Presentation on theme: "Per Eckefeldt European Commission – DG ECFIN"— Presentation transcript:
1 Pension Reform in the European Union: How to Cope with Ageing Populations Per EckefeldtEuropean Commission – DG ECFINCicero Foundation Great Debates seminar:Pension Reform in the European Union – Comparing Different National ApproachesParis, May 2008
2 demographic changes and economic and budgetary implications OutlineWhy reform?demographic changes and economic and budgetary implicationsScale and composition of the fiscal sustainability challenge in the EUPolicy implicationsEuropean 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 EUConsistency between medium-term budgetary targets and long-term fiscal sustainability emphasized in the EUs fiscal framework, the Stability and Growth PactEuropean Commission
4 Measuring the ‘cost of ageing’: common long-term budgetary projections PopulationLabour forceParticipationEmploymentUnemploymentLabourproductivityRealinterest rateGDPPensionsNational modelsHealth careLong-term careEducationUnemploymentbenefitsTotalage-relatedspending
5 The consequences of ageing populations on employment and growth Main demographic indicatorsEU15EU1020042050Fertility rate1,51,6+0.11,2+0.4Life expectancy at birth - men76,482,1+670,178,7+8.6Life expectancy at birth - women82,287+578,284,1Net migration flows (thousands)1347778-3101Net migration flows(as % of population)0,40,20,1Source: 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 2050Most numerous age cohorts: age 36 in 2004, age in 2050Population aged 65+ doubles until 2050 (from 75 to 133 millions in 2050)Old age dependency ratio (65+/15-64): doubles from 26 to 5220042050898985858181777773736969656561615757535349494545414137373333292925252121171713139955114000400030002000100010002000300040003000200010001000200030004000Males FemalesMales FemalesSource: 2006 EPC/Commission report on ageing.
7 Participation rate projections: the cohort approach Three main features of the methodologyUse of entry rates and exit rates2) Participation rates are projected foreach single year of age and gender3) Incorporate the impact of pensionreformsNow 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 periodThen 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 periodThe 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 ageProbability 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 summarisedby 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 malesParticularly high increases are projected for Slovakia and Hungaryand 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%586062646668707220032010202020302050Pension reforms effectsCohort effectFixed Participation Rate for each age and gender group
11 Ageing or retirement problem? Adult life spent in retirement EU25Men20032050Employment rate of older workers50.064.8Average exit age61.962.9Life expectancy at the time of withdrawal19.022.1% of adult life spent in retirement28.831.6Requested exit postponement,in years (to keep % life spent in retirement constant)1.9Women2003205030.453.061.161.923.326.633.636.21.9
12 The consequences of ageing populations on employment and growth Projected time frame for meeting the Lisbon employment target 70%TARGET ALREADY REACHED IN 2004Denmark Netherlands Sweden UK2035 EU12EU102023 Slovenia2020 EU25, Slovakia2020 EU252018 Spain2015 EU15, Czech Republic2015 EU152014 LithuaniaTARGET NOT REACHED IN 2050 (7MSs)BelgiumFranceHungaryITALYLuxembourgMaltaPoland2013 Estonia2011 Latvia2010 Germany2009 Ireland2007 Finland2006 Portugal2005 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 fastPhase 1Phase 2Phase 3320300working-age population280260Between :Employed persons: - 30 millions (14%)Working-age population: - 45 mill. (15%)240220200total employment1802003200820132018202320282033203820432048Source: 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 growthProductivity growthGDP 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 constantΔ capital stock = Δ L +labour augmenting technical progress (or TFP/ α ),
16 Projected Growth : EU15 & EU10 The consequences of ageing populations on employment and growthProjected Growth : EU15 & EU10EU15-1.00.01.02.03.04.05.0GDP growthEmployment growthProductivitygrowth4.5EU105.05.04.03.04.03.03.02.184.108.40.206.02.01.01.00.00.0-1.0-1.0
17 Results of the budgetary projections GDPTotalage-relatedspendingPensionsNational modelsLabour forceParticipationEmploymentUnemploymentPopulationHealth careLabourproductivityLong-term careRealinterest rateEducationUnemploymentbenefits
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. effectPensExp = Pop> x Pop (15-64)GDP Pop(15-64) EmplNoTake-up eff Benefit effectx PensNo x PensExp/PensNoPop> 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…
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 EUConsistency between medium-term budgetary targets and long-term fiscal sustainability emphasized in the EUs fiscal framework, the Stability and Growth PactSustaining 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 sustainabilityEnsuring sustainabilityReducing debtat a fast paceRaising employmentand productivityReforming pension,health-care andlong-term caresystemsEuropean 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 reachedIf attained, the debt ratio in the EU would almost remain below the 60% threshold up to 2050European 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 sustainabilitystructural reforms, notably in the field of pensions, are crucial to improve fiscal sustainability; there are several examples showing that reforms do pay offEuropean 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 reformsimproving the quality of public finances will involve prioritization of public expenditure – and its financing - in view of competing budgetary pressures, such as education and healthcareEuropean Commission
30 Reports on ageing and sustainability The 2005 EPC projections of age-related expenditure ( ) for the EU25 Member States: underlying assumptions and projection methodologiesThe 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