Pension Reform in the European Union: How to Cope with Ageing Populations

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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
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Outline

• Why reform?
• demographic changes and economic and budgetary
  implications
• Scale and composition of the fiscal
  sustainability challenge in the EU
• Policy implications

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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

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Measuring the cost of ageing common long-term
budgetary projections
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The consequences of ageing populations on
employment and growth
Main demographic indicators
EU15 EU15 EU10 EU10
  2004 2050   2004 2050  
Fertility rate 1,5 1,6 0.1 1,2 1,6 0.4
Life expectancy at birth - men 76,4 82,1 6 70,1 78,7 8.6
Life expectancy at birth - women 82,2 87 5 78,2 84,1 6
Net migration flows (thousands) 1347 778 -3 101
Net migration flows (as of population) 0,4 0,2 0 0,1
Source 2006 EPC/Commission report on ageing.
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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
2050
89
89
85
85
81
81
77
77
73
73
69
69
65
65
61
61
57
57
53
53
49
49
45
45
41
41
37
37
33
33
29
29
25
25
21
21
17
17
13
13
9
9
5
5
1
1
4000
0
1000
4000
3000
1000
4000
3000
2000
3000
2000
0
1000
2000
3000
2000
1000
4000
Males Females
Males Females
Source 2006 EPC/Commission report on ageing.
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Participation rate projections the cohort
approach

• Three main features of the methodology
• 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

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Impact of recent pension reforms
Cumulative probability of retire at or before a
given age
Probability of retirement
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Impact of recent pension reforms(2003 - 2025)
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• 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 -
  womens employment from 55 to 65
  - older workers (aged 55-64) from
  40 to 59

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Ageing or retirement problem? Adult life spent
in retirement EU25
Men Men
2003 2050
Employment rate of older workers 50.0 64.8
Average exit age 61.9 62.9
Life expectancy at the time of withdrawal 19.0 22.1
of adult life spent in retirement 28.8 31.6
Requested exit postponement, in years (to keep life spent in retirement constant) 1.9
Women Women
2003 2050
30.4 53.0
61.1 61.9
23.3 26.6
33.6 36.2
1.9
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The consequences of ageing populations on
employment and growth
Projected time frame for meeting the Lisbon
employment target 70
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
TARGET ALREADY REACHED IN 2004 Denmark
Netherlands Sweden UK
2035 EU12
EU10
2023 Slovenia
2020 EU25, Slovakia
2020 EU25
2018 Spain
2015 EU15, Czech Republic
2015 EU15
TARGET NOT REACHED IN 2050 (7MSs) Belgium
France Hungary ITALY Luxembourg Malta Poland
2014 Lithuania
2013 Estonia
2011 Latvia
2010 Germany
2009 Ireland
2007 Finland
2006 Portugal
2005 Austria, Cyprus
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Phase 1 A window of opportunity both
working-age population and employment increasing
but closing fast
The consequences of ageing populations on
employment
Phase 1
Phase 3
Phase 2
320
300
working-age population
280
Between 2018-2050 Employed persons - 30
millions (14) Working-age population - 45 mill.
(15)
260
240
220
200
total employment
180
2003
2008
2013
2018
2023
2028
2033
2038
2043
2048
Source 2006 EPC/Commission report on ageing.
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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
Productivity growth
Employment growth
GDP growth ? labour input (? population ?
Active ageing population ? employment rate)

? labour productivity (TFP growth
contribution from capital deepening)
- long run equilibrium in
Solow model ?
Y/L ? K/L ? TFP/a (labour augmenting
technical progress)
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Productivity

• ? labour productivity
• - convergence to 1.7 in 2030 (EU15) 2040
  (EU10)
• ? TFP assumptions is key
• - convergence to 1.1 in 2030
• Contr. from capital deepening 0.6 in 2030
• (1- a) ? K/L or ? TFP(1-a)/ a
  (alabour share 0.65)
• - long run capital rule capital/labour ratio
  in efficiency units constant
• ? capital stock ? L labour augmenting
  technical progress (or TFP/ a ),

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The consequences of ageing populations on
employment and growth
Projected Growth EU15 EU10
4.5
EU10
5.0
5.0
4.0
4.0
3.0
3.0
3.0
0.9
2.2
1.8
1.3
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
2031-50
2004-10
2011-30
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Results of the budgetary projections
GDP
Total age- related spending
Pensions National models

• Labour force
• Participation
• Employment
• Unemployment

Population 2004-2050
Health care
Labour productivity
Long-term care
Real interest rate
Education
Unemployment benefits
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Projected changes in public pension expenditure
2004-2050 ( of GDP)
From 6pp in Poland to 13 pp in Cyprus
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Decomposition of the increase in pension
expenditure

• Dep. effect Empl. effect
• PensExp Popgt65 x Pop (15-64)
• GDP Pop(15-64) EmplNo
• Take-up eff. Benefit effect
• x PensNo x PensExp/PensNo
• Popgt65 GDP/EmplNo

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Factors contributing to pension expenditure
changes, EU15 and EU10 ( of GDP)
2004-2050
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• 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

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Budgetary projection results, EU15
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Budgetary projection results, EU10
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Budgetary projection results, EU9 (excluding
Poland)
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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,

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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
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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

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What are the policy implications? (2)

• Adapting Europes 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

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What are the policy implications? (3)

• Adapting Europes 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

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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/p
  ublication_summary7907_en.htm

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Thank you for your attention!