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Pension Reform in the European Union: How to Cope with Ageing Populations Per Eckefeldt European Commission – DG ECFIN Cicero Foundation Great Debates seminar: Pension Reform in the European Union – Comparing Different National Approaches Paris, 15-16 May 2008 Outline • Why reform? • demographic changes and economic and budgetary implications • Scale and composition of the fiscal sustainability challenge in the EU • Policy implications European Commission Fiscal sustainability a core policy objective • Ensuring sustainable public finances in view population ageing is a key challenge for policy-makers in the EU • Consistency between medium-term budgetary targets and long-term fiscal sustainability emphasized in the EUs fiscal framework, the Stability and Growth Pact European Commission Measuring the ‘cost of ageing’: common long-term budgetary projections Pensions Labour force National models - Participation - Employment - Unemployment Health care Population 2004-2050 Labour productivity GDP Long-term care Real interest rate Education Unemployment benefits Total agerelated spending The consequences of ageing populations on employment and growth Main demographic indicators EU15 EU10 2004 2050 1,5 1,6 Life expectancy at birth - men 76,4 82,1 Life expectancy at birth women 82,2 87 Net migration flows (thousands) 1347 Net migration flows (as % of population) 0,4 Fertility rate Source: 2006 EPC/Commission report on ageing. 2004 2050 1,2 1,6 +0.4 +6 70,1 78,7 +8.6 +5 78,2 84,1 +6 778 -3 101 0,2 0 0,1 +0.1 A much older population structure in the EU25 • • • • Total population: 457 mill. in 2004, 471 mill. in 2030, 454 mill. in 2050 Most numerous age cohorts: age 36 in 2004, age 57-59 in 2050 Population aged 65+ doubles until 2050 (from 75 to 133 millions in 2050) Old age dependency ratio (65+/15-64): doubles from 26 to 52 2004 89 85 81 77 73 69 65 61 57 53 49 45 41 37 33 29 25 21 17 13 9 5 1 4000 3000 2000 Males 1000 0 2050 89 85 81 77 73 69 65 61 57 53 49 45 41 37 33 29 25 21 17 13 9 5 1 1000 4000 2000 Females Source: 2006 EPC/Commission report on ageing. 3000 4000 3000 2000 1000 Males Females 0 1000 2000 3000 4000 Participation rate projections: the cohort approach Three main features of the methodology 1) Use of entry rates and exit rates 2) Participation rates are projected for each single year of age and gender 3) Incorporate the impact of pension reforms Impact of recent pension reforms DE - Male DE - Male 100% 20% 2003 90% 2003 2025 80% 2025 15% 70% 60% 50% 10% 40% 30% 5% 20% 10% 0% 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 AGE Probability of retirement 0% 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 AGE Cumulative probability of retire at or before a given age Impact of recent pension reforms (2003 - 2025) Increase in the average exit age Males Female 4 3.5 years 3 2.5 2 1.5 1 0.5 0 SK HU FR CZ FI PL SL AT BE DE LT UK IT LV ES EE SE • Unemployment rate assumed to converge to EU15 average -7% for those with higher UR) • Employment rate for the EU25 : from 63% in 2003 to 71% in 2050 mainly due to: - women’s employment: from 55% to 65% - older workers (aged 55-64): from 40% to 59% Pension reforms effects Cohort effect Fixed Participation Rate for each age and gender group 72 70 68 66 64 62 60 58 2003 2010 2020 2030 2050 Ageing or retirement problem? Adult life spent in retirement EU25 Men Women 2003 2050 2003 2050 Employment rate of older workers 50.0 64.8 30.4 53.0 Average exit age 61.9 62.9 61.1 61.9 Life expectancy at the time of withdrawal 19.0 22.1 23.3 26.6 % of adult life spent in retirement 28.8 31.6 33.6 36.2 Requested exit postponement, in years (to keep % life spent in retirement constant) 1.9 1.9 The consequences of ageing populations on employment and growth Projected time frame for meeting the Lisbon employment target 70% 2005 2010 2015 TARGET ALREADY REACHED IN 2004 Denmark Netherlands Sweden UK 2020 2025 2023 Slovenia 2030 2035 2040 2035 EU12 2045 2050 EU10 2020 EU25 EU25, Slovakia 2018 Spain 2015 EU15 EU15, Czech Republic 2014 Lithuania 2013 Estonia 2011 Latvia 2010 Germany 2009 Ireland 2007 Finland 2006 Portugal 2005 Austria, Cyprus TARGET NOT REACHED IN 2050 (7MSs) Belgium France Hungary ITALY Luxembourg Malta Poland The consequences of ageing populations on employment Phase 1: A “window of opportunity” : both working-age population and employment increasing –but closing fast Phase 1 Phase 3 Phase 2 320 300 working-age population 280 260 Between 2018-2050: Employed persons: - 30 millions (14%) Working-age population: - 45 mill. (15%) 240 220 200 180 2003 total employment 2008 2013 Source: 2006 EPC/Commission report on ageing. 2018 2023 2028 2033 2038 2043 2048 Impact of ageing on economic growth Moving from Employment to GDP growth assumptions: the Production function approach based on the projections of the main components: POP15 64 L K GDP POP TFP (1 ) POP POP15 64 L Employment growth Productivity growth GDP growth = Δ labour input (Δ population + Δ Active ageing population+ Δ employment rate) + Δ labour productivity (TFP growth + contribution from capital deepening) - long run equilibrium in Solow model: Δ Y/L = Δ K/L= Δ TFP/a (=labour augmenting technical progress) Productivity Δ labour productivity : - convergence to 1.7 in 2030 (EU15) & 2040 (EU10) = • Δ TFP assumptions is key : - convergence to 1.1% in 2030 + • Contr. from capital deepening: 0.6% in 2030 = (1- α)* Δ K/L or Δ TFP(1-α)/ α (α=labour share = 0.65) - long run capital rule: capital/labour ratio in efficiency units constant Δ capital stock = Δ L +labour augmenting technical progress (or TFP/ α ), The consequences of ageing populations on employment and growth Projected Growth : EU15 & EU10 EU15 5.0 4.0 5.0 5.0 4.0 4.0 4.5 5.0 4.0 3.0 Employment growth 3.0 3.0 2.2 EU10 3.0 3.0 0.9 GDP growth 1.8 2.0 1.3 1.0 2.0 2.0 2.0 1.0 1.0 1.0 0.0 0.0 0.0 -1.0 -1.0 Productivity 0.0 growth -1.0 2004-10 2011-30 2031-50 -1.0 2004-10 2011-30 2031-50 Results of the budgetary projections Pensions Labour force National models - Participation - Employment - Unemployment Health care Population 2004-2050 Labour productivity GDP Long-term care Real interest rate Education Unemployment benefits Total agerelated spending Projected changes in public pension expenditure 2004-2050 (% of GDP) From – 6pp in Poland to + 13 pp in Cyprus 15 10 5 0 PL EE LV AT MT IT SE DE SK LT FR UK FI DK NL BE CZ IE HU ES SI LU PT CY -5 -10 Decomposition of the increase in pension expenditure Dep. effect Empl. effect PensExp = Pop>65 x Pop (15-64) GDP Pop(15-64) EmplNo Take-up eff. x PensNo x Pop>65 Benefit effect PensExp/PensNo GDP/EmplNo Factors contributing to pension expenditure changes, EU15 and EU10 (% of GDP) 2004-2050 10 8 6 4 2 0 -2 -4 -6 -8 9,9 8,2 2,3 0,3 -1,0 Dependency ratio -1,7 Employment rate -1,7 -3,8 Take up ratio EU15 EU10 -2,8 -3,5 Benefit ratio Total Large reductions in the benefit ratio in several countries (2050 in percent of 2004) PL EE MT LV SK IT AT DE SE 0,0 -20,0 -40,0 -60,0 -80,0 -100,0 Mainly resulting from: shift towards private funded schemes, pension inversely linked to life expectancy gains; shift towards indexation to prices … and leading to possible adequacy challenges… FR EU25 Budgetary projection results, EU15 EU15 +3.7 30 % of GDP 25 20 +2.3 2004 15 2050 +1.6 10 -0.6 +0.7 -0.2 5 0 pensions health care long-term care education unemployment benefits total Budgetary projection results, EU10 EU10 30 +0.2 % of GDP 25 20 15 2004 2050 +0.3 +1.3 10 -1.3 +0.2 5 -0.2 0 pensions health care long-term care education unemployment benefits total Budgetary projection results, EU9 (excluding Poland) EU9 (EU10 - PL) 30 +5.4 % of GDP 25 20 +4.8 2004 15 2050 +1.3 10 -0.9 +0.3 5 -0.1 0 pensions health care long-term care education unemployment benefits total Fiscal sustainability analysis at the EU level • Ensuring sustainable public finances in view population ageing is a key challenge for policy-makers in the EU • Consistency between medium-term budgetary targets and long-term fiscal sustainability emphasized in the EUs fiscal framework, the Stability and Growth Pact • Sustaining the European welfare model(s) central policy issue in view of ageing and globalisation; Lisbon strategy, Integrated guidelines, Open method of co-ordination,… European Commission What should be done? A three-pronged strategy to ensure sustainability Ensuring sustainability Reducing debt at a fast pace Raising employment and productivity Reforming pension, health-care and long-term care systems European Commission What are the policy implications? (1) • Ambitious fiscal policies contribute significantly to fiscal sustainability; the planned budgetary positions in the Member States need to be reached • If attained, the debt ratio in the EU would almost remain below the 60% threshold up to 2050 European Commission What are the policy implications? (2) • Adapting Europe’s social models and enhancing its growth potential is paramount: • the Lisbon strategy, by fostering employment creation and enhancing productivity, give rise to double benefits: higher future living standards and, importantly a contribution to fiscal sustainability • structural reforms, notably in the field of pensions, are crucial to improve fiscal sustainability; there are several examples showing that reforms do pay off European Commission What are the policy implications? (3) • Adapting Europe’s social models and enhancing its growth potential is paramount: • measures that extend working lives and provide incentives for private pension provision contribute to adequate retirement income and are necessary to ensure the lasting success of several major implemented pension reforms • improving the quality of public finances will involve prioritization of public expenditure – and its financing - in view of competing budgetary pressures, such as education and healthcare European Commission Reports on ageing and sustainability • The 2005 EPC projections of age-related expenditure (2004-2050) for the EU25 Member States: underlying assumptions and projection methodologies http://ec.europa.eu/economy_finance/epc/documents/2005/ageing2005en.pdf • The impact of ageing on public expenditure: projections for the EU25 Member States on pensions, long-term care, education and unemployment transfers (2004-2050) http://ec.europa.eu/economy_finance/epc/documents/2006/ageingreport_en.pdf • The long-term sustainability of public finances in the European Union http://ec.europa.eu/economy_finance/publications/publication_summary7907_en.htm Thank you for your attention! European Commission