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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)