Download Demographic Change

The Cyprus economy
at a time of European uncertainty:
managing reform & sustainability
London School of Economics – 10 February 2012
The fiscal implications
of demographic change
Bernard H Casey
Institute for Employment Research
University of Warwick
and
Hellenic Observatory
London School of Economics
The fiscal implications
of demographic change
Outline of presentation
Demographic trends and prospects
Pension costs and reform proposals
The challenge of caring for the frail elderly
Unfinished agendas
The fiscal implications
of demographic change
Demographic trends and prospects
Longevity
life expectancy at birth or ….
…. life expectancy at 65
1973: 13 years men, 14 years women
2008: 17 years men, 19 years women
2060: 22 years men, 25 years women
comparisons with rest of EU, 2008-2060
old age dep. rate (15-64/65+):
CY 5.6-2.3, EZ 3.7-1.9
old (65+) as share of total pop. (%): CY 12-26, EZ 18-30
very old (80+) as share of old (%): CY 3-9, EZ 5-13
NB: EZ=Eurozone
The fiscal implications
of demographic change
Demographic trends and prospects
Fertility
low fertility rate
1990 2.3, 2007 1.4, 2009 2008, 1.5
projected 1.6 by 2060
NB: replacement rate = c2.1
comparisons with rest of EU
southern Europe: HE 1.3, PT 1.4, ES 1.4, IT 1.4
Scandinavia: DK 1.9, SE 1.9, FI 1.8
others: FR 1.8, UK 1.8
Immigration
very high inward migration
2008: c1.2% p.a., ES 1.4%, HE 0.4, EZ 0.4%
The fiscal implications
of demographic change
Pension costs and reform proposals
Projected pension costs – main scheme (GSIS)
system dependency rate
2010 4.8:1, 2060 1.5:1
scheme maturity 2020
replacement rate: 44-53% men, 41-50% women
expenditures (% GDP)
2010 c5%, 2060 c15%
Public sector workers – central govt. + semi-public
generosity
higher rep. rate, lump sum gratuity, full pension at 55 (58 since 2008)
expenditure (no reform, % GDP)
2010 c2.5%, 2050 4%+
The fiscal implications
of demographic change
Pension costs and reform proposals
Reform of GSIS
increase contribution rates (2009 reform)
from 12.6%, by 1pp every five years to 19.6% by 2039
reduced costs c5%
little change to pension age
unreduced pension at 63 for majority
latest (2011) proposals to move to 65 dropped
no change in generosity
current high rates of “pensioner poverty”
mature pensions not high by EU standards
fiscal sustainability v social sustainability
…. or inability to reform
The fiscal implications
of demographic change
Pension costs and reform proposals
Reform of (semi-)public sector pensions
closing systems to new entrants (2011 reform)
all into GSIS
contribution rate increased for serving employees
reduced costs by c50% by 2060
little change to pension age
opposition to lifting pension age for current employees
outstanding challenges for semi-public sector
funded systems with substantial deficits
contingent fiscal liabilities
The fiscal implications
of demographic change
The challenge of caring for the frail elderly
Extent of the challenge
“very old” fastest growing group
pop. growth 2008-2060 (%): total 60, “old” 240+, “very old” 400
low government priority
reform of health care
social insurance proposals rejected
care provided by family
public assistance and “filial piety” laws
role of semi-legal immigrants
pub. expenditure lowest in EU (0% GDP v 1.2%)
lack of wider infrastructure
low level of part-time working (%) (CY 8 all 13 w, EU27 19 all 32 w)
half-day schooling
The fiscal implications
of demographic change
The challenge of caring for the frail elderly
Fiscal implications of the challenge
low female employment rates
people 55-64 (%): men CY 72, SE 73, women CY 41, SE 67
from child-caring to grandchild-caring to elder-care
assumptions of GSIS
increase in female emp. rate and esp. older female emp. rate
“informal care ratio” (women 55-64: all very old)
currently c2:1, 2060 c0.6:1
non-working older women: very old 1.2:1, 2060 c0.3:1
costs of improved infrastructure
public and business provision
working-time flexibility
The fiscal implications
of demographic change
Unfinished agendas
The retirement age
reconciling adequacy and sustainability
all increases in life expectancy absorbed in leisure
fiscal advantages
employment policy implications (“hydraulic effect”)
Funding pensions
government and IMF proposals
a “second order” issue
market risk transfers, political risk
Physical dependency as important as financial
addressing the care challenge
major “cultural shift” needed
The fiscal implications
of demographic change
60
80
50
70
40
60
30
50
20
40
10
30
0
20
2010
2020
2030
2040
total expend as % GDP
total revenue as % GDP
pension revenue as % GDP
pension deficit as % total deficit
2050
% of total
% of GDP
Appendix: projections of pension expenditure
2060
pension expend as % GDP
(own calculations from “Stability Report 2011”, assume reforms to (semi-)public sector schemes)