Angela Maddaloni, Alberto Musso, Philipp Rother, Thomas Westermann, Melanie Ward-Warmedinger
From The Economist, 14 June 2007: Europe is fast becoming a barren, ageing, enfeebled place. Vast numbers of old people, [..] will be looked after, or neglected, by too few economically active adults, supplemented by restless crowds of migrants. The combination of low fertility, longer life and mass immigration will put intolerable pressure on public health, pensions and social services, leading (probably) to upheaval. Maybe this looks a bit gloomy, but
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Overview
Look at the impact of population ageing for:
Economic growth
Labour markets
Public finances Financial markets
1.5
United States
1.0
0.5
0.0
-0.5
euro area
-1.0 1950-55 1960-65 1970-75 1980-85 1990-95 2000-05 2010-15 2020-25 2030-35 2040-45
5
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
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4 United States 3
2 euro area
W orking age population contribution Labour productivity contribution Labour utilisation contribution Real GDP growth
1985
1990
1995
2000
8
7 6 5 4 3 2 1 0 -1 -2 1965 1970
W orking age population contribution Labour productivity contribution Labour utilisation contribution Real GDP growth
1975
1980
1985
1990
1995
2000
9
W orking age population contribution Labour productivity contribution Labour utilisation contribution Real GDP growth
1995
2005
2015
2025
2035
2045
10
7 6 5 4 3 2 1 0 -1 -2 1965
W orking age population contribution Labour productivity contribution Labour utilisation contribution Real GDP growth
1975
1985
1995
2005
2015
2025
2035
2045
11
7 6 5 4 3 2 1 0 -1 -2 1965
1975
1985
1995
2005
2015
2025
2035
2045
12
W orking age population contribution Labour productivity contribution Labour utilisation contribution Real GDP growth
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Overview
Go through the impact on:
Economic growth
Labour markets
Public finance Financial markets What are the options for reforms?
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um gi l Be
m er G
y an
e ec e r G
n ai p S
e nc a Fr
d an l Ire
Ita
ly m xe u L
g ur o b
s nd a l er th e N
ri st u A
l ga u t r Po
d an l in
Source: Eurostat
15
Source: Eurostat
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Invest in quality of education, research and development, increase lifelong learning and tackle old age discrimination
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The stabilisation of the old-age dependency ratios through migration alone is unlikely, due to the large number of migrants that would be required The EC states that using migration to fully compensate the impact of demographic ageing on the labor market is not a realistic option.
18
Overview
Go through the impact on:
Economic growth
Labour markets
Public finances Financial markets What are the options for reforms?
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Offsetting effects through unemployment and education expenditure are small and uncertain The EPC/European Commission projections may still turn out too low (e.g. favourable assumptions re. labour productivity) Recent projections by the OECD point to a much more gloomy scenario, especially concerning the cost increases of public spending on health and long-term care.
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Parametric reform of conventional pay-as-you-go pension systems necessary, but most likely insufficient Systemic pension reform: shift part of pension financing to funded arrangements and reduce exposure to demographic risks
One option: notional defined contribution (PAYG) system combined with funded pillar
Health care: raise efficiency through setting the right incentives for all participating parties (insurers, providers, patients)
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Overview
Go through the impact on:
Economic growth
Labour markets
Public finance Financial markets What are the options for reforms?
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Impact on prices and quantities due to changes in savings patterns and savings allocations of people belonging to different generations Changes in financial structures linked to ongoing pension reforms
Workers are required to save more and contribute to funded pension arrangements
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52
56
60
64
68
72
76
80
26
27
28
Recent developments in some countries (US, UK but also most of euro area countries) suggest that households may treat real estate as a source of portfolio diversification
may be risky: a future house prices meltdown?
29
30
80
60
40
20
0
Belgium Germany Italy J apan Netherlands S weden UK US
Source: OECD
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Portfolio allocation of pension funds likely to exert significant pressures on financial markets
possible shifts towards less risky assets as people become older?
The extent of the impact is likely to depend on the financial structure and in particular on the social security arrangements
if countries in continental Europe shift more strongly towards funded systems, financial asset prices could in theory show more pronounced swings related to demographic changes
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Conclusions
Scenario analysis shows that projected demographic trends imply a decline in average GDP growth in the euro area to around 1% from 2020 to 2050
It is important to implement the European Employment Guidelines to mitigate the impact of population ageing
Reforms of pension systems and health care arrangements are needed to counteract pressures on public expenditures
Impact on financial markets will derive from changes in portfolio sizes/allocations, the likely increase in the role of financial intermediaries and the related adjustment in the supply of some financial instruments
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