The economic and budgetary consequences of ageing populations Henri Bogaert Bureau du Plan and Chairman of the Ageing Working Group Giuseppe Carone European Commission DG ECFIN Rome, 23 February 2007
Outline of the presentation Overview of the projection exercise Underlying population and economic assumptions Budgetary projection results Pensions Health care and long-term care Education Overall budgetary impact of ageing Making use of the projections
Overview of 2005 projection exercise Labour force Pensions National models - Participation - Employment - Unemployment Population 2004-2050 Labour productivity GDP Health care Long-term care Total agerelated spending Real interest rate Education Unemployment benefits
The consequences of ageing populations on employment and growth Main demographic indicators EU15 EU10 IT 2004 2050 2004 2050 2004 2050 Fertility rate 1,5 1,6 1,2 1,6 1,3 1,4 Life expectancy at birth - men 76,4 82,1 70,1 78,7 77,3 82,8 Life expectancy at birth - women 82,2 87 78,2 84,1 83,2 87,8 Net migration flows (thousands) 1347 778-3 101 150 150 Net migration flows (as % of population) 0,4 0,2 0 0,1 0,3 0,3 Source: 2006 EPC/Commission report on ageing.
89 85 81 77 73 69 65 61 57 53 49 45 41 37 33 29 25 21 17 13 9 5 1 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 57-59 59 in 2050 Population aged 65+ doubles until 2050 (from 75 to 133 millions in 2050) Old age dependency ratio (65+/15-64): 64): doubles from 26 to 52 2004 2050 4000 3000 2000 1000 0 1000 2000 3000 4000 89 85 81 77 73 69 65 61 57 53 49 45 41 37 33 29 25 21 17 13 9 5 1 4000 3000 2000 1000 0 1000 2000 3000 4000 Males Females Males Females Source: 2006 EPC/Commission report on ageing.
ITALY Total population: from 58 mill.. in 2004 to 54 mill.. in 2050 Most numerous age cohorts: age 39 in 2004, age 75-78 78 in 2050 Population aged 65+ : from 11 in 2004 to 18 millions in 2050) Old age dependency ratio (65+/15-64): 64): doubles from 29 to 626 Age Italy: 2004 Age Italy: 2050 85 81 77 73 69 65 61 57 53 49 45 41 37 33 29 25 21 17 13 9 5 1 600 400 200 0 200 400 600 Males Females 85 81 77 73 69 65 61 57 53 49 45 41 37 33 29 25 21 17 13 9 5 1 500 400 300 200 100 0 100 200 300 400 500 Males Females
Participation rate projections: the cohort approach Three main features of the methodology : 1) Use of entry rates and exit rates: 1997-2003 average rates kept constant over the period of projection 2) Participation rates are projected for each single year of age and gender 3) Incorporate the impact of pension reforms
Methodology to estimate the impact of recent pension reforms on participation rates FIRST STEP: Analysis of the exit rates, probability of retirement and the cumulative distribution function at different ages Analysis of the impact of different pension rules and their changes on the rate of exit and probability of retirement SECOND STEP: Change the probability of retirement Change the corresponding exit rates Re-run the cohort model
Estimating the impact of recent pension reforms Probability of retiremnt Cumulative probability of retirement IT - Male IT - Male 20% 2003 2025 100% 90% 80% 2003 2025 15% 70% 60% 10% 50% 40% 30% 5% 20% 10% 0% 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 AGE 0% 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 AGE
Impact of recent pension reforms (2003-2025) Increase in the average exit age Males Female y ears 4 3.5 3 2.5 2 1.5 1 0.5 0 +2 years +1 year SK HU FR CZ FI PL SL AT BE DE LT UK IT LV ES EE SE
Employment rate of older workers Ageing or retirement problem? Adult life spent in retirement (Men) EU25 2003 50.0 2050 64.8 2003 29.4 Italy 2050 54.6 Average exit age Life expectancy at the time of withdrawal 61.9 19.0 62.9 22.1 59.7 22.0 62.3 23.5 % of adult life spent in retirement 28.8 31.6 33.0 33.1 Requested exit postponement, 1.9 0.1 in years (to keep % life spent in retirement constant)
Ageing or retirement problem? Adult life spent in retirement (Women) EU25 Italy 2003 2050 2003 2050 Employment rate of older workers 30.4 53.0 18.0 45.1 Average exit age 61.1 61.9 60.7 61.3 Life expectancy at the time of withdrawal 23.3 26.6 24.8 28.5 % of adult life spent in retirement 33.6 36.2 35.2 38.1 Requested exit postponement, 1.9 2.2 in years (to keep % life spent in retirement constant)
Increase in participation rates due to pension reforms 2003-2050 18 16 14 12 10 8 6 4 2 0 2,2 9,3 4,4 15,5 2,5 10,4 4,3 EU15 EU10 EU25 IT Total (15-64) Older (55-64) 12,8
Changes in the participation rates by age-groups and gender (2003-2050) BIG INCREASE FOR OLDER WORKERS more than 20 p.p. for women (26 IT) and 15 p.p. for men (22 IT) Older Prime age Young Total Women PRIME-AGE FEMALES UP MORE THAN 8 p.p. ONLY MODERATE INCREASE for PRIME-AGE MALES (about 2 p.p. in EU-25 & EU-12) YOUNG rates Older Prime age Young Total Older Prime age Young Total Men Total BROADLY CONSTANT -10,0 0,0 10,0 20,0 30,0 Italy EU25 Eurozone EU10
FROM PARTICIPATION RATES TO EMPLOYMENT 3 Groups of countries: Unemployment assumptions 1) THOSE BELOW THE EU-15 AVERAGE : project further decline in the ECFIN 2005 NAIRU up to 2008 (a simple rule that allows for 50% of the most recent decline: e: NAIRU t+1 = NAIRU t - 0.5* (NAIRU( t - NAIRU t-1 ) 2) THOSE ABOVE EU-15 AVERAGE: convergence to the 2008 EU15 NAIRU average (about 7%) by 2015 IT: : down from 8.9% in 2003 to 7.3% in 2010 and 6.5% in 2015 3) POLAND AND SLOVACK REPUBLIC (with very high UR) convergence to the 2008 EU15 NAIRU average (about 7%) by 2025
Employment rate for the EU25 from 63% in 2003 to 71% in 2050 (IT: 57.2 to 65.7) mainly due to: 72 70 68 66 64 62 60 - women s employment: from 55% to 65% (IT: 44.9 to 56.1) - older workers (aged 55-64): from 40% to 59% (IT: 29.4 to 54.6) Pension reforms effects Cohort effect Fixed Participation Rate for each age and gender group 58 2003 2010 2020 2030 2050 Source: 2006 EPC/Commission report on ageing.
The consequences of ageing populations on employment and growth Projected employment rates and Lisbon targets for the EU25 75 70 65 60 55 50 45 40 35 30 Total Female Older w orkers Lisbon target 2000 2004 2010 (p) 2020 (p) 2050 (p) 2000 2004 2010 (p) 2020 (p) 2050 (p) 2000 2004 2010 (p) 2020 (p) 2050 (p) Source: 2006 EPC/Commission report on ageing.
The consequences of ageing populations on employment and growth Projected time frame for meeting the Lisbon employment target 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 TARGET ALREADY REACHED IN 2004 Denmark Netherlands Sweden UK 2009 Ireland 2007 Finland 2006 Portugal 2011 Latvia 2010 Germany 2005 Austria, Cyprus 2014 Lithuania 2013 Estonia 2018 Spain 2023 Slovenia 2020 EU25, Slovakia 2015 EU15, Czech Republic 2035 EU12 TARGET NOT REACHED IN 2050 (7MSs) Belgium France Hungary ITALY Luxembourg Malta Poland EU10
The consequences of ageing populations on employment Phase 1: A window of opportunity : both working-age population and employment increasing but closing fast 320 Phase 1 Phase 2 Phase 3 300 280 260 240 220 working-age population Between 2018-2050: Employed persons: - 30 millions (14%) Working-age population: - 45 mill. (15%) 200 total employment 180 2003 2008 2013 2018 2023 2028 2033 2038 2043 2048 Source: 2006 EPC/Commission report on ageing.
Impact of ageing on economic growth Production function approach based on the projections of the main components: GDP = POP + POP15 POP 64 + L POP15 64 + + TFP (1 α) K L 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)
Labour input= employment growth (average working hours kept constant) Annual growth rate of 0.4% over the period 2003 to 2025 (IT=0.3%) Negative annual growth rate of -0.5% in 2025-2050 (IT= -0.7%) Overall number of employed people in the EU-25 is projected to fall by about 25 millions (-12%) over the period 2025 to 2050 (IT= -4 millions / -17%)
Productivity Δ labour productivity : - convergence to 1.7 in 2030 (EU15) & 2040 (EU10) (Italy: from 0.7 in 2005 to 1.7 in 2015) = Δ TFP assumptions is key : - convergence to 1.1% in 2030 (Italy: from 0.3 in 2005 to 1.1 in 2015) + 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 ),
The consequences of ageing populations on employment and growth Projected Growth : EU15 & EU10 5.0 EU15 5.0 5.0 4.5 EU10 5.0 4.0 3.0 2.0 2.2 Employment growth GDP growth 1.8 1.3 4.0 3.0 2.0 4.0 3.0 2.0 3.0 0.9 4.0 3.0 2.0 1.0 1.0 1.0 1.0 0.0 Productivity growth 0.0 0.0 0.0-1.0 2004-10 2011-30 2031-50 -1.0-1.0 2004-10 2011-30 2031-50 -1.0
The consequences of ageing populations on employment and growth Projected Growth ITALY Labour productivity growth and Employment growth 3,0 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0 +1,9 +1,5 +0,9 2004-10 2011-30 2031-50 Labour productivity growth Employment growth GDP growth Source: 2006 EPC/Commission report on ageing.
Results of the budgetary projections Labour force Pensions National models - Participation - Employment - Unemployment Population 2004-2050 Labour productivity GDP Health care Long-term care Total agerelated spending Real interest rate Education Unemployment benefits
Pension Projections OUTLINE All pensions Time profile of pension spending Decomposition Sensitivity tests Comparison with the 2001 projections
Projected changes in public pension expenditure 2004-2050 2050 (% of GDP) 15 10 5 0-5 -10 PL EE LV AT MT IT SE DE SK LT FR UK FI DK NL BE CZ IE HU ES SI LU PT CY
Time profile of projected public pension expenditure 2004-2050 2050 (% of GDP) 17 16 15 14 13 12 11 10 9 8 2004 2007 2010 2013 2016 2019 2022 IT EU25 Euro area 12 Peak in 2040= 15.97 2025 2028 2031 2034 2037 2040 2043 2046 2049
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
Factors contributing to pension expenditure changes, EU15 and EU10 (% of GDP) 2004-2050 2050 10 8 8,2 9,9 6 4 2 0 2,3 0,3-2 -4-6 Dependency ratio -1,0-1,7 Employment rate -1,7-2,8-3,8-3,5 Take up ratio Benefit ratio Total EU15 EU10
Factors contributing to pension expenditure changes, Italy and Euro area (% of GDP) 2004-2050 2050 12 10 8 6 4 2 0-2 -4-6 -8 11,5 9,3 2,7 0,4-1,3-2,0-1,8-3,2-3,1 Dependency ratio Employment rate Take up ratio Benefit ratio Total -5,3 IT Euro area
70 60 50 40 30 20 10 0 Dependency ratio (+65/15-64) 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 IT EU25 Euro area 12 30 25 20 15 10 5 0 Benefit ratio 2004 2007 2010 2013 2016 20 19 2022 20 25 2028 20 31 20 34 2037 20 40 2043 20 46 2049
Sensitivity tests Increase in gross public pension expenditure 2004-2050 (% of GDP) 3 2,5 2 1,5 1 0,5 0-0,5-1 2,3 0,3 Baseline 2,6 2,2 2,2 0,1 0,0-0,4 Higher life Higher expectancy employment (~= 1year) (+1pp) EU15 EU10 Higher empl of older workers (+5pp) 2,6 0,5 Lower labour productivity (+0.25pp)
Comparison between the 2001 and 2005 projections 22 20 % 18 16 o f 14 12 10 G D P 8 6 4 2 0-2 2001 BE 2001 DK 2001 DE 2001 ES 2001 FR 2001 IE 2001 IT 2001 LU 2001 NL 2001 AT 2001 PT 2001 FI 2001 SE 2001 UK 2001 EU15 2005 Increase by 2050
Methodology to project health care spending Healthy life expectancy Population by age and gender Health care spending by age and gender Unit cost development Death-related costs Income elasticity of demand Costs in health care sector
Age-related expenditure profile EU15 & E10 20% 15% 10% 5% 0% 0-4 10-14 20-24 30-34 40-44 50-54 60-64 70-74 80-84 90-94 100+ males - EU15 females - EU15 males - EU10 females - EU10 % of GDP per capita
Health status scenarios Pure Demographic Scenario year 2004 year 2050 year 2004 Constant Health Scenario year 2050 year 2004 Improved Health Scenario year 2050 Years spent in good health Increase in life expectancy Years spent in bad health (with morbidity/disability)
Change in health care expenditure (In percent of GDP; EU25) 2,5 2,0 1,5 1,0 1,7 0,9 1,3 2,0 1,6 0,5 0,0 Pure ageing GDP per capita Constant health Death-related costs Incom e elasticity AWG reference scenario
Change in health care expenditure 2004-2050 2050 (in percent of GDP- Italy ) 2.5 2 1.5 1.4 1.0 1.6 1.6 1 0.8 0.5 0 Pure ageing GDP per capita Constant health Death-related costs Income elasticity AWG reference scenario
Results of different scenarios 3 2,5 2 1,5 1 0,5 0 1,7 Increase in public health care expenditure 2004-2050 (% of GDP) 1,2 Pure ageing 0,9 0,6 Constant health 1,4 0,8 Deathrelated costs 2,1 1,7 Income elasticity >1 2,6 1,8 Fast cost growth 2,0 1,4 High life expectancy EU15 EU10
Change in health care expenditure 2004-2050 2050 (in percent of GDP) Pure ageing scenario 2.5 2 1.5 1 0.6 0.7 0.9 1 1.1 1.2 1.3 1.4 1.5 1.7 1.8 1.9 2 2.2 2.3 0.5 0 PT LT LV EE SE HU DK LU CY EU10 DE NL PL IT SI BE FI AT EU25 EU15 GR FR SK CZ IE MT ES UK
Health care expenditure in 2004-2030 and 2050 (In percent of GDP; AWG scenario) 10,0 8,0 6,0 4,0 6,4 7,5 8,1 +1.6 4,9 5,8 6,2 +1.3 2,0 0,0 EU15 EU10
Main findings on health care Ageing leads to strong increse in spending Improved health status would substantially offset ageing effects Less progress made in modelling supply side factors (technology, prices in health care sector, institutional setting) that tend to push up spending
Model structure for long-term care Formal care at home Unit cost of care at home Total spending Population by age and gender Size of the disabled population Formal care in institutions Unit cost of care at institution Informal care Other disability transfers
100 90 80 70 60 50 40 30 20 10 0 12 10 8 6 4 2 0 Per capita cost rises with age EU15 - males EU15 - females 0-14 20-24 30-34 40-44 50-54 60-64 70-74 80-84 90-94 100+ 100 90 80 70 60 50 40 30 20 10 0 0-14 20-24 30-34 40-44 50-54 60-64 70-74 80-84 90-94 100+ BE DK DE IT NL FI SE UK LU BE DK DE IT NL FI SE UK LU EU10 - males EU10 - females 14 12 10 8 6 4 2 0 00-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95+ 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95+ 00-14 CZ LT LV PL MT SI CZ LT LV PL MT SI
Dependency rates by age group Men Women 40 30 % 20 10 0 65-70 70-74 75-79 80+ Age group
Projection of dependent population Formal care in institutions Formal care at home Informal or no care in thousands 30000 25000 20000 15000 10000 5000 0 % change 2004-2005 +98 +110 +130 % change 2004-2005 +21 +38 +55 2004 2050 2050 - constant disability scenario
Change in long-term care expenditure 2004-2005 2005 (in percent of GDP; EU25) 1.6 1.5 1.4 1.2 1 0.8 0.6 0.8 0.5 0.7 0.6 0.4 0.2 0 Pure ageing GDP per capita Constant disability Cost - GDP per capita Increased formal care AWG reference scenario
Change in long-term care expenditure 2004-2005 2005 (in percent of GDP; Italy) 2 1.8 1.2 1 0.8 0.6 0.9 0.5 0.7 0.7 0.4 0.2 0 Pure ageing GDP per capita Constant disability Cost - GDP per capita Increased formal care AWG reference scenario
Change in long-term care expenditure 2004-2050 2050 (in percent of GDP) Pure ageing scenario 3 2.5 2.2 2.4 2 1.5 1 0.5 0.1 0.3 0.4 0.5 0.7 0.8 0.9 1 1.2 1.3 1.4 1.5 0 PL ES EU10 LV MT CZ LT IE NL SK IT LU EU25 EU15 AT UK BE DE DK SI FI SE
Main findings on long-term care Strong impact of ageing populations on long-term care expenditure Significant divergences in projection results due to different starting levels of formal LTC provision/financing Need to reconcile two opposite trends: growing pressure on public finances and/or increasing need for formal LTC provision
Significant changes only projected for some countries Change in education expenditure 2004-2050) (In percent of GDP) 0,0-0,2-0,4-0,6-0,8-1,0-1,2 AT IE LU SE DE FI BE ES IT UK FR GR P T DK NL -0,2-0,3-0,4-0,4-0,5-0,7-0,7-0,6-0,6-0,6-0,9-0,9-0,9-1,0-1,0
Age-related expenditure in 2004-2030 and 2050 (In percent of GDP) 30,0 25,0 20,0 15,0 10,0 5,0 0,0 23,5 27,2 25,4 24,7 21,1 21,4 20,8 19,4 19,3 +3.7 +0.2 +5.4 EU15 EU10 EU9 (EU10-PL)
Budgetary projection results,, EU15 EU15 30 +3.7 25 % of GDP 20 15 10 5 +2.3 +1.6 +0.7-0.6-0.2 2004 2050 0 pensions health care long-term care education unemployment benefits total
Budgetary projection results,, EU10 EU10 30 25 +0.2 % o f G D P 20 15 10 +0.3 +1.3-1.3 2004 2050 5 +0.2-0.2 0 pensions health care long-term care education unemployment benefits total
Budgetary projection results,, EU9 (excluding Poland) EU9 (EU10 - PL) 30 25 +5.4 % of GDP 20 15 10 +4.8 +1.3-0.9 2004 2050 5 +0.3-0.1 0 pensions health care long-term care education unemployment benefits total
Budgetary projection results ITALY 30 +1.7 25 % of GDP 20 15 10 +0,44 +1.3-0.6 2004 2050 5 +0.7-0.1 0 pensions health care long-term care education unemployment benefits total
Making use of the results Budgetary surveillance: more emphasis on sustainability in Stability and Growth Pact Lisbon Strategy: impact of reforms on employment and GDP growth Employment policy: progress towards Lisbon employment targets for older workers Open Method of Co-ordination - 2nd pensions exercise in 2005 and also a new exercise on health care and long-terms
Making use of the results Budgetary surveillance: 1. Long-term budgetary projections are an important part in the assessment of the long-term sustainability of public finances 2. With the 2005 reform of the SGP, increased importance was put on longer-term sustainability concerns 3. The common long-term projections form the basis for the assessment of public finance sustainability in the EUs budgetary surveillance
Full report The 2005 EPC projections of age-related expenditure (2004-2050) for the EU25 Member States: underlying assumptions and projection methodologies http://europa.eu.int/comm/economy_finance/publications/european _economy/2005/eespecialreport0405_en.htm The impact of ageing on public expenditure: projections for the EU25 Member States on pensions, long-term care, education and unemployment transfers (2004-2050 http://europa.eu.int/comm/economy_finance/publications/european _economy/2006/eespecialreport0106_en.htm