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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.

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Presentation on theme: "Pension Reform in the European Union: How to Cope with Ageing Populations Per Eckefeldt European Commission – DG ECFIN Cicero Foundation Great Debates."— Presentation transcript:

1 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, May 2008

2 Outline European Commission Why reform?Why reform? demographic changes and economic and budgetary implicationsdemographic changes and economic and budgetary implications Scale and composition of the fiscal sustainability challenge in the EUScale and composition of the fiscal sustainability challenge in the EU Policy implicationsPolicy implications

3 Fiscal sustainability a core policy objective European Commission Ensuring sustainable public finances in view population ageing is a key challenge for policy-makers in the EUEnsuring 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 PactConsistency between medium-term budgetary targets and long-term fiscal sustainability emphasized in the EUs fiscal framework, the Stability and Growth Pact

4 Population Labour force - Participation - Employment - Unemployment Labour productivity Real interest rate GDP Pensions National models Health care Long-term care Education Unemployment benefits Total age- related spending Measuring the cost of ageing: common long-term budgetary projections

5 Source: 2006 EPC/Commission report on ageing. Main demographic indicators The consequences of ageing populations on employment and growth EU15EU Fertility rate1,51, ,21, Life expectancy at birth - men76,482, ,178, Life expectancy at birth - women82, ,284,1 +6 Net migration flows (thousands) Net migration flows (as % of population)0,40,200,1

6 A much older population structure in the EU25 Source: 2006 EPC/Commission report on ageing Males Females Males Females Total population: 457 mill. in 2004, 471 mill. in 2030, 454 mill. in 2050Total population: 457 mill. in 2004, 471 mill. in 2030, 454 mill. in 2050 Most numerous age cohorts: age 36 in 2004, age in 2050Most numerous age cohorts: age 36 in 2004, age in 2050 Population aged 65+ doubles until 2050 (from 75 to 133 millions 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 52Old age dependency ratio (65+/15-64): doubles from 26 to 52

7 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

8 Probability of retirement Cumulative probability of retire at or before a given age Impact of recent pension reforms

9 Impact of recent pension reforms ( )

10 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% Pension reforms effects Cohort effect Fixed Participation Rate for each age and gender group

11 Ageing or retirement problem? Adult life spent in retirement EU25 Men Employment rate of older workers Average exit age Life expectancy at the time of withdrawal % of adult life spent in retirement Requested exit postponement, in years (to keep % life spent in retirement constant) 1.9 Women

12 Austria, Cyprus 2006 Portugal 2007 Finland 2009 Ireland 2010 Germany 2011 Latvia 2013 Estonia 2014 Lithuania 2018 Spain 2023 Slovenia TARGET NOT REACHED IN 2050 (7MSs) Belgium France Hungary ITALY Luxembourg Malta Poland Projected time frame for meeting the Lisbon employment target 70% TARGET ALREADY REACHED IN 2004 Denmark Netherlands Sweden UK 2035 EU EU15, Czech Republic 2020 EU25, Slovakia The consequences of ageing populations on employment and growth EU EU EU25

13 Phase 1: A window of opportunity : both working-age population and employment increasing –but closing fast The consequences of ageing populations on employment Source: 2006 EPC/Commission report on ageing total employment working-age population Phase 1 Phase 2 Phase 3 Between : Employed persons: - 30 millions (14%) Working-age population: - 45 mill. (15%)

14 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 population + Active ageing population+ employment rate) 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)

15 Productivity Δ labour productivity : - convergence to 1.7 in 2030 (EU15) & 2040 (EU10) = Δ TFP assumptions is key : - convergence to 1.1% in 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 ),

16 The consequences of ageing populations on employment and growth Projected Growth : EU15 & EU10 EU GDP growth Employment growth Productivity growth EU

17 Population Labour force - Participation - Employment - Unemployment Labour productivity Real interest rate GDP Pensions National models Health care Long-term care Education Unemployment benefits Total age- related spending Results of the budgetary projections

18 Projected changes in public pension expenditure (% of GDP) From – 6pp in Poland to + 13 pp in Cyprus

19 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. Benefit effect x PensNo x PensExp/PensNo Pop>65 GDP/EmplNo

20 Factors contributing to pension expenditure changes, EU15 and EU10 (% of GDP)

21 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…

22 Budgetary projection results, EU15

23 Budgetary projection results, EU10

24 Budgetary projection results, EU9 (excluding Poland)

25 Fiscal sustainability analysis at the EU level European Commission Ensuring sustainable public finances in view population ageing is a key challenge for policy-makers in the EUEnsuring 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 PactConsistency 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,…Sustaining the European welfare model(s) central policy issue in view of ageing and globalisation; Lisbon strategy, Integrated guidelines, Open method of co-ordination,…

26 What should be done? A three-pronged strategy to ensure sustainability European Commission Ensuring sustainability Reducing debt at a fast pace Raising employment and productivity Reforming pension, health-care and long-term care systems

27 What are the policy implications? What are the policy implications? (1) European Commission Ambitious fiscal policies contribute significantly to fiscal sustainability; the planned budgetary positions in the Member States need to be reachedAmbitious 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 2050If attained, the debt ratio in the EU would almost remain below the 60% threshold up to 2050

28 What are the policy implications? (2) European Commission Adapting Europes social models and enhancing its growth potential is paramount: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

29 What are the policy implications? (3) European Commission Adapting Europes social models and enhancing its growth potential is paramount: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

30 Reports on ageing and sustainability The 2005 EPC projections of age-related expenditure ( ) for the EU25 Member States: underlying assumptions and projection methodologies The impact of ageing on public expenditure: projections for the EU25 Member States on pensions, long-term care, education and unemployment transfers ( ) The long-term sustainability of public finances in the European Union

31 European Commission Thank you for your attention!


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