The clock is ticking away
Elderly people will account for an increasing share of Europe's population whereas the working age population (15-64) is projected to drop by 15 per cent by 2060, the Brussels Economic Forum concluded recently.
During the forum it emerged that Malta is included in the group of EU member states that is expected to be most affected by the impact of aging across Europe.
The forum, a gathering of decision-makers, social partners and media, is the EU's premier platform for economic debate and was first set up in 2000.
During the forum, the 2009 Aging Report published by Economic Policy Committee - made up of senior officials from the finance ministries and central banks of the EU member states - was presented.
By 2020 labour growth will give a negative contribution to growth potential in the EU, the forum was told. As a result, average potential growth will fall below two per cent per year in about 10 years' time.
A breakdown of age-related expenditure in the EU27 as a percentage of GDP clearly shows the effects of an aging population. Spending on education and unemployment benefits will decrease slightly while spending on pensions, health care and long-term care will increase by large percentages.
Pension, health care and long-term care spending will be most impacted by aging, although infrastructure, housing and education may also be affected. Moreover, even the current projections may be optimistic. According to Carlo Cottarelli of the International Monetary Fund, technological change, while offering new cures, will increase spending on health care to as high as 11 per cent of GDP by 2060. Mr Cottarelli cited the historically high cost of technology in the US and other countries to support his assertion.
Over the next 50 years, the EU will move from having four working-age people for every person aged over 65 to a ratio of 2 to 1. There will be more workers over the age of 65 and more women working, but overall the workforce is expected to shrink by about 19 million people by the year 2060.
By 2060, nearly one in three citizens in the EU27 will be over the age of 65. While the proportion of people aged 65 to 79 will increase by almost 50 per cent, the most striking change in population structure will occur in the oldest age group, people aged 80 and above.
This group will nearly triple in size. With the proportion of the working age population falling, the support ratio of dependents to people of working age is set to soar. By 2060, the EU will have two working age people for every dependent person over 65, compared with four to one in 2009.
Immigration to Europe should help release some of the pressure, but not much of it, the forum heard. Net inward migration to EU countries is projected to decelerate, and the bulk of net migration flows (nearly 40 per cent by 2060) will be concentrated in a handful of countries: Italy, Spain, Germany and the UK.
"The impact of the financial crisis pales compared to demographic problems," said Robert Holzmann of the World Bank. Yet the crisis has made a bad situation even worse. It has, for example, reduced the value of assets to finance retirements by 20-25 per cent, according to an estimate by Mr Holzmann, and has hit state-supported and private pension funds alike. Additional scenarios included in the Aging Report suggest that the impact of the economic downturn depends upon whether it's a temporary or permanent shock.
Joaquín Almunia, Commissioner for Economic and Monetary Affairs, warned that delays in turning around Europe's fiscal and social structures would only make the problems worse - especially in the current economic crisis. "The crisis is increasing public debt, and that increases the urgency of our task," he said. He called for long-term fiscal sustainability, an increase in overall employment rates, and reforms to adapt social systems to the changing situation.
The impact of aging across the EU member states over the next 50 years is expected to be highest in Luxembourg, Greece, Slovenia, Cyprus, Malta, The Netherlands, Romania, Spain and Ireland with public spending increases of seven per cent of GDP or more.
The "medium impact countries" - which will witness an increase in public spending of four to seven percentage points of GDP - are Belgium, Finland, Czech Republic, Lithuania, Slovakia, the United Kingdom, Germany and Hungary.
The last group of EU member states are the "low impact countries" which are expected to see an increase in public spending of four percentage points of GDP or less. Most of these countries have implemented substantial pension reforms, in several cases involving a partial switch to private pension schemes - Bulgaria, Sweden, Portugal, Austria, France, Denmark, Italy, Latvia, Estonia and Poland.
The panel of experts on aging at the forum agreed that more reform was urgently required. Facing down increased pension costs by reducing debt is an option that has been "derailed by the crisis," Mr Cottarelli said. Instead, further increases in retirement ages may be required, as may some rationalisation of health care - a much more politically sensitive issue.
According to the Aging Report, there is a window of opportunity - a period of about 10 years during which labour forces will increase - for implementing the structural reforms needed by aging societies. In the future, growth will have to come from increased productivity.
Swedish Finance Minister Anders Borg warned that the public still didn't appreciate the gravity of the aging trends, which need to be dealt with now. "If we want people to return to the labour force, there is a need for further labour tax cuts, especially for women and the low-skilled," he added.
Dick Sluimers of the APG ALL Pensions Group said the private sector was an "essential" element to any solution. "Further development of funded pension systems - preferably collective funded pension systems - is essential to supplement future generations with an adequate and sustainable retirement income," he said.
But he underlined the political risks of fundamental reform, pointing out that "future retirees may demand higher pension benefits through the ballot box". In The Netherlands, political parties for the elderly already have considerable power, he noted.
In addition, pension funds should be better organised and regulated, it was argued, to insure against a repeat of the implications of sharp falls in assets seen over the last year. Martine Durand, deputy director of the OCED, also emphasised the human consequences of pension reform.
Cutting entitlements for low-income pensioners might be sustainable on a fiscal level, she said, but probably not on a social level.
The Stockholm European Council in 2001 identified a three-pronged strategy to cope with the economic and budgetary challenges posed by aging populations, namely, reducing debt at a fast pace; raising employment rates and productivity; and reforming pension, health care and long-term care systems.
The European Commission identified five policy goals in October 2006 in its communication on the demographic future of Europe, namely: Promote demographic renewal in Europe by creating better conditions for families; promote employment in Europe with more jobs and longer working lives of better quality; make Europe more productive and dynamic; receive and integrate migrants in Europe; and secure sustainable public finances in Europe, thus guaranteeing adequate social security and equity between the generations.