Over the coming decades, the size and age-profile of the population of EU Member States will undergo substantial changes. The large cohorts of the post-war years will reach retirement age, while fertility rates are expected to remain low and life expectancy is expected to continue increasing. These demographic changes will lead to sig- nificant pressure for increased spending on public pen- sions and healthcare, and raises doubts as to whether pub- lic finances are sustainable in the long term. Such concerns acquired added significance in EMU given the commitment to ensure sound public finances at all times in accordance with the Stability and Growth Pact (SGP). This chapter outlines the growing involvement of the EU in the debate on ageing populations and focuses on the steps being taken to ensure the long-term sustainability of public finances in EMU. The next section briefly sum- marises the latest Eurostat population projections up to 2050. Section 2 discusses the economic and budgetary consequences of ageing populations and considers how the long-term sustainability of public finances is dealt with in the existing EU framework for budgetary sur- veillance. Section 3 reviews recent attempts at EU level to develop more comparable projections for the impact of ageing on public finances. Section 4 outlines a compre- hensive policy response to the economic and budgetary consequences of ageing populations, and considers how the long-term sustainability of public finances could be systematically incorporated into the budgetary surveil- lance process at EU level.
2.1. Recent demographic projections
2000–50
Updated Eurostat population projections (see Table 26) show that the average birth rates in the EU are currently only 1.5 children per woman, although they are projected to increase to almost 1.7 by 2025. Even these fertility rates are too low to ensure a natural replacement of the population or to stabilise its age structure. Life expectancy
is projected to steadily increase reflecting improved healthcare provision and breakthroughs in medical tech- nologies. Having risen from 67 in 1960 to 75 in 2000, life expectancy at birth for men is projected to rise to an average of 80 by 2050. Life expectancy is also projected to rise for women, from 81 in 2000 to 85 by 2050. The revised population projections are based on the assumption of continued net inward migration to Member States of some 600 000 persons annually over the projection period. As a result of these demographic developments, the EU working age population (aged between 15 and 64) will stay broadly stable at some 250 million until 2015. There- after, it will decline to 244 million by 2025 and 211 mil- lion by 2050, a drop of some 16 %. As well as declining in size, the labour force will be greying, with workers aged between 55 and 64 accounting for a larger share of the total workforce.
At the same time, the numbers of elderly persons aged 65 and above will rise from 61 million in 2000 to 103 mil- lion by 2050. The largest increase will take place amongst the very old (aged 80+), whose numbers will almost triple from 14 million in 2000 to 38 million in 2050. The old- age dependency ratio (defined as persons aged over 65 as a percentage of working age population 15–64) will more than double from some 24 % in 2000 to 49 % in 2050 for the EU. In other words, the EU will move from having four to only two persons of working age for every elderly person by 2050, thus placing an increased burden on the economically active population in supporting the inactive. These figures for the EU as a whole mask considerable variations in both the timing and size of demographic changes across Member States. Currently, there are very wide differences as regards fertility rates (ranging from below 1.3 in Spain, Greece, Italy and Austria to over 1.7 in Denmark, France, Ireland, Luxembourg, Finland and the UK). Large falls in the size of the total population between 2000 and 2050 are projected in Germany, Spain and Italy, whereas it is expected to grow in France, Ireland, Netherlands, Portugal and the UK.
Striking differences across Member States are evident on Graph 22 displaying old-age dependency ratios. In terms of starting position, Ireland has the lowest old-age depen- dency ratio at 17 % compared with ratios of 25 % in Bel- gium, Greece, Italy and Spain. The timing of the demo- graphic changes also differs. Steep increases in the old-age dependency ratio already start to occur after 2005 in Ger- many, Greece, Italy, the Netherlands and Austria. In most Member States, the old-age dependency ratio will reach a new plateau around 2040, with the highest ratios of some 60 % in 2050 forecasts for Spain and Italy (an increase of 35 percentage points over the projection period). While caution must be exercised when using long-term population projections, they nonetheless provide reliable evidence that substantial demographic changes will occur in the coming decades. This is because the old-age depen- dency ratio largely depends upon the life expectancy of generations currently alive (which tend to change in a stable fashion) and on past fertility rates (which are known). Higher levels of inward migration could offset the projected decline of the total and working age popu- lations projected, but would have to reach levels vastly above those experienced in the past to have a significant
impact (United Nations, 1999). Some authors (1) have
expressed concerns that official national population pro- jections underestimate the impact of the demographic changes underway on the grounds that fertility rates may not increase as projected and that the rate of increase in life expectancy could be higher than anticipated if there are significant breakthroughs in medical sciences. These concerns underline the need to regularly update population projections and the indicators of budgetary sustainability on which they are based.
2.2. Long-term sustainability in
the context of EMU
The public debate on ageing populations, and especially in the context of EMU, has mostly focused on whether public finances are sustainable in the long run. Several studies have suggested that the EU could face a particu- larly severe impact on public finances as a result of age-
(1) Schieber and Hewitt (2000), England (2001).
Table 26
Demographic developments in the EU, 2000–50
2000 2025 2050 Change
Assumption
Total fertility rate 1.55 1.68 1.69 0.14 Life expectancy male (years) 75 79 80 5 Life expectancy female (years) 81 84 85 4 Net migration (thousands) 661 622 622 – 39
Population size (millions)
Working age population (15–64) 252 244 211 – 41 Elderly population (65+) 61 86 103 42 Very old population (85+) 14 24 38 24 Total population 376 386 364 – 12
Dependency ratios
Older workers share in labour force (1) 17 % 23 % 21 % 4 %
Old-age dependency ratio (2) 24 % 35 % 49 % 25 %
Very-old as share of elderly (3) 23 % 28 % 37 % 14 %
Number of potential workers per retiree (4) 4.1 2.8 2.1 – 2.0
(1) Population aged 55–64 as % of population aged 15–64.
(2) Population aged 65 + as % of population aged 15–64.
(3) Population aged 80 + as % of population aged 65+.
(4) Number of persons of working age (15–64) per elderly person (aged 65+).
ing populations (1). It has been argued that the budgetary
surveillance process established by the Maastricht Treaty, with its short-term focus on the government balance and debt, fails to take adequate account of the future burden on public finances due to ageing populations or the capac- ity of Member States to meet them.
Increased age-related spending cannot be financed by running up large structural deficits and public debt. This applies to all countries in all circumstances: however, it has added significance in EMU as the running of large deficits would be contrary to the SGP. A Member State with an unsustainable public finance position may seek an accommodating monetary policy, and financial markets may perceive monetary discipline to be vulnerable with consequent pressure on euro interest and exchange rates. As pointed out by the ECB (2000), unsustainable public finance positions, or the risk thereof, would complicate the implementation of the single monetary policy and undermine confidence in the EMU process possibly resulting in interest rates being higher than they otherwise would be. There is therefore a strong rationale for EU surveillance of the long-term sustainability of public
finances in EMU so as to internalise potential negative cross-border spillover effects.
Overall, there is a broad consensus in the literature that ageing populations are likely to lead to negative bud- getary and economic consequences although there is uncertainty as to the scale of these effects. The Treaty recognises that a decentralised approach to fiscal policy in EMU under national authorities, and ultimately the via- bility of the EMU project, hinges upon sound public finances being sustained in the long run. However, the term ‘sustainability’ is not found in the Treaty provi- sions: although intuitively clear (i.e. ultimately avoiding government bankruptcy), the analytical and operational
definition of sustainability has proven elusive (2). In the
absence of an agreed definition of sustainable public
(1) Roseveare et al. (1996), Chand and Jaeger (1996), IMF (2001).
(2) The so-called present value budget constraint (PVBC) translates
formally the principle that sooner or later the public debt has to be repaid, i.e. that today’s government debt has to be matched with the present value of cumulated primary surpluses. An important impli- cation of the PVBC is that permanent primary deficits are not sus- tainable. However, this offers poor guidance to policy-makers as the solvency condition is compatible with an ever-growing debt ratio and can be met by assuming that primary surpluses will be generated by future governments. See Balassone and Franco (2000).
P a r t I V T h e q u a l i t y a n d s u s t a i n a b i l i t y o f p u b l i c f i n a n c e s 15 20 25 30 35 40 45 50 55 60 65 EU UK S FIN P A NL L I IRL F E GR D DK B % 2000 2025 2050 Graph 22:Old-age dependency ratios 2000–50 (baseline scenario)
finances that is operationally feasible, the Maastricht Treaty took a pragmatic route. Sustainability in the Maas- tricht Treaty and the SGP is ensured by requiring Mem- ber States to avoid excessive deficits. Although the SGP only imposes commitments on Member States for bud- getary positions in the medium term (three to five years), and does not require explicit long-term commitments,
sustainability is de facto ensured as respect of the
medium-term target will lead to the virtual disappearance of public debt in the long run.
Aside from budgetary consequences, ageing populations will also have potentially important consequences for labour market developments, private savings behaviour, productivity and economic growth. Unless offset by increases in factor productivity or resource utilisation, a decline in the size of the labour force coupled with a rapid increase in the old-age dependency ratio will lead to a lower rate of economic growth (McMorrow and Röger, 1999). The potential impact of ageing on aggregate sav- ings is of particular importance as higher national savings could play an important role in offsetting the effects of ageing by increasing productive investment and long-run growth (1). At the global level, changes in the savings/
investment balance could result in changes in interest rates prevailing on the world market. The impact of age- ing population on labour supply is also a key concern. If Member States meet the additional costs of public pen- sions by raising contribution rates (which are already very high in many Member States), this would widen the wedge between labour costs and net wages, and create disincen- tives to hire workers and participate in the labour market. Similarly, increasing the overall tax burden could exacer- bate disincentives towards employment and investment.