The Economic Impact of Ageing Populations in the Eu25 Member States

Abstract

This paper presents an assessment of the overall economic impact of ageing for the EU Member States. It draws upon the macroeconomic assumptions developed by the Ageing Working Group attached to the Economic Policy Committee and the Directorate General for Economic and Financial Affairs for the purpose of making age related expenditure projections. The paper presents and analyses projections of the impact of ageing populations on the labour market using a refined cohort approach by age and gender, as well as projections for potential economic growth rates up to 2050. The projections point to pressing economic policy challenges for the EU. From an economic perspective, potential growth rates and living standards are projected to fall to levels below those observed in recent decades: moreover, the sources of economic growth will alter over time, with productivity becoming the dominant source. Fiscal challenges will come from both a higher share of the total population in older age cohorts and a decline in the share of the population that is economically active. As regards policy conclusions, the paper underlines the critical need for further labour market reforms, and the possible need for the EU to look beyond the Lisbon employment targets and deadlines. Even if the EU as a whole achieves the Lisbon employment targets, this will not be sufficient to offset the effects of demographic change and considerable unused labour capacity would remain in many Member States. The paper also argues that ageing is an evolving process, and that a key challenge will be to develop labour market and welfare state policies that are sustainable in the face of uncertain economic and demographic developments. Current financing problems in pension schemes stem to a large extent from the failure of contribution/entitlement parameters in public pension schemes to adjust in the face of increased life expectancy. It will be important to ensure that retirement behaviour takes due account of future increases in life expectancy.

Keywords: ageing population, pension reforms, productivity, labour force, GDP growth, production function

JEL Classification: J10, J11, J18, J21, J26, I0, O4, H55