1

Making use of long-term demographic Making use of long-term demographic projections in multilateral policy projections in multilateral policy

coordination in the EUcoordination in the EU

Per EckefeldtDG ECFIN

European Commission

Joint Eurostat/UNECE Work Session on Demographic ProjectionsOrganized in cooperation with Statistics Portugal

Instituto Nacional de Estatística, Lisboa, 28-30 April 2010

2 Outline

• Background• Demographic prospects• Economic effects of ageing populations• Overall budgetary effects of ageing populations• Potential medium- and long-term impact of the

economic crisis• Concluding remarks

3Background Background

• Preparing the European Social Models to be apt for tomorrow is high on the EUs policy agenda

• Population ageing is a key challenge

• The 2001 Stockholm European Council took initiatives to face the impact of ageing on the economy; a three-pronged strategy was agreed:

o Reducing public debt at a fast paceo Raising employment rates and enhancing productivityo Reforming social security systems

• Challenge adressed by several initiatives at EU level:

– the just-launched Europe 2020 strategy for smart, sustainable and inclusive growth (updating the previous Lisbon agenda)

– the Stability and Growth Pact (SGP) – reformed in 2005

– the Open Method of Coordination on Social Protection and Social Inclusion

• Commission Communications on the Ageing Report and the Sustainability report in 2009

4A unique collaboration

• Comparable projections provided by Eurostat of long-term demographic developments is essential for the Commision in order to deliver appropriate policy advice on how to cope with global megatrends like population ageing to Member States

• It forms the basis for the projections at EU level of the economic consequences of ageing and future public expenditure on pensions, health care, long-term care, education and unemployment transfers

• Joint project of the Member States – the Economic Policy Committee (EPC) and the European Commission (DG ECFIN) to ensure comparability while reflecting the diversity of welfare systems accross Member States

• A special time of crisis: the Commission will continue to monitor the situation

5

Population2008-2060

Labour force

- Participation- Employment- Unemployment

Labour productivity

Real interest rate

GDP

PensionsNational models

10.2% GDP

Health care6.7% GDP

Long-term care1.2% GDP

Education4.3% GDP

Unemployment Benefits0.8% GDP

Total age-

relatedspending

23.1% GDPi.e.

50% of public

expenditure

Overview of 2009 projection exercise

6

Main demographic indicators (EUROPOP2008)

2008 2060 2008 2060 2008 2060Fertility rate 1,6 1,7 1,4 1,5 1,5 1,6Life expectancy at birth - men 77,2 84,8 71,2 82,3 76,0 84,5Life expectancy at birth - women 82,6 89,1 79,0 87,6 82,1 89,0Net migration flows (thousands) 1647 750 37 54 1684 804Net migration flows (cumulated 2008-2060 as % of population in 2008)Total population (millions) 390 421 103 85 493 506Old-age dependency ratio (65+/15-64) 27 51 21 65 25 53

EU15 EU12 EU27

14 4 12

7EUROPOP2008: Population projections

2008 2060

European Union

39 42

4649

x Median age

8

EUROPOP2008: The population in the EU27 grows much older

• Total population: 495.4 millions in 2008, 505.7 millions in 2060

• Working-age population : 333.2 millions in 2008, 283.3 millions in 2060 (-15%)

• Most numerous cohorts: age 40-44 in 2008, age 50-54 in 2060

• Population aged 65+ nearly doubles: 85 millions in 2008, 151 millions in 2060

• Old-age dependency ratio (65+/15-64) doubles from 25 to 53 per cent

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EUROPOP2008: Changes in the population structure

Old-age dependency ratio (65+ / 15-64)

EU: +28 p.p.

0

10

20

30

40

50

60

70

LU UK

DK IE NO

CY

FR

BE

SE NL FI

AT

EU

15

EU

25

EU

27

EA

12 EA PT

EE EL

HU

ES

MT

DE IT CZ SI

BG LV

EU

10 RO LT SK PL

2008 2008-2030 2030-2060

10

Labour force developments by Labour force developments by cohortcohort

Main features of the Commission’s approach

1) Use of entry rates and exit rates (based on average of participation rates over last ten years)

2) Participation rates are projected for each single year of age and gender

3) Incorporate the impact of pension reforms

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Employment rates rise due to reforms and cohort effects – EU 27

0

10

20

30

40

50

60

70

80

90

100

15_19 20_24 25_29 30_34 35_39 40_44 45_49 50_54 55_59 60_64 65_71

Employment rates 15-71 - Males - 2008 Employment rates 15-71 - Males - 2060

%

Age groups

EU27

0

10

20

30

40

50

60

70

80

90

15_19 20_24 25_29 30_34 35_39 40_44 45_49 50_54 55_59 60_64 65_71

Employment rates 15-71 - Females - 2008 Employment rates 15-71 - Females - 2060

%

Age groups

EU27

12

The consequences of ageing populations on employment – EU 27

0

50

100

150

200

250

300

350

400

2003

2008

2013

2018

2023

2028

2033

2038

2043

2048

2053

2058

58

60

62

64

66

68

70

72

total employment working-age population "employment rate (right scale)"

EU27 - BASELINE

1 2 3

Employment

Working-age population

Employment rate

13

Potential growth rates decline in the EUdue to shrinking working age populations productivity becomes the dominant source of growth

EU27

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2007-20 2021-40 2041-60

Lab

ou

r p

rod

uct

ivit

y g

row

th a

nd

E

mp

loym

ent

gro

wth

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

GD

P g

row

th

Labour productivity growth Employment growthGDP growth GDP per capita growth

LP LP LP

E

E E

GDP p. capita growth

GDP growth

2.3

1.61.3

14Ageing or retirement problem?

2008 2060 2008 2060Employment rate of older workers 54.5 64.2 36.6 55.7Average exit age 62.2 63.8 61.3 63.3Life expectancy at the time of withdrawal 18.5 22.9 23.1 26.7% of life spent in retirement 23% 26% 27% 30%

3.0 2.1

2008 2060 2008 2060Employment rate of older workers 72.0 66.0 63.5 63.3Average exit age 63.8 63.8 63.5 63.5Life expectancy at the time of withdrawal 18.3 23.0 21.4 26.5% of life spent in retirement 22% 26% 25% 29%

3.6 3.8

EU27Men Women

Requested exit postponement, in years (to keep %life spent in retirement constant)

NO

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The Total Cost of Ageing, EU27, components(change in percentage points)

EU27

0

5

10

15

20

25

30

Pensions Health care Long-term care Education Unemploymentbenefits

Total

% o

f GD

P

2007 2060

+4.7

-0.2

-0.2+1.1

+1.5

+2.4

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The Total Cost of Ageing, EU Member States, variety in the EU (change in percentage points)

Total Cost of Ageing, 2007-60 (p.p. of GDP)

-3.0

2.0

7.0

12.0

17.0

EU: +4.7 p.p.

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Crisis scenarios (1)potential GDP growth under different shocks (European Commission Spring 2009 forecast)

2010 2015 2020 2040 2060Rebound -4 -6 0 0 0Lost decade -4 -9 -11 -11 -11Permanent shock -4 -9 -12 -16 -20

EU27, GDP per capita, diff. from baseline (in %)

EU27 - GDP growth

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

2055

2057

2059

Baseline

Rebound

Lost decade

Permanent shock

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Crisis scenarios (2)pension & total expenditure under different shocks(European Commission Spring 2009 forecast)

0

1

2

3

4

5

6

7

Baseline Rebound Lost decade Permanentshock

EU27, Pension expenditure, change in p.p of GDP, 2007-2060

+0.9

+1.4

0

1

2

3

4

5

6

7

Baseline Rebound Lost decade Permanentshock

EU27, Cost of Ageing, change in p.p of GDP, 2007-2060

+1.4

+2.0

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• Demographic change in the coming decades – the transition to an older population - will exercise strong pressures for higher public spending in the EU

• Considerable policy action in reforming public pension programmes helps to offset this

• There are many cases of successful reforms, most recently PT, HU, CZ, DK

• But vigilance is called for as new challenges emerge… (issues of future pension levels, support from private pillars, ...)

• …and not least concerning the organisation of health care and long-term care in the future

What do the latest projections tell us?

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Concluding remarks• Europeans living longer than ever before is an enormous achievement for

societies and should not be seen as a threat

• The EU is facing a retirement challenge and not an ageing challenge, stemming from European social models of yesterday not being apt for tomorrow, affecting expectations and behaviour of the population

• On pension policy, reforms carried out suggest progress towards fiscal sustainability for many MS, although some still have a long way to go

• The focus increasingly turns to aligning public perception of retirement incomes and its composition in the future with what the reformed systems will deliver, so as to ensure lasting success of implemented reforms and to provide opportunities for people to adjust and shape their lives as pensioners

• A key challenge will be to extend working lives, giving a double dividend: (i) higher living standards; and, (ii) progress towards sustainable public finances

• Moreover, the transformation of the European social models – not restricted to pension policy - need to be intensified to support jobs and growth

• For the EU to swiftly get out of the crisis, a credible and coordinated exit strategy – building on structural reforms supporting durable growth – is necessary so as to restore confidence in the public finances

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The full report can be found at DG ECFINs website:

http://ec.europa.eu/economy_finance/thematic_articles/article14761_en.htm

Thank you for your attention!