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, 25-27 June 2013 1
Outline Longer-term challenges 2012 Ageing Report Demographic prospects Economic impact of ageing populations Overall budgetary effects of ageing populations 2
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
2012 Ageing Report overview Labour force Pensions National models - Participation - Employment - Unemployment Population 2010-2060 Labour productivity GDP Health care Long-term care Total agerelated spending Real interest rate Education Unemployment benefits
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 Demography (1) 3.0 Total fertility rates 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 European Union Euro Area
Demography (2) 92 Life expectancy at birth, men (in years) 88 84 80 76 72 68 64 60 European Union Euro Area 92 Life expectancy at birth, women (in years) 88 84 80 76 72 68 64 60 European Union Euro Area
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 Demography (3) 2500000 Net migration flows, 1965-2060 2000000 1500000 1000000 500000 0-500000 -1000000 European Union Euro Area
Demography (4) EUROPOP 2010 Key assumptions 2060 EU27 FR 2010 2060 2010 2060 Fertility rate 1.6 1.7 2.0 1.9 Life expectancy at birthmen 76.2 84.0 77.9 85.1 Life expectancy at birthw omen 82.2 88.5 84.6 90.0 Net migration flow s (thousands) 1043 945 72 63 Net migration flow s (as % of population) 0.21 0.18 0.11 0.09 2010
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 80 70 Old-age dependency ratio (65+ / 15-64) EU: 26% to 52% 60 50 40 30 20 10 0 2010 2010-2030 2030-2060
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 2001-2010 average kept constant over the period of projections 2) Incorporate the impact of pension reforms
Pension reform (1) example of IT
Pension reform (2) example of IT
Cohort effects particularly relevant for women Employment rate, EU in 2010 and 2060 (%) EU27 100 90 80 70 60 50 40 30 20 10 0 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 ER Women-2010 ER Women-2060
2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 The consequences of ageing populations on employment 320 75 300 74 73 280 260 240 220 until 2012: rising employ ment and slow growth in workingage population 2013-2022: rising employment, declining working-age population from 2023 onward: both employment and working-age population decline 72 71 70 69 68 200 67 66 180 65 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
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
Potnetial GDP growth: Total factor productivity (1) Actual and potential TFP growth in the EU-15, % change
Potnetial GDP growth: Total factor productivity (2) Productivity level trends in the Euro area vs. the US EA Capital Intensity + TFP (US=100) 110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0 70.0 1997 2000 2003 2006 2009 2012 2015 2018 TFP Capital Intensity
Potential growth rates decline due to shrinking working age populations (%) Potential GDP growth rates 2.50 2.00 1.50 1.00 0.50 0.00 EU27 EA17 EU15 EU12 2010-2020 2021-2040 2041-2060 18
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Potential growth rates decline due to shrinking working age populations 3.0 Potential GDP growth - EU27 2.5 2.0 1.5 1.0 0.5 0.0 2009 AR 2012 AR 19
2012 Ageing Report overview Labour force Pensions National models - Participation - Employment - Unemployment Population 2010-2060 Labour productivity GDP Health care Long-term care Total agerelated spending Real interest rate Education Unemployment benefits
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What next? 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Debt sustainability analysis 2014 2016 2018 2020 2022 2024 2026 2028 2030 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 110 100 90 80 70 60 50 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
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