A Distinguished Banker Warns of Demographic Doomsday
from Summer 1999
by Desmond Wolfe
According to Peter Peterson, we’re all in danger of becoming boiled frogs—at least, metaphorically. In his new book, Gray Dawn: How the Coming Age Wave Will Transform America—and the World (Times Books; 1999), he says too many of us are ignoring the serious social, political, and economic ramifications of global aging. We are doing so, he says, at our peril, and he uses the familiar frog analogy: “When a frog falls into boiling water, it jumps out. But when a frog falls into cold water that is slowly heated, it swims around calmly until it cooks.”
Peterson, 72, who is chairman of The Blackstone Group, an investment banking firm, and a director of the Federal Reserve Bank of New York, thinks we’re swimming in slowly heating water right now. And he’s interested in working toward solutions that might help us jump out.
Secretary of commerce in the Nixon administration and chairman and CEO of Lehman Brothers from 1973 to 1984, Peterson is currently a director of Transtar Inc. and Sony. In an interview with Corporate Board Member, Peterson discussed the challenges presented by global aging and how directors can help meet them.
What’s the most crucial part of the aging issue that the public—or politicians—have failed to grasp?
Most people seem to think that global aging is only about the fact that we are living longer. But what’s often missed is that the unprecedented growth in the number of elderly has been accompanied by an unprecedented decline in birthrates in the developed world. The decline in birthrates in many countries so far outstrips even the unprecedented longevity gains that many developed countries will experience shrinking populations in absolute numbers. And shrinking populations have profound implications that we have only begun to consider.
Also, if we only focus on demographic trends in the U.S., we get a distorted picture. Speaking on a comparative basis, the U.S. has one of the highest birthrates in the developed world—close to the so-called replacement rate that would keep the population at least at the same levels as today. When we add to this our relatively large number of immigrants, we are likely to experience a slight amount of population growth.
To take the opposite extreme, look at Japan. Its population is on track to fall in half by the end of the next century. [Toyota Chairman] Shoichiro Toyoda predicts, only half-jokingly, that 800 years from now—extrapolating from current trends—there won’t be any Japanese left at all.
How should corporate boards be thinking about global aging?
Corporate boards are supposed to think about the future. In my view, they ought to get in a 21st-century frame of mind.
The ratio between active, tax-paying workers and benefit-receiving retirees, which is now about 3-to-1 in most developed countries, is going to plunge down to almost 1-to-1 in some parts of the world. This change is going to have profound impacts on such things as output and productivity trends, GDPs of individual countries, and immigration patterns.
Paying very high taxes to support earlier retirement is hardly a recipe for economic and employment growth. And a world of rapidly shrinking work forces is one in which we will need more workers, not fewer. Even in the U.S., the work force is expected to experience near-zero growth unless we open up to more immigration and make more room for senior workers.
It would be presumptuous in the extreme for me to tell corporations how these daunting demographics will affect their businesses, but the kinds of questions they should be asking are obvious. First, how are current businesses affected by a rapid decline of younger people and a rapid increase in the elderly? Then, of course, one would want to ask what new business opportunities these demographics suggest.
On the downside, I would think durable structures businesses—construction and infrastructure, to take two examples—will be hit in countries with shrinking populations. On the other hand, health care companies, retirement community operators, and other kinds of senior-oriented businesses may do quite well.
You seem particularly concerned about age bias and how it conflicts with the trend toward a smaller, older work force. How should boards approach that issue?
I think ageism is going to become a much more pronounced issue in business—one that ultimately will move boards to consider new policies. Indeed, I predict that just as racism was a major challenge in the workplace in this century, ageism will challenge us in the next.
In my view, ageism is a bias that proclaims a number of myths. The first is that most of the elderly don’t want to work, which simply is not true. The second is that most elderly don’t need to work. Even in America, the median 60-year-old only has about $10,000 in net financial assets—scant preparation for retirement. The third myth is that most elderly aren’t able to work. Real-life evidence suggests that this certainly is not true. Finally, there’s the myth that there is no productive work for them to do. Again, not true, particularly given the outlook for shrinking work forces in the next century. A number of enlightened corporations have proved that their senior work force can be highly motivated and productive.
What effect, if any, can U.S. directors have on global solutions to the aging issue?
American business has a very important role to play in participating in the shaping of aging policy. Many of us have been involved recently in bringing the influence of organizations like The Business Roundtable, the National Association of Manufacturers, and the U.S. Chamber of Commerce to bear on issues such as balancing the budget and funding for the IMF. Our efforts paid off, at least at the margins, because some leading CEOs personally got involved. I think something similar can be done on global aging issues. And this, ideally, should be approached globally with organizations such as the International Chamber of Commerce.
You credit a number of countries for establishing policies that should help them prepare for coming fiscal and social burdens. What can the United States learn from them?
I think perhaps the most interesting example for Americans is the British one, because political and economic conditions in the UK are not so far removed from that of the American reality. Britain took steps, beginning in the Thatcher era, to reform and significantly privatize its pension systems. Current projections indicate that its deficits will not rise during the next 20 to 30 years, even as it experiences the same wave of growth in the elderly population that will devastate the pension systems of other countries.
That wasn’t too long ago. Can’t we just follow Britain’s example?
I believe that if we start now making similar kinds of reforms in the U.S., our process still can be relatively gentle and humane. What worries me is that most countries, the United States included, are nowhere near starting today. The result will be a tendency toward quick fixes and sudden, draconian, across-the-board cuts a decade or two down the road when the crises hit.
As I tell my liberal friends—and I do have a few—if you’re concerned about how poor and lower-income American families are going to fare in the reform of Social Security and Medicare, the sudden explosive crisis scenario is exactly what you want to avoid. Given the low savings rate among the baby boomers, the much larger post-65 crowd of the next century may be even more dependent on Social Security. You don’t want to eviscerate those benefits suddenly for people who are highly dependent.
You say that much of our understanding of future fiscal burdens doesn’t include health care costs. And you also suggest that a rationing of publicly funded care might someday be necessary. Can we make changes today to forestall that eventuality?
I’ve pointed out in Gray Dawn the many ways in which the United States is more favorably positioned than Europe and Japan in terms of the aging crisis. But health care is our real Achilles heel. First of all, we spend about twice what any other country in the world does on health care as a percentage of GDP, although we are not particularly healthier, and we don’t live longer than persons in other developed countries. Societies all over the world, but ours in particular, will be faced with the obvious limitations on how much health care can be provided, particularly in terms of expensive high-tech medicine in the last months of life. It is not too extreme to say that a key 21st century debate will be who lives, who dies, and who decides.
As with Social Security reform, the key is to start thinking early rather than allowing ourselves to arrive at a juncture where a sudden cutoff of benefits is triggered and a huge generation of senior citizens has had no chance to prepare.
