Transcript Financial aspects of the European aging society

Drs A.P.Ranner
Financial aspects of the
European ageing society
An assessment
©
financial consultancy
Sovereign
Transnational foresight ,
The Hague 3 Dec. 2004
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Financial aspects of the European ageing society
Three parts:
• Impact on financial markets and economy
• Policies to meet the challenges
• Some consequences
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2
Financial aspects of the European ageing
society:
Impact on financial markets and economy
EU forecasts:
Old age dependency ratio increases from 24% (2000) to 49% (2050)
EPC report (October 2003):
With unchanged policies:
1)
Ageing populations leads to a public spending increase of between
3 and 7 % of GDP in most Member states (without new members) in 2050:
in particular health care, long-term care and state-funded pension schemes.
This would imply risk of unsustainable public finances i.e. budget deficits
and state debt (reference value 60% GDP)
As raising taxes is no option corrective spending actions are
necessary
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
% GDP / % change
Budgetary impact of ageing populations on public
expenditures
30
25
Total age
related
spending in
2000 as %
GDP
% Increase
2000-2050
20
15
10
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IE
IT
LU
N
L
AT
PT
FI
SE
U
K
BE
D
K
D
E
EL
ES
FR
0
EU member countries (15)
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
2) Fall in labour supply and of economic production / growth and prosperity
(reduction of annual average growth rate by around 0.4%)
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Increased pension- and health care contributions by workers (or their
employers) imply less disposable incomes (or less profits) and a loss of
resources to finance capital investments.
The sale of financial assets to finance retirement consumption lowers the
value of assets and rises the costs of capital impacting growth and
investment
Drawing on corporate pension liabilities could (a) reduce profitability of
corporations liable to fund the pensions and (b) a disposal of securities
implying a rise in the costs of capital (interest rates) and so economic growth
3) Unsustainable pension entitlements (effectively paid by a relatively smaller
workforce with a bleak view as to their old age finances
intergenerational problem )
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
•
Macro-economic relationships
A Results from econometric literature (1)
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Per capita growth related positively with relative size of population
negatively with changes in share elderly
However:
per capita growth also positively related to life expectancy
positive effects from open and competitive markets
Productivity /
investments in education
allocation gains
fiscal discipline
Gains from trade
depth of financial sector
Risk reduction

Crucial relation: life-cycle hypothesis of saving
Savings rise over a worker’s active career and then decline in retirement.
So savings increase with an increase of the share of the working–age
population, and decrease with a decline with share of elderly
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
• Macro-economic relationships
A Results from econometric literature (2)
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Current account balances increase with the relative size of the
working-age population and deteriorate with a rise in the
elderly dependency ratio
Governmental budgets deteriorate due to higher spending on
pensions,health care and long term residential care and lower
tax revenues
A rise in the share of elderly puts a downward pressure on real
equity prices
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Financial aspects of the European ageing society:
Impact on financial markets and economy
• Macro-economic relationships
Disadvantages of econometric analysis
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historical correlations might not reflect causality
each variable is considered separately and not part of an
integrated system
international interdependencies frequently neglected
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Financial aspects of the European ageing society:
Impact on financial markets and economy
B Results from multicountry model IMF (INGENUE), September 2004
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Global demographic changes lower output growth in all regions,
the output growth of developing countries is below the decline of
Europe (and Japan)
In Europe saving rates decline sharply with a fall in the share of
working age population and a growth of the share of the elderly:
social security contributions have to be raised to finance additional
pension expenditures: the propensity to save of elderly is lower than
that of younger people
The lower saving rates in Europe causes a deterioration of the current
account, the capital account also changes as capital is increasingly
repatriated
This to the detriment of developing countries.
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
1.Long term maco-economic forecasts
(50 years) are not accurate due to
(a) data limitations
(b) incomplete coverage of all relevant
economic relations
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
2. The development of the savings ratio is of importance
Reduction of savings by the elderly could be less than
assumed:
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uncertainty of longevity is a reason to continue to
smoothen consumption and try to maintain wealth.

the value of heritages (“windfall” profits to working
generation) are consequently also uncertain
These effects can not be measured (empirical data is
lacking), but in any case implies less severe macro
economic outcomes
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
3. With a relatively smaller labour force EU investments
could be lower.
However the magnitude of the difference between future rates
of savings and of investments is critical for the future
development of the balance of payments (current account
deficits and cross-border capital) as well as of exchange rates !
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
4.
Empirical evidence for the influence of the population age
structure on the level of stock prices is weak
the
magnitude of investments abroad and the wealth and income
effects of owning securities are uncertain
5.
In most projection exercises the impact of non-demographic
factors are not explicitly modelled
Factors like globalisation, EU integration, technological
developments, increasing flexibility and increased risk
management mitigate the effects of ageing on economic
growth and macro-economic balances or could even be of
more importance
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Financial aspects of the European ageing
society:
Impact on financial markets and economy
Though magnitudes of changes are uncertain, the directions
of longer term macro-economic developments in EU ceteris
paribus are plausible:
• Reduced growth rates of living standards + potential
output.
• Increase in public expenditures.
• Shifts in relative importance of different world areas.
• Current account imbalances of EU members are to occur
reflecting savings-investments imbalances.
• Lower economic growth in the EU leads to institutional
savings flowing to specific developing countries at
detriment of domestic investments.
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Financial aspects of the European ageing
society:
Part 2 policies to meet the challenge
As a few policy changes will
not solve the problem
a comprehensive policy
package is generally
advocated
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Financial aspects of the European ageing
society:
policies to meet the challenge
Consensus
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Increase in labour force participation rates
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Reductions in structural unemployment
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Increase in effective retirement age to 65 years
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Structural reforms aimed at
1) enhancing allocative efficiency
2) increasing flexibility of goods, services and capital markets
Ensure more open and competitive global trading conditions
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Financial aspects of the European ageing
society:
policies to meet the challenge
Policy documents (EU, OECD and IMF) propose the following responses:
1. Boost labour supply
women
older workers
immigration (but problems of
integration)
raising fertility rates is not effective
(takes to long)
through
requires
pension reform: raising retirement age
work incentives
skills needed for work
more flexible labour markets
education
reduction of employment discrimination
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Financial aspects of the European ageing
society:
policies to meet the challenge
2.
Increase savings
to realise more labour-efficient capital stock
a. governmental fiscal surpluses/ reduction of debt
but competition with increased expenditures for
health care
decrease public sector
contributions to (1) pensions (raise retirement age,
reduce generosity elements)
to (2) health care
In any case stick to fiscal discipline / fast pace of
debt reduction
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Financial aspects of the European ageing
society:
policies to meet the challenge
2.
Increase savings
b. reform private pensions:
eliminate or reduce indexation to wages / prices,
raise retirement age,
eliminate provisions that subsidies early
withdrawal from active life
PM
stimulate private savings by fiscal instruments
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Financial aspects of the European ageing
society:
policies to meet the challenge
3.
Public sector measures to increase productivity
a. reduction impediments to competition
b. improve flexibility of labour market and prices
c. spur innovation
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Financial aspects of the European ageing
society:
part 3 some consequences of measures
(1) The priority given to fiscal restraint
(in contrast to an expansionary economic growth policy)
and safety implies a relative reduction of non or little age
related public expenditures (housing, infrastructure and education
of younger people) that also influence economic growth negatively.
(2) Many of the traditional growth stimulating factors (e.g.
investment in human and business capital, technological innovation)
are left to the market. Uncertain whether the private sector will deliver
(3) The results of economic analysis can lead to different views as to
the intensity of the package of measures
the proper policy mix
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Financial aspects of the European ageing
society:
some consequences of measures
In any case differing positions between member states:
(a) fertility rates,
(b) generosity levels of pension and adequacy of
its funding (pay as you go/advanced funding),
(c) levels of public sector debt or deficits
(d) institutional and political set up
(e) level of national income
imply there is no solution that fits all.
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