The European Commission has released the 2015 Ageing Report, a document focusing on the costs of projected demographic change until 2060. The report is based on 2013’s demographics and commonly agreed assumptions on fertility and life expectancy. Building on this, the Commission has developed projections for the development of expenditure on health, long-term care, education, pensions and unemployment benefits. The Ageing Report will be used by the Commission to assess the need for reforms in member states in the European Semester process.
Demographic development: larger population, higher participation, but a reduced workforce
While the population in 2060 will be slightly larger than today, mainly because of inward migration, it will be much older on average. However, this development will be unevenly distributed across member states: most Central and Eastern European countries, Germany and some Mediterranean countries will decrease in population, Northern and Western European countries are expected to grow. The so-called dependency ratio (people aged 15-64 vs people aged 65 and above) is expected to be halved from 4 younger to 1 older person towards 2 younger persons for 1 older one.
At the same time, labour market participation rates are expected to increase (from 77% to 80%), mainly by older workers working longer, but also by the increasing participation rates of younger women. A consequence is a projected narrowing of the gender pay gap. Despite increased participation rates, the total workforce will decline by 8% as a result of the decline of the number of middle-aged persons. Employment rates will rise from 68% to 75% in 2060.
The costs of ageing: 2% of GDP in 2060, with less need for unemployment benefits
The change foreseen by the Commission in strictly age-related public expenditure is about 2 percentage points of GDP in 2060. Most of this additional spending will come from health and long-term care. In terms of pensions, an increase in expenditure is foreseen until 2040, when pension expenditures will start to decline again. At the same time, increasing employment rates and the reduction of the labour force will result in lower unemployment benefits, bringing the total increase of expenditure to 1.4 percentage points of GDP.
The regional divergences are significant, again: expenditures will fall in Croatia, Greece, Latvia, France, Denmark, Cyprus, Italy and Spain, rise only moderately in Bulgaria, Portugal, Estonia, Sweden, Hungary, Poland, Ireland, Romania, Lithuania and the UK, and rise much more (2.5-6.8 percentage points) in Finland, Austria, the Czech Republic, the Netherlands, Germany, Belgium, Luxemburg, Malta and Slovenia.
A challenge to pension adequacy
These changes are calculated with constant pension legislation. Pension reforms will change the outcome of these projections in the future, and changes might be possible, as there is a challenge to pension adequacy. With unchanged pension legislation, replacement rates (average pensions to average wages) will fall by 9 percentage points on average, and up to 20 percentage points in Cyprus, Portugal and Spain – in some countries, this will result in a 30% replacement rate only.
Ageing less costly than in the 2012 report
In the last Ageing Report, dating from 2012, the costs of ageing were estimated at 3.5 percentage points of GDP in 2060. That is 1.5 percentage points of GDP more than in the 2015 edition. This outcome is mainly due to pension reforms which have lowered projected expenditures, and to revised demographic data.