1 Making use of long-term demographic projections in multilateral policy coordination in the EU Per Eckefeldt DG ECFIN European Commission Joint Eurostat/UNECE Work Session on Demographic Projections Organized in cooperation with Statistics Portugal Instituto Nacional de Estatística, Lisboa, April 2010

2 Outline Background Demographic prospects Economic effects of ageing populations Overall budgetary effects of ageing populations Potential medium- and long-term impact of the economic crisis Concluding remarks

3 Background Preparing the European Social Models to be apt for tomorrow is high on the EUs policy agenda Population ageing is a key challenge The 2001 Stockholm European Council took initiatives to face the impact of ageing on the economy; a three-pronged strategy was agreed: o Reducing public debt at a fast pace o Raising employment rates and enhancing productivity o Reforming social security systems Challenge adressed by several initiatives at EU level: –the just-launched Europe 2020 strategy for smart, sustainable and inclusive growth (updating the previous Lisbon agenda) –the Stability and Growth Pact (SGP) – reformed in 2005 –the Open Method of Coordination on Social Protection and Social Inclusion Commission Communications on the Ageing Report and the Sustainability report in 2009

4 A unique collaboration Comparable projections provided by Eurostat of long-term demographic developments is essential for the Commision in order to deliver appropriate policy advice on how to cope with global megatrends like population ageing to Member States It forms the basis for the projections at EU level of the economic consequences of ageing and future public expenditure on pensions, health care, long-term care, education and unemployment transfers Joint project of the Member States – the Economic Policy Committee (EPC) and the European Commission (DG ECFIN) to ensure comparability while reflecting the diversity of welfare systems accross Member States A special time of crisis: the Commission will continue to monitor the situation

5 Population Labour force - Participation - Employment - Unemployment Labour productivity Real interest rate GDP Pensions National models 10.2% GDP Health care 6.7% GDP Long-term care 1.2% GDP Education 4.3% GDP Unemployment Benefits 0.8% GDP Total age- related spending 23.1% GDP i.e. 50% of public expenditure Overview of 2009 projection exercise

6 Main demographic indicators (EUROPOP2008)

7 EUROPOP2008: Population projections European Union x Median age

8 EUROPOP2008: The population in the EU27 grows much older Total population: millions in 2008, millions in 2060 Working-age population : millions in 2008, millions in 2060 (-15%) Most numerous cohorts: age in 2008, age in 2060 Population aged 65+ nearly doubles: 85 millions in 2008, 151 millions in 2060 Old-age dependency ratio (65+/15-64) doubles from 25 to 53 per cent

9 EUROPOP2008: Changes in the population structure Old-age dependency ratio (65+ / 15-64) EU: +28 p.p LU UKDK IE NO CY FR BE SE NL FI AT EU15EU25EU27 EA12 EA PT EE EL HU ES MT DE IT CZ SI BG LV EU10 RO LT SK PL

10 Labour force developments by cohort Main features of the Commission’s approach 1) Use of entry rates and exit rates (based on average of participation rates over last ten years) 2) Participation rates are projected for each single year of age and gender 3) Incorporate the impact of pension reforms

11 Employment rates rise due to reforms and cohort effects – EU 27

12 The consequences of ageing populations on employment – EU 27

13 Potential growth rates decline in the EU due to shrinking working age populations productivity becomes the dominant source of growth

14 Ageing or retirement problem?

15 The Total Cost of Ageing, EU27, components (change in percentage points)

16 The Total Cost of Ageing, EU Member States, variety in the EU (change in percentage points) EU: +4.7 p.p.

17 Crisis scenarios (1) potential GDP growth under different shocks (European Commission Spring 2009 forecast)

18 Crisis scenarios (2) pension & total expenditure under different shocks (European Commission Spring 2009 forecast)

19 Demographic change in the coming decades – the transition to an older population - will exercise strong pressures for higher public spending in the EU Considerable policy action in reforming public pension programmes helps to offset this There are many cases of successful reforms, most recently PT, HU, CZ, DK But vigilance is called for as new challenges emerge… (issues of future pension levels, support from private pillars,...) …and not least concerning the organisation of health care and long-term care in the future What do the latest projections tell us?

20 Concluding remarks Europeans living longer than ever before is an enormous achievement for societies and should not be seen as a threat The EU is facing a retirement challenge and not an ageing challenge, stemming from European social models of yesterday not being apt for tomorrow, affecting expectations and behaviour of the population On pension policy, reforms carried out suggest progress towards fiscal sustainability for many MS, although some still have a long way to go The focus increasingly turns to aligning public perception of retirement incomes and its composition in the future with what the reformed systems will deliver, so as to ensure lasting success of implemented reforms and to provide opportunities for people to adjust and shape their lives as pensioners A key challenge will be to extend working lives, giving a double dividend: (i) higher living standards; and, (ii) progress towards sustainable public finances Moreover, the transformation of the European social models – not restricted to pension policy - need to be intensified to support jobs and growth For the EU to swiftly get out of the crisis, a credible and coordinated exit strategy – building on structural reforms supporting durable growth – is necessary so as to restore confidence in the public finances

21 The full report can be found at DG ECFINs website: thematic_articles/article14761_en.htm Thank you for your attention!