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

3. 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
European Commission

4. Measuring the ‘cost of ageing’: common long-term budgetary projections
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

5. The consequences of ageing populations on employment and growth
Main demographic indicators
EU15
EU10
2004
2050
Fertility rate
1,5
1,6
+0.1
1,2
+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
Net migration flows (thousands)
1347
778 -3
101
Net migration flows
(as % of population)
0,4
0,2
0,1
Source: 2006 EPC/Commission report on ageing.

6. 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 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
4000
3000
2000
1000
1000
2000
3000
4000
3000
2000
1000
1000
2000
3000
4000
Males Females
Males Females
Source: 2006 EPC/Commission report on ageing.

7. 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
Now We can move to the main features of the methodology used for the labour force projections.
For the the projection of participation rates we have used the cohort method applied to participation rates for each single year of age, since age 15 and up to 71.
For this we have calculate for each single year of age from age 15 to age 71, the entry rates and the exit rates for the period
Then we have used an average of these rate in order to get rid of cyclical influences and measurement errors.
The PR projections are produced by applying these fixed entry and exit rate over the period
The cohort approach used in the simulation tends to produce an autonomous increase of female participation – referred to as a “cohort effect” - corresponding to the gradual replacement of currently older women by younger women.
An important feature of the projection is that this basic cohort approach has been complemented by additional calculation to incorporate the impact of recent pension reforms on PRs of older workers in 17 MSs.
Let’s see in a bit more detail the methodology used for assessing this impact on PR.

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

9. Impact of recent pension reforms (2003 - 2025)
The results of our simulation in terms of the expected postponement of the retirement age is summarised
by the change in the “average exit age“ from the labour force over the period (see Table 3).
In general, the effective retirement age for female is expected to increase more than for males
Particularly high increases are projected for Slovakia and Hungary
and for males in Italy, Germany and Poland (around 2 years)

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 mainly due to: - women’s employment: from 55% to 65% older workers (aged 55-64): from 40% to 59% 58 60 62 64 66 68 70 72
2003
2010
2020
2030
2050
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
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
2003
2050
30.4
53.0
61.1
61.9
23.3
26.6
33.6
36.2
1.9

12. The consequences of ageing populations on employment and growth
Projected time frame for meeting the Lisbon employment target 70%
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
2014 Lithuania
TARGET NOT REACHED IN 2050 (7MSs)
Belgium
France
Hungary
ITALY
Luxembourg
Malta
Poland
2013 Estonia
2011 Latvia
2010 Germany
2009 Ireland
2007 Finland
2006 Portugal
2005 Austria, Cyprus

13. The consequences of ageing populations on employment
Phase 1: A “window of opportunity” : both working-age population and employment increasing –but closing fast
Phase 1
Phase 2
Phase 3
320
300
working-age population
280
260
Between :
Employed persons: - 30 millions (14%)
Working-age population: - 45 mill. (15%)
240
220
200
total employment
180
2003
2008
2013
2018
2023
2028
2033
2038
2043
2048
Source: 2006 EPC/Commission report on ageing.

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:
Employment growth
Productivity growth
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 TFP assumptions is key :
Δ labour productivity :
- convergence to 1.7 in 2030 (EU15) & 2040 (EU10) =
Δ TFP assumptions is key :
- convergence to 1.1% in 2030 +
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. Projected Growth : EU15 & EU10
The consequences of ageing populations on employment and growth
Projected Growth : EU15 & EU10
EU15
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
GDP growth
Employment growth
Productivity
growth
4.5
EU10
5.0
5.0
4.0
3.0
4.0
3.0
3.0
2.2
0.9
1.8
1.3
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0

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

18. Projected changes in public pension expenditure 2004-2050 (% 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> x Pop (15-64)
GDP Pop(15-64) EmplNo
Take-up eff Benefit effect
x PensNo x PensExp/PensNo
Pop> 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
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,…
European Commission

26. A three-pronged strategy to ensure sustainability
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
European Commission

27. 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
European Commission

28. What are the policy implications? (2)
Adapting Europe’s 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
European Commission

29. What are the policy implications? (3)
Adapting Europe’s 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
European Commission

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. Thank you for your attention!
European Commission