Secular declines in birth rates and rises in life expectancy have meant that the average ages of the populations of what are now the OECD countries have been rising for at least a century and a half. But the rapidity of the demographic developments now affecting the OECD economies is unprecedented, which raises very large questions for policy-makers.

lthough life expectancies have been rising more or less steadily for a long time, the secular fall in birth rates was sharply reversed after the end of the Second World War - the socalled baby-boom'. For a brief while, OECD societies got younger again. But then birth rates fell back, and kept on falling. The baby-boomers have had relatively few children of their own and, unless fertility rates recover, or immigration increases, the populations of many OECD countries will be lower in a few decades than they are now. This continued fall in birth rates was unexpected, and demographic projections over the past 20-30 years have had to be successively revised downwards.

As a result, most OECD countries have a large bulge of baby-boomers' now in their prime earning years - the oldest of them are in their early fifties - but comparatively few young adults or children. Concurrently, the proportion of older retired people rises all the time because of population growth in the past and increasing longevity in the present. Ageing is also occurring in most non-OECD countries, because people there are living longer, but their birth rates have proved more sustained than in OECD countries. For some time, the baby-boom phenomenon has been beneficial to the OECD economies. Although bringing the baby-boomers to adulthood was an expensive exercise - because of their numbers and because they spent more time in full-time education than their predecessors - they subsequently swelled the ranks of productive workers, paying the taxes that support the young, the old, the sick and the unemployed. Older Workers

The baby-boomers will shortly start moving into the category of `older workers - a vague term, usually applied to those over 55 years of age. People of this age-group tend to be relatively well paid, but have more difficulties than younger workers in finding a new job if they are made redundant, and generally change jobs less frequently than younger ones. They are also often regarded as being less productive than younger workers, so that employers are often ready to lay them off. Yet there is very little reliable empirical evidence to establish whether older workers are indeed less productive than younger ones. One fact is clear: the older workers of today are on average less well-educated than today's younger workers, simply because today's older workers are much more likely to have left full-time education in their mid-teens. So the observed tendency selectively to lay-off older workers may reflect more their relatively low educational attainment, coupled with their relatively high wages, than low productivity because of age. It certainly seems to be the case that the older workers who stay in the labour force are on average better educated than those who leave. Arguably, then, the problem of the low-productivity, high-wage older worker could diminish in coming years.

Even if it does so, this problem will probably not disappear, and it would be prudent to assume that there will continue to be a large number of people over 55 who have de facto withdrawn from the labour force through long-term unemployment or disability. In any case, whether or not older workers are inherently less productive than younger ones doing comparable jobs for comparable salaries, it is undeniable that the older ones are less flexible in the sense that they are less able - or less willing - to acquire new skills. Since the acquisition of new skills requires an investment of time and effort. this difference may represent a rational decision by older workers (or their employers) not to proceed with such an investment if they are not going to stay long enough in the workforce to recoup the cost. But by the same token, because older workers change jobs less often, it should logically be more profitable for employers to invest in training them.2 Whatever the reason, most OECD countries are going to be faced with the problem of having an unusually high proportion of employees in the less flexible age-groups, in a world that is changing rapidly, where new techniques and new ways of doing business are becoming more and more common. The competitive edge of the OECD countries in their own and other markets could be eroded as a result. The Pension Problem

In about ten years' time another, and potentially more serious, problem will emerge as the baby-boomers start to retire. The numbers of retirees will rise faster than in the past, and they will continue to rise quickly for many years. By contrast, the numbers of people in the economically active cohorts will start to shrink in many countries and - unless a higher proportion of them can be encouraged to take jobs, or retire later - the proportion of the population that is employed will also shrink. In some countries, indeed, the absolute numbers of employees is likely to fall. Unfortunately, in the public pension systems currently in force in the OECD countries, it is generally the taxes of people in work which pay the pensions of those who are retired - there is no 'fund' into which an employee's pension contributions are paid, and which could be drawn on when that employee retires (box, p. 12). The money goes straight to service existing pensioners. So, in a decade or so, the cost of public pensions will rise faster than ever - unless hard decisions are taken soon - and the tax base for financing them will simultaneously shrink. To the extent that older people use medical resources more intensively than younger citizens (box, p. 14), population ageing will put additional pressure on public finances, since there will be relatively more older people.

The public-pension problem is thus fiscal in nature. Unless existing individual pension benefits are reduced and/or individual contribution rates are raised, the gap between revenues and expenditures will show up as a gap in public finances and would entail either rising publicsector deficits, higher taxes, lower expenditures on other items, or a combination of all three. It is a serious problem because the numbers are large: if left unchecked, public-sector deficits could rise again to the volumes of the 1980s. Government debt would soar, exceeding 100% of GDP in Europe and Japan, and up to 70% in the United States. This potential fiscal problem is a symptom of the real and inevitable challenge posed by ageing, namely! how to ensure that pensioners enjoy adequate living standards without placing large burdens on the working generations. Only people in work generate incomes, but both workers and retirees (as well as society's other dependants) consume. As the number of retirees rises and that of n orkers shrinks, other things being equal, there is less to go round. Builingup debt is no solution: eventually it has to be repaid, and to the extent that rising debt entails rising interest rates, it will crowd out private investment and living standards for everyone will suffer. It should be emphasised that ageing will not suddenly result in massively lower living standards: the impact each year will be small, but the cumulative effect over two or three decades will be substantial. That is why some countries - Italy, the United Kingdom and the United States, for example - have begun to take steps to deal with the coming problems, and all governments recognise that these are issues that have to be addressed soon. What

Solutions?

What, then, can be done? There is no simple, painless solution to meet all cases: population ageing will put downward pressure on material living standards wherever it happens. There are nonetheless several policy actions that would reduce the pain in any case, and/or render it less acute by spreading it over a longer period and more people, by:

raising the volume of output so that living standards can be higher for everybody once the demographic pressures begin to bite

putting public finances in as healthy a position as possible so that some extra demands on the public purse can be tolerated for a while

ensuring that lengthy periods in retirement in relative affluence are not financed at the expense of younger generations.

In fact, all these policy actions are desirable in themselves:4 they simply become more important and more urgent because of the demographic background. Raising Output