Transcript will the young have to pay the bill?

The fiscal costs of ageing in the euro area:
will the young have to pay the bill?
Ad van Riet
Head of the Fiscal Policies Division
European Central Bank
Seminar on “Young People in an Ageing Europe”,
Centre d’analyse stratégique, Paris, 5 March 2007
The views expressed in this presentation do not necessarily reflect the views of the European Central Bank.
Outline
Three questions:
• How will the ageing of society affect government budgets in
the euro area?
• What budgetary and economic measures must be taken to
ensure longer-term sustainability of public finances?
• How would these measures affect the young and the future
generations?
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Net payments to / net receipts from government by age
Net payments to government
20000
15000
10000
5000
young age population
old-age population
working age population
0
3
7
11
15
19
23
27
31
35
39
43
47
51
55
59
63
67
71
75
79
83
87
age
91
95+
-5000
-10000
-15000
-20000
-25000
-30000
Net receipts
Source: Manzke (2002) for West Germany.
•
•
Typically in euro area countries, on average, the young and the old are net
recipients of government transfers, while persons of working age are net
contributors.
Major re-distribution tools are child benefits and education expenditure for
the young; public pensions and health care benefits for the old; labour taxes
and public pension contributions for the working age population.
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The ageing of society in the euro area
Euro area (percentages)
1.5
Old age dependency ratio (Eurostat)
Old age dependency ratio (UN)
Young age dependency ratio1.0
(Eurostat)
Young age dependency ratio (UN)
0.5
0.0
-0.5
-1.0
-1.5
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
1980
2015
1992
2020
2025
2030
2035
2040
2045
2050
60
55
50
45
40
35
30
25
20
15
10
5
0
Source: Maddaloni, Musso, Rother, Ward-Warmedinger and Westermann (2006)
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•
As the baby-boom generation born after WW II is about to retire and life
expectancy is rising, the old-age dependency ratio (i.e. old-age relative to
working-age population) is projected to double between now and 2050.
As the fertility rate is expected to remain low in the euro area, the young-age
dependency ratio (i.e. young-age relative to working-age population) will
continue to decline somewhat until around 2025 and then broadly stabilise.
4
Impact of ageing on public expenditure in the euro area
(changes 2004-2050, as a % of GDP, assuming unchanged policies)
Total
4
3.5
3
2.5
2
1.5
1
Unemployment
benefits
0.5
Education
0
-0.5
Public
pensions
Health care
Long-term care
-1
Source: EPC/EC Report (2006)
Note: Public pensions is calculated without Greece, long-term care without France, Greece and Portugal.
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•
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As a result of this demographic shift, total ageing-related public expenditure is
estimated to rise by almost 4% of GDP for the euro area average by 2050.
Major contributors are public pensions, health care and long-term care;
moderate savings may be possible for unemployment benefits and education.
Raising taxes and contributions is no solution, as tax burden is already high.
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Impact of ageing on government debt in the euro area (%
of GDP, assuming unchanged policies)
200
180
160
140
120
100
60 % reference value
80
60
40
20
0
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Source: European Commission (2006)
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Without budgetary and economic reforms, the average euro area public debt
ratio will start to rise rapidly from around 2020 and become unsustainable.
Urgent need for action to restore sustainability: 1) reduce current public debt
ratio and alleviate fiscal costs of ageing, 2) improve performance of the economy.
Maybe also support population growth (higher birth rates and immigration).
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Comprehensive reforms can alleviate the burden
1) Measures to reduce public debt and alleviate fiscal costs of ageing
Move to balanced budgets or a surplus, to reduce current public debt ratio.
Reform public pension systems:
- reduce generosity of public pension systems;
- extend official retirement age, e.g. linking it to life expectancy;
- introduce funded public pensions, link pension benefits to contributions.
Reform public health and long-term care:
- reduce generosity of public health care systems;
- raise efficiency, increase cost control.
2) Measures to improve performance of the economy
Raise employment rate and hours worked on a life-time basis:
- raise employment rates for young, women, and older workers;
- reduce unemployment, in particular for the young;
- increase working hours per week/per year and postpone retirement.
Increase productivity growth:
- allow for more product market competition and labour market flexibility;
- promote R&D, innovation and adoption of new technologies;
- strengthen education systems, support life-long learning.
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Impact on the young and the future generations
How will ageing and policy measures affect the young and future generations?
•
As the working-age population declines, job-seekers will find a job more easily and
both youth and total unemployment rates should fall (for those workers with the
right education).
•
More men and women of all ages should be willing to work and to work more
hours on a life-time basis, so as to raise labour supply (which requires appropriate
labour tax incentives, child-care facilities and less incentives to retire early).
•
They will also need to be more flexible, by changing jobs if needed and accepting
temporary contracts and variable wage rises in line with local productivity growth.
•
Apart from a good basic education for the young, life-long learning will be key for
all workers.
•
They will need to accept responsibility for building up private pensions and health
care insurance to complement the probably less generous public arrangements.
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Will the young have to pay the bill of ageing?
Conclusions:
•
The distribution of the fiscal costs of ageing between the young and the old and
between current and future generations is a political decision.
•
The young and the future generations will have to pay a larger share of the bill, if
necessary budgetary and economic reforms are postponed until after the baby-boom
generation has retired.
•
Budget consolidation through expenditure restraint is urgent in order to avoid that
the fiscal burden of ageing is largely passed on to the young and future generations.
•
Economic reforms will help to increase income per head of the population and, thus,
increase the financial resources available to cover for the fiscal costs of ageing.
•
While they will have less “free time”, must accept more flexible work arrangements,
and can rely less on pensions and health care provided by the government, the young
and future generations are the main beneficiaries of budgetary and economic reforms
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