The Cost of Growing Older
Why paying for an aging population may force the United States -- and its allies -- to cut back on military spending.
By 2050, rapidly graying populations are likely to impose an unprecedented fiscal burden on the United States, many European countries, Japan, and South Korea. This aging is the topic of intense political, economic, and social welfare debates worldwide. But it may prove to be a problem with implications far wider than just national or even regional reach, posing profound foreign and security policy challenges and possibly undermining the ability of America and its allies to sustain current levels of military and development spending. All sorts of expenditures will be up for review — and prominent on the chopping block could be defense and foreign aid.
For example, "some European and rapidly aging East Asian states might conclude that they cannot afford to maintain a sizeable military," noted the U.S. National Intelligence Council in its report "Global Trends 2030: Alternative Worlds." And with this eventuality, Washington’s perennial frustration with its allies’ failure to share the burden of paying for global security may only grow. And the allies’ ability to compensate for America’s shortcomings in the provision of foreign aid could well be compromised.
The generation of baby boomers, who for decades fueled the expansion of consumer demand and economic growth around the world, will require assistance as their prime working years are ending. In 2010 in the United States, there were 19 people age 65 or older for every 100 people of working age (15 to 64). By 2050 there will be 36 old-age dependents per 100 working-age Americans.
As daunting a fiscal challenge as this may be for the United States, it is dwarfed by the test facing other aging societies. Japan’s old-age dependency ratio will double from 36 seniors per 100 working-age people to 72 oldsters by midcentury. South Korea’s elderly dependency burden quadruples from 15 to 66, while Germany’s increases from 32 to 60. A new survey by the Pew Research Center has found that while only about a quarter of the U.S. population looks to government to bear the greatest responsibility for people’s economic well-being in their old age, a third or more of the publics in Britain, France, Germany, Japan, and South Korea expect their governments to be their primary support.
Faced with a graying population that will need additional support, U.S. spending on public pensions is expected to grow from 6.8 percent of the economy in 2010 to 8.5 percent in 2050, according to estimates by the International Monetary Fund (a prospect that has already ignited a political debate over priorities among American politicians). Meanwhile, South Korea is expected to increase pension spending from 1.7 percent of GDP to 12.5 percent over that same period. And Germany will grow such expenditures from 10.9 percent to 13.1 percent.
The intensity of the potential competition this may create between spending on the elderly and spending for defense will differ among the allies. Over the next four decades, the United States must find an additional 1.7 percentage points of GDP to fund public pensions. In 2012, Washington devoted 4.4 percent of GDP to the Pentagon, according to data from the Stockholm International Peace Research Institute. That proportion is shrinking already, potentially freeing up some money for the elderly. But U.S. defense spending as a portion of GDP is still larger today than in most years since the early 1990s, suggesting the competition for resources could be intense.
America’s other allies face even tougher trade-offs. In 2012, South Korea spent just 2.7 percent of its GDP on defense, but it must find an additional 10.8 points of GDP to support its rapidly aging population by 2050. Germany spends only 1.4 percent of GDP on the military and needs to increase public pension expenditures by 2.2 points of GDP. Britain, France, and Japan face lesser challenges balancing guns and pensions, but all will have to make spending choices.
The rapid aging of China may help attenuate some of the need for allied defense spending, thereby easing friction with spending on the elderly. Beijing spends 2 percent of its GDP on defense, a huge amount in nominal terms given the size of China’s economy. Such spending is one reason Washington and its allies feel the need to maintain their military expenditures. But, by 2050, China will have 39 people age 65 or older for every 100 working-age people — an old-age dependency ratio higher than that in the United States. And a plurality of Chinese (47 percent) expect Beijing to bear the greatest responsibility for their economic well-being in their declining years. This leads the IMF to project that China will spend 10 percent of GDP on pensions, up from just 3.4 percent in 2010. Beijing is also likely to face its own guns versus pension spending trade-offs.
Foreign aid may prove even more vulnerable to new pressures to allocate more resources to the elderly. The United States devotes only 0.19 percent of gross national income to development assistance, according to data from the Organization for Economic Cooperation and Development, the advanced-economy think tank in Paris. This is hardly a deep well to plumb to support the elderly. But foreign aid has never enjoyed widespread public support in the United States, which has always made it a favorite target for budget cutters.
Moreover, the recent fate of development assistance spending in Europe in the wake of the euro crisis suggests just how vulnerable it may be in future domestic battles over spending, even in societies that have proved far more generous than the United States in the past. Between 2011 and 2012, recession-challenged Spain slashed official foreign aid 47 percent, and Italy reduced it 32 percent. Even Germany, which has weathered recent economic storms better than most, cut such assistance by 2 percent.
Thus, as aging societies come to grips with how to pay for sustaining the rapidly growing elderly share of their populations, what they spend on defense and development assistance may well become part of the conversation. Washington has long argued that allied defense spending is woefully inadequate. And it has relied on its allies to pick up some of the slack in foreign aid spending as the United States focuses its international expenditures on security. But the competition for resources created by aging populations is only likely to generate even greater burden-sharing friction.
In the future, aging will not be just a social welfare challenge. It may prove to be a national security one as well. And in Washington’s discussions with Berlin, Tokyo, and Seoul about global burden sharing, it is not too early to begin to share perspectives on how these allies intend to balance competing fiscal responsibilities. Because a day of reckoning on priorities and a clash between the needs of aging populations and national security concerns may come sooner rather than later.