The long term policy view: Shifting Wealth, Income Inequalities and Demography - The Ageing Report

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Preston Simmons
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1 The long term policy view: Shifting Wealth, Income Inequalities and Demography - The Ageing Report Per Eckefeldt European Commission Directorate General for Economic and Financial Affairs XXV Villa Mondragone International Economic Seminar Economics Foundation University of Rome Tor Vergata Rome, June

2 Outline Longer-term challenges 2012 Ageing Report Demographic prospects Economic impact of ageing populations Overall budgetary effects of ageing populations 2

3 Joint Commission (ECFIN)-EPC (AWG) longterm projection exercise 2012 Ageing Report Fourth update of the joint Commission (ECFIN) EPC (AWG) long-term projections (previous 2001, 2006 and 2009). Mandate of the ECOFIN Council (May 2009): "The Economic Policy Committee is invited to update, on the basis of a new population projection to be provided by Eurostat, its analysis of the economic and budgetary implications of ageing by the autumn of 2012, or earlier if deemed necessary." 3

4 2012 Ageing Report overview Labour force Pensions National models - Participation - Employment - Unemployment Population Labour productivity GDP Health care Long-term care Total agerelated spending Real interest rate Education Unemployment benefits

5 Demography (1) 3.0 Total fertility rates European Union Euro Area

6 Demography (2) 92 Life expectancy at birth, men (in years) European Union Euro Area 92 Life expectancy at birth, women (in years) European Union Euro Area

7 Demography (3) Net migration flows, European Union Euro Area

8 Demography (4) EUROPOP 2010 Key assumptions 2060 EU27 FR Fertility rate Life expectancy at birthmen Life expectancy at birthw omen Net migration flow s (thousands) Net migration flow s (as % of population)

9 IE UK NO DK BE LU SE FR NL FI CY EU15 AT EU27 EA17 CZ EE MT ES GR IT LT PT SI HU DE BG EU12 SK PL RO LV Population Old-age dependency projections: ratios Old-age dependency ratio (65+ / 15-64) EU: 26% to 52%

10 Participation rate projections: the cohort approach The cohort approach: participation rates are projected for each single year of age and gender Two Main Features of the Methodology: 1) Use of entry rates and exit rates average kept constant over the period of projections 2) Incorporate the impact of pension reforms

11 Pension reform (1) example of IT

12 Pension reform (2) example of IT

13 Cohort effects particularly relevant for women Employment rate, EU in 2010 and 2060 (%) EU ER Women-2010 ER Women-2060

14 The consequences of ageing populations on employment until 2012: rising employ ment and slow growth in workingage population : rising employment, declining working-age population from 2023 onward: both employment and working-age population decline working-age population (20-64) total employment (20-64) employment rate (20-64) Phase 1 : rising employment and slow growth in working-age population. Phase 2 : rising employment, declining working-age population Phase 3 : both employment and working-age population decline

15 Potential economic growth GDP POP POP15 64 POP L POP15 64 TFP (1 ) K L Employment growth Productivity growth GDP growth = Δ labour input (Δ population + Δ Active-age 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

16 Potnetial GDP growth: Total factor productivity (1) Actual and potential TFP growth in the EU-15, % change

17 Potnetial GDP growth: Total factor productivity (2) Productivity level trends in the Euro area vs. the US EA Capital Intensity + TFP (US=100) TFP Capital Intensity

18 Potential growth rates decline due to shrinking working age populations (%) Potential GDP growth rates EU27 EA17 EU15 EU

19 Potential growth rates decline due to shrinking working age populations 3.0 Potential GDP growth - EU AR 2012 AR 19

20 2012 Ageing Report overview Labour force Pensions National models - Participation - Employment - Unemployment Population Labour productivity GDP Health care Long-term care Total agerelated spending Real interest rate Education Unemployment benefits

21 21

22 What next? Debt sustainability analysis Government debt is very high in the EU, but attaining the budgetary targets (MTOs) would set it on a clear downward path to 60% of GDP (% of GDP) Gross debt as % of GDP - EU27 - Medium term debt projections COM no-policy change scenario COM + Shock ( -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015) COM + Shock (+1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015) COM consolidation scenario (0.5% per year on SB) in order to achieve MTO COM consolidation scenario (1% per year on SB) in order to achieve MTO SCP scenario 22

23 Thank you for your attention!

Report prepared by the Economic Policy Committee and the European Commission (DG ECFIN)

Report prepared by the Economic Policy Committee and the European Commission (DG ECFIN) Special Report n 1/2006 EUROPEAN ECONOMY EUROPEAN COMMISSION DIRECTORATE-GENERAL FOR ECONOMIC AND FINANCIAL AFFAIRS The impact of ageing on public expenditure: projections for the EU25 Member States on