...pension health care reforms are increasingly high on the policy agenda. Similarly, the weak financial position of many pension funds has highlighted the need to secure financial resources and improve risk management practices to meet retirement needs, triggering a variety of reform efforts.

Financial markets can play an important role in the management of aging-related risks. For this reason, governments should seek to encourage and influence market developments in this area, and policymakers may need to reconsider the appropriate sharing of risk between the public, private, and household sectors. In some cases, governments may simply provide a framework or otherwise influence market participants to address incomplete markets. In other cases, governments may need to intervene directly to provide some minimum level of insurance coverage. Some risks may be best managed by the household sector, although shifting more risk to households will likely require additional measures to ensure they have some ability to manage such risks. The selection of any combination of these alternatives will be influenced by the sophistication and depth of domestic or regional financial markets and institutions, as well as by cultural and social considerations.

Governments should also act as long-term risk managers, pursuing proactive and comprehensive risk management strategies. In doing so, they would likely benefit from greater market inputs and risk management instruments. So far, few governments have approached aging-related challenges in this manner. However, given the focus that, for example, rating agencies are increasingly applying to sovereign long-term fiscal issues and related risks, and the potential for rating downgrades if such risks are not addressed, greater action may soon be required. Indeed, although the typically shorter-term focus of politicians and much of society may often inhibit more immediate efforts to address these long-term challenges, greater scrutiny from public auditors and legislators, the financial media, and international financial institutions and investors, and possibly even domestic households, is likely to increase the policy emphasis on aging-related challenges.

This article looks at the nature and size of the financial challenges facing aging societies today, the potential role of financial markets in addressing these challenges, and the role of governments as managers of key long-term risks related to aging, drawing on policy work we have done for the IMF's Global Financial Stability Report, the Group of Ten, and a Group of Twenty workshop on...

NOTE: All illustrations and photos have been removed from this article.



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