Report confirms huge challenge to pension systems

The demographic challenge is growing but the EU has come a good deal closer to winning the race for balanced pension schemes as the population grows older, says an EU report.

The key findings of the report are: 

  • Europe’s population will be older in 2050, with a much smaller population of working age.  

Age_pyramids_04_50.png

Age pyramids for EU25 population in 2004 and 2050                                                              Source: Economic Policy Committee

  • While the total population of the EU25 will fall only slightly from 457 to 454 million (0.6%) between 2004 and 2050, the population of working age will fall disproportionately by 48 million (or 16%). The elderly population above the present retirement age of 65 years will rise even more disproportionately by 58 million (77%). 
  • This will lead to a situation where higher employment rates will become unavoidable, while the number of employed persons will continue to fall. Growth potentials will therefore decline also. 

Pot_growth_04-50.png

Potential growth rates and their determinants (employment/productivity)               
Source: Economic Policy Committee

The annual average potential GDP growth rate in the EU25 as a whole is projected to decline from 2.4% in the period 2004-10 to 1.9% in the period 2011-30 and to only 1.2% between 2031 and 2050.

Pension_spending_04-50.png  

Decomposition of the driving forces of pension spending                                        Source: Economic Policy Committee

 

Positions

The Economic Policy Committee says that the projections "confirm the large potential benefits of pension reform", as well as "the validity of the Lisbon strategy and the need to vigorously pursue measures that raise labour supply/utilisation and enhance productivity." The researchers say that "overall, the projections confirm previous research saying that Europe faces a significant budgetary challenge posed by ageing populations." 

Economic and Monetary Affairs Commissioner Joaquín Almunia said: "While the process of an ageing population cannot be turned around, the consequences for prosperity and sustainability lie in the hands of governments. Some Member States have already carried out reforms to avoid overburdening future generations. But there is no room for complacency. Member States should exploit a fast-closing window of opportunity to intensify reform efforts, especially in those cases where the long-term sustainability of public finances is most at risk. Unless this is done, many EU countries, from the old to the new members, will simply not be able to face the cost; not when there will be two workers per elderly citizen as opposed to a ratio of four to one now. Delays will simply increase the cost and pain of adjustment, which is not fair for our children and grandchildren. The prospects of much lower growth combined with the risks to the sustainability of public finances vividly underlines the need to live up to commitments to implement the Lisbon strategy and to modernise welfare systems."

Background

The Commission and the Economic Policy Committee have jointly prepared a report based on the demographic challenge up to 2050. The report, which is based on new, more detailed projections on the economic and budgetary costs for member states, is likely to be adopted by the ECOFIN council on 14 February 2006.

Further Reading