Transcript Spring 2004 Forecast Presentation UK

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:



GDP  POP 
POP 15  64
POP


L
POP 15  64
Employment growth


 TFP  (1   )
K
L
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
-10
CY
PT
LU
SI
ES
HU
IE
CZ
BE
NL
DK
FI
UK
FR
LT
SK
DE
SE
IT
MT
AT
LV
EE
PL
-5
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