Simply put, the fact that few babies are being born in Europe is becoming a big problem. To keep the population from shrinking, Europe requires a natural replacement rate of 2.1 children per woman. In 2008, its fertility rate was just 1.52 children per woman. Falling fertility rates have become a hallmark of modern, affluent societies and will hasten their economic demise. Depending on migration is no long-term solution to Europe’s greying population.
As from 2012, Europe’s working age population (15 to 64 years) will start to decline. The “baby boom” generation is reaching pensionable age and Europe’s economic growth will have to be driven by increased labour productivity and imported labour. Europe’s share of world population will continue to fall from eight per cent (2007) to five per cent (2050).
Changes in global demography will inevitably reshape the geopolitical landscape. World population will grow to an estimated nine billion by 2050 due to higher birth rates in the developing world, especially Asia and Africa. Inevitably, either economic activity will increasingly shift to these regions or more people will migrate to the developed countries. Europe already takes up an annual inflow of 1.68 million migrants. This, while being an important economic safety valve, generates a multitude of socio-cultural issues, such as the “Islamisation“of Europe. The EU’s 2009 Aging Report states that inward net migration will continue albeit at a decelerating rate. The report projects, without giving an adequate explanation, that the inflow will fall by half to some 800,000 annually by 2060.
Europeans can also expect to live longer. In 2060, males will have a life expectancy of 84.5 years and females 89 years. The present life expectancy in the EU is 76 years and 82 years respectively. Over this period, while Europe’s population will grow by 10 million people to 505 million, the number of elderly people (aged 65 years or more) will increase by 66 million to reach the 151 million mark. The European Commission estimates that while at present there are four working-age people (15-64) for every elderly person, by 2060 there will be only two. This poses a double challenge: less revenue for public pensions and more retired people to support.
An aging population also has significant implications for age-related public expenditure such as education, healthcare and long-term care services. On the basis of current policies, by 2060, age-related public expenditure in the EU is projected to increase by five percentage points of GDP (for Malta, the increase is twice as much). Half of this increase in public expenditure will be on pensions. Under the present pay-as-you-go (PAYG) pension system, today’s employees pay for today’s pensioners. This system works well as long as the labour force is expanding and the economy is growing. The economic scenario in the EU is not so promising.
The European Commission is outwardly being cautious in its approach to pensions as technically these are still the responsibility of national governments.
However, the EU’s hands have been strengthened by the current emphasis on fiscal discipline and transparency.
It did not look right when the Germans, many of whom retire at 65, were forced to bail out the Greeks who have been able to retire at 55. Due to the economic crisis many Europeans have seen the value of their private retirement funds erode and 73 per cent of Europeans now expect to receive lower pensions. As many as 54 per cent of Europeans are now worried that they will be poor in old age.
At the 2002 Barcelona European Council, member states had promised to push up the retirement age to 65. Today, fewer than 50 per cent of Europeans are still in employment by the age of 60. The EU is not convinced that all member states have the political will to implement the necessary pension reforms. The current economic situation does not make things any easier for these governments.
Last month the European Commission embarked on a four-month consultation process (ending November 15, 2010). How best can the EU confront the pensions challenge? The main message coming through the consultation document published as a Green Paper is that European employees need to dig into their pockets so as to ensure that their pensions remain “adequate”. Pension reform is essentially meant to reduce the onus on government and pass it on to employees (and partly their employers) by obliging, or inducing, them to take up private pension schemes or by making them work longer before being entitled to a pension.
EurActiv.com reported László Andor, EU Employment and Social Affairs Commissioner, saying that “the choice we face is poorer pensioners, higher pension contributions or more people working more and longer”. A pretty defeatist attitude.
The EU denies that it is pushing for the retirement age to be raised to 70 years. It fears concerted trade union backlash. The EU emphasises that each member state has to find a better balance between “time at work” and “time in retirement”. A promising policy option, it says, is that which automatically links the retirement age to life expectancy.
For many EU member states these measures are a Hobson’s choice. In the present circumstances they have to be seen as being fiscally responsible. In my next article, I will try to give a general assessment of the Green Paper.
This is the first in a series of three articles on pensions.
fms18@onvol.net