050, about 40 million immigrants.  We do not have to be a scientist that this is no way feasible because the social imbalance, even if you want it, even if you make huge political campaigns, it will not happen.  This is a pattern more or less; migration ameliorates it but will not solve it.

Jim Kolbe:  What you have done is just highlight the tension that is there.

Hans Groth:  Yeah.

Jim Kolbe:  Because on the one hand, you have the economic forces pushing you towards that.  On the other hand, and we see it right here in the United States with the immigration debate going on, you have the cultural forces.  There are people saying, “No, we cannot have that.  We cannot assimilate that number of people.”  Even though we have a better history of assimilating in this country than Europe does, there is still that backlash that is developing here.  So you have these two tensions here, of these two forces that are at work here.  Exactly how those are going to get resolved, I do not think we know.

Nicholas Eberstadt:  The thing that we mentioned in the book--for the most part, the stories of immigration into Europe are happy stories--not unhappy stories  over the last generation--so let’s be very clear about that.  But as Congressman Kolbe mentioned, although the United States’ story is far from perfect, the United States seems to have a more workable generalizable formula for assimilating newcomers and turning them into loyal and productive citizens than we see in different parts of Western Europe.  That is one phenomenon.

A second phenomenon which we mentioned in here is that there is a feedback loop that is already starting to be evident in Western Europe.  In areas where there seem to be problems with assimilation from immigrants, there is an out-migration of native-born.  One can see that in--not all European countries collect statistics on this because the presumption is that the age of emigration was over--the time of World War I. 

But for those countries that do collect statistics--Germany, the Netherlands, UK, some of the Nordic countries--we can see an increasing number of native-born people leaving over the last few years.  When we try to parse it, it is not only increasing numbers, but they are young and they are relatively well-educated, exactly the people that you want to keep.  So it is not as if immigration is just a one-way flow for Europe.  There is a more complex dynamic that seems to be going on at least in northern parts of the continent.

[Audio skips 80:48 - 80:59]

Megan Davy:  I’m afraid I can take one more question--right over here.  Then, if you have any other questions, with the exception of Congressman Kolbe, we will be hanging around.

Sarah Rix:  Thank you.  I’m Sarah Rix from AARP.  I enjoyed the presentations, but until a comment about Austria, no attention was paid to the efforts on the part of the European Union, in particular, to retreat from Europe’s retreat from work, and a lot is going on.  In fact, older workers are really high on the agendas of European countries, much more so in the United States.

You have the Stockholm target, for example, which is calling for an increase to 50 percent in the labor force participation rate of the critical age group for Europe, which is fifty-five to sixty-four which has much lower employment rates than does the United States for that same age group.  There have been increases in the early and normal retirement age.  There have been efforts to cut off alternative pathways to retirement by reforming disability programs.  There have been incentives introduced to workers and employers to foster longer work lives.  As a result, employment rates are going up in many of these countries by 10 percentage points or more in some of them. 

And I wonder the extent to which your book addresses some of these initiatives and assesses their impact both today and in the future.  I realize it is not enough maybe, but they really are significant undertakings.

Nicholas Eberstadt:  Yes.  Of course, there are stirrings, and they are very promising stirrings within the EU and the original fifteen members of the EU.  Sweden, for a long time, has had relatively high levels of older worker participation, certainly in comparison to at least what people in Italy say they are doing about formal work and so forth.

The countries which really are interesting outliers in Europe, and we discussed this a little bit more within the book, are Iceland and Ireland, whose average age of retirement is substantially above the rest of Western Europe and actually look quite comparable to some prosperous non-OECD Europe countries like Japan and South Korea.

Ireland is within the EU.  Iceland is outside of the EU.  Switzerland is outside the EU.  It may be that it is easier for some of the smaller non-EU members to begin with experimentation and to be almost a laboratory that people within the EU can learn from.  It does not hurt that their populations are smaller either.

Hans?

Hans Groth:  To respond to your comments.  You are fully right.  A lot is going on--a huge amount of efforts--but it is a long process, and there is as well a huge resistance.  And just to remind you of a recent phenomenon in Germany, they made a decision, I think, a year ago to prolong, to expand retirement age by one year or something like this.  Now, the government has changed and the next election is ahead.  What are they going to do?  They change and they go back to the old rules.

You should also not forget this is a huge political change, and in most of the countries, about 50 percent of the voters are above fifty.  Why should I change laws or vote for policy makers who change laws, who disfavor me?  You see?  So the people are, in principle, extremely change-resistant when it comes to managing demographic changes.

Jim Kolbe:  I have the answer, and it just occurred to me.  What the heck do you do in Iceland once you retire anyhow?  So of course, you do not want to retire.

[Audio skips]

Megan Davy:  All right.  On that note, I' think we'll come to a close. Thank you all for coming.

[End of file]

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