1 Ageing populations: a real challenge for Europe. Frank Lierman, Chief Economist Dexia Bank SRI Roadshow May 2011

1

Ageing populations: a real challenge for Europe.

Frank Lierman, Chief Economist Dexia Bank

SRI Roadshow May 2011

2

Ageing populations: a real challenge for Europe

Ageing: a real world problem!

Total cost of ageing

Pensions in danger?

Health care costs are increasing faster

Risk of poverty

Which solutions?

Annexes

3

Overview of the 2009 projection of age-related expenditure

Total age-related

spending

GDP production

function

Population 2008-2060

EUROPOP2008Convergence scenario

Labour ProductivityProduction function

Labour forceCohort method

UnemploymentConvergence to ECFIN estimate

of NAIRU

Real interestrate (constant)

PensionsNational models

Education

Long-term care

Health care

Unemploymentbenefits

Source: Commission services, EPC


4

Dependency ratio of older people (65+ / 15-64).

0

10

20

30

40

50

60

Africa Asia Europe Latin

America

North

America

Oceania World

2007 2050


Source: United Nations, World Population Prospects, 2007.

5

Turnaround in the air?Ageing: a real world problem!

Number of live births in EU-27, 1980-2009 Number of deaths in EU-27, 1980-2009

Source: European Commission, Demography Report 2010, Eurostat

6

Total fertility rate and mean age of women at childbirth, 2009.Ageing: a real world problem!


7

Population pyramid EU-27

20000000 15000000 10000000 5000000 0 5000000 10000000 15000000 20000000

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-89

90+

Men Women

Source: European Commission, The 2009 Ageing Report


20000000 15000000 10000000 5000000 0 5000000 10000000 15000000 20000000

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-89

90+

Men Women

2008 2060

8

Dependency ratio of elder people (65+ / 15-64)Ageing: a real world problem!


20

25

30

35

40

45

50

55

60

65

2008 2020 2030 2040 2050 2060

EU Belgium Germany France Netherlands

9

Relative share of the age in 2008 (in % of total population)Ageing: a real world problem!

Source Eurostat:

16

67

17

4

17

66

17

5

14

66

20

5

18

65

17

5

18

67

15

4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU BE DE FR NL

14

56

30

12

16

58

27

10

13

55

32

13

17

57

26

11

15

58

27

11

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU BE DE FR NL

0-14 15-64 65+ 80+

2008 2060

10



Employment rates and Lisbon targets in the EU-27 (in %)

11

Employment projections, composition of employment by age groups (Euro area)

Young Older Prime Age



2007 2060

12

Population change by component, EU-27, 1961 – 2009Ageing: a real world problem!


13

Age structure could changeAgeing: a real world problem!

Source: European Commission, Demography Report 2010

Age structure of the population on 1 January 2009 and of immigrants in 2008, EU-27

Age structure of immigrants by basic citizenship groups, EU-27, 2008

14

Change in overall population: natural change and net migration, EU-27 (in thousands)Ageing: a real world problem!

Source: European Commission, Demography Report 2010

BEBE DEDE FRFR NLNL EU27EU27

Population 1.1.2009 10 753,1 82 002,4 64 367,0 16 485,8 499 703,3

Live births 127,3 665,1 825,6 184,9 5 371,9

Deaths 104,5 854,5 548,7 134,2 4 848,8

Natural change 22,8 - 189,4 276,9 50,7 523,1

Net migration 64,0 - 10,7 70,2 38,5 877,1

Total change 86,8 - 200,1 374,1 89,2 1 400,1

Population 1.1.2010 10 839,9 81 802,3 64 714,1 16 575,0 501 103,4

P

P

P

P

P

P

P

P

P: provisional data

15

Change in overall population: natural change and net migration, EU-27 (in thousands)Ageing: a real world problem!


16

Population of main geographic areas and selected countries as percentage of the population, 1950, 2000, 2050



17

Effective economic old-age dependency ratio (65+ / 15-64).Ageing: a real world problem!


18



Pensions in danger?


Risk of poverty

Which solutions?

Annexes


19

Cost of ageing in EU 27 (% point change of GDP)Total cost of ageing


20

Member States with low ageing costs (% of GDP)Total cost of ageing

Source: Commission services EPC

Unemployment benefits

Pensions Health care Education

Long-term care

EA

FR

EU

27

DE

NL

BE

21



Pensions in danger?


Risk of poverty

Which solutions?

Annexes


22

Pension schemes in some EU Member States

BEBE DEDE FRFR NLNL

Public pensionsPublic pensions

Minimum pension/social allowanceMinimum pension/social allowance

Old-age pensionsOld-age pensions

Early retirement pensionsEarly retirement pensions

Disability pensionsDisability pensions

Survivors pensionsSurvivors pensions

MT – SA

ER

ER

ER (wage earner); FR (self employed)

ER

MT – SA*

ER

ER

ER

ER

MT

ER

ER

ER – HC

ER

SA*

FR

-

ER

FR

Occupational pension scheme Occupational pension scheme

V* V* V M

Private pension schemePrivate pension scheme

Mandatory private schemeMandatory private scheme

Voluntary pension schemeVoluntary pension scheme

X

V*

X

V*

-

V*

X

V*


Pensions in danger?

MT: means tested V: voluntary participation ER: earnings related

SA: social allowances X: does not exist FR: flat rate

M: mandatory participation *: not covered by projection HC: partly covered by healthcare

23

Legal indexation rules in some EU Member States

BEBE DEDE FRFR NLNL

Public pensionsPublic pensions

Minimum pension/social allowanceMinimum pension/social allowance

Old-age pensionsOld-age pensions

Early retirement pensionsEarly retirement pensions

Disability pensionsDisability pensions

Survivors pensionsSurvivors pensions

CPI + LSA

CPI + LSA

CPI + LSA

CPI + LSA

CPI + LSA

In line with pensions & re-exam (5)

NI + sust

NI + sust

NI + sust

NI + sust

CPI

CPI

CPI

CPI

CPI

NI

NI

NI

NI

NI

Occupational pension scheme Occupational pension scheme

- - -70% NI & 30%

CPI

Private pension schemePrivate pension scheme

Mandatory private schemeMandatory private scheme

Voluntary pension schemeVoluntary pension scheme

-

-

-

-

-

-

-

-


CPI: consumer price inflation NI: nominal income growth

LSA: living standard adjustment sust: additional adjustment

Pensions in danger?

24

Statutory retirement age and average exit age

BEBE DEDE FRFR NLNL EU27EU27 EAEA

Exit age Male 2001

2007

57,8

61,6

60,9

62,6

58,2

59,5

61,1

64,2

60,4

61,9

60,2

61,6

Exit age Female 2001

2007

55,9

61,9

60,4

61,5

58,0

59,4

60,8

63,6

59,4

60,5

59,6

60,9

Total 2001Total 2001

20072007

56,856,8

61,661,6

60,660,6

62,062,0

58,158,1

59,459,4

60,960,9

63,963,9

59,959,9

61,261,2

59,959,9

61,361,3

Statutory retirement age 2008

Male

Female

65

64

65

65

60

60

65

65

-

-

-

-


Pensions in danger?

25

Pensions in danger?Decomposition of the public pension spending to GDP ratio over 2007 – 2060 (% of GDP)


2007 level 10,0 10,4 13,0 6,6 10,1 11,1

Dependency ratio contribution 7,4 7,9 8,4 6,6 8,7 8,8

Coverage ratio contribution - 0,9 -1,9 - 2,2 - 1,5 - 2,6 - 1,9

Employment effect contribution - 0,5 - 0,8 - 0,5 - 0,2 - 0,7 - 0,7

Benefit ratio contribution - 1,0 - 2,2 - 4,0 - 0,6 - 2,5 - 2,9

Interaction effect - 0,3 - 0,8 - 0,7 - 0,4 - 0,6 - 0,7

2060 level 14,7 12,8 14,0 10,5 12,5 13,8


26

Pension expenditure and benefit ratioPensions in danger?


27

Change in the public pension/GDP over 2007-60 (in percentage points)


Pensions in danger?

28

Privately managed funded pension coverage and contributions in the EU, 2008

Source: OECD

Pensions in danger?

29



Pensions in danger?

Health care costs are increasing faster.

Risk of poverty

Which solutions?

Annexes


30

Ageing report – Economic and budgetary projections for the EU-27 Member States (2008-2060)



31

Total expenditure on healthcare and life expectancy in the EU member states

Source: Eurostat and OECD


32

Public spending on health care (% of GDP) (*)


Level 2007 7,6 7,4 8,1 4,8 6,7 6,7

Change 2007 – 2060

% of GDP

%

1,2

16

1,8

24

1,2

15

1,0

20

1,5

22

1,4

21

Level 2060 8,8 9,2 9,4 5,8 8,2 8,1

Difference to pure demographic scenario

- 0,2 - 0,2 - 0,2 - 0,1 - 0,2 - 0,2



(*) AWG reference scenario

33

Factors pushing up healtcare costsHealth care costs are increasing faster

Demand side Demografic structure of the population Developments in health status Individual and national income

Supply side Technology Legal and institutional setting Human and physical capital

34

Public expenditure on long-term care (% of GPD) (*)


Level 2007 1,5 0,9 1,4 3,4 1,2 1,3

Change 2007 – 2060

% of GDP

%

1,4

93

1,4

153

0,8

58

4,7

140

1,1

94

1,4

105

Level 2060 2,9 2,4 2,2 8,1 2,4 2,7

Difference to pure demographic scenario

- 0,2 - 0,1 - 0,1 - 0,5 - 0,1 - 0,1



(*) AWG reference scenario

35



Pensions in danger?


Risk of poverty

Which solutions?

Annexes


36

Expenditure on social protection benefits (gross, by function, in % of GDP – 2007)

Source: Eurostat – ESSPROS 2007

Risk of poverty

EU-27

0

5

15

20

25

30

35

10

BE DE FR NL

Housing and social exclusion n.e.c.

Unemployment

Family / Children

Sickness / Health care

Old age and survivors

Disability

37

At-risk-of-poverty rate and illustrative value of the at-risk-of-poverty thresholds (single adult households); 2008.

Source: EU-SILC (2008), dk*: values including imputed rent²

Risk of poverty

38

At-risk-of-poverty rate by age group, 2008


Risk of poverty

EU-270

5

15

20

25

10

BE DE FR NL

Children (aged 0 -17).

Working population (aged 18 – 64)

Elderly (aged 65+)

39



Pensions in danger?


Risk of poverty

Which solutions?

Annexes


40

Structural reformsWhich solutions?

From a “pay as you go” regime towards a “capitalisation” regime

From a “defined benefit” regime towards a “defined contribution” regime

The goal of each reform is to set up an equilibrium between

“adequacy” and “sustainablilty”

41

Parametrical reformsWhich solutions?

Source: BNB, Les réforms des régimes de pension dans les pays de l’UE 15

Fiscal sustainability

Social sustainability

Receipts ↑

Actual retirement age ↑

Benefits↓

Tax-like advantages ↓

Minimum guarantees↑

2nd and 3rd pillar pensions ↑ Indexations and adaptations to well being ↓

Legal retirement age ↑

Early retirement options ↓

Penalties for early retirementand incentives to stay

Benchmark career ↑

Least favourable period

(Portion of) salary considered ↓

Salary raises ↓

Reference salary↓

Objectives that are contradictoryin the short term

42

Reform of public sector employeesWhich solutions?

Source: BNB, Les réforms des régimes de pension dans les pays de l’UE 15

BEBE DEDE FRFR NLNL

Longer life spans or raising of the minimum retirement age

X X X

Obstacles to early retirement and promotion of later retirement

X X X X

Lengthening contribution times X X X

Reduction in retirement benefits X X X

43

Swedish first-pillar reformWhich solutions?

Source: Sunden, The Swedish experience wtih pension reform, 2006

Before the reformBefore the reform After the reformAfter the reform

Basic systems

(other than those based on salaries)

• universal basic allowance

• when there is no sufficient working income, right to an additional pension and a housing allowance

Minimum guaranteed (residual) pension and housing allowance funded by general fiscal resources

Salary-based systems Supplemental allocation based on defined benefit covering salaries up to a certain ceiling:

• 15 best salaries

• price indexation (also for the ceiling)

• 30 years of contributions

• 18.5% contribution rate

• normal retirement age: 65 years, but early retirement possible at 60

Allowance based on defined contributions covering salaries up to a certain ceiling:

• benefits based on paid contributions

• yield and indexation linked to salaries (also for the ceiling)

• 18.5% contribution rate:

- 16% for notional accounts

- 2.5% capitalisation

• flexible retirement age beginning with 61 years

Survival pensions Funded by Social Security contributions

Separate system funded by general fiscal resources

44



Pensions in danger?


Risk of poverty

Which solutions?

Annexes


45

AnnexesUnited Nations ageing index (= number 60+ per 100 0-14 years)

0

50

100

150

200

250

Africa Asia Europe Latin

America

North

America

Oceania World

2007 2050

Source: United Nations, World Population Prospects, 2007

46

Number 60+ in % of population

0

5

10

15

20

25

30

35

40

Africa Asia Europe LatinAmerica

NorthAmerica

Oceania World

2007 2050

Annexes


47

Averge age (in years)

0

5

10

15

20

25

30

35

40

45

50

Africa Asia Europe LatinAmerica

NorthAmerica

Oceania World

2007 2050

Annexes


48

Lack of children (number of births per woman)

0

0,5

1

1,5

2

2,5

3

3,5

1960 1980 2000 2008 2020 2040 2060

EU Belgium Germany France Netherlands

Annexes


49

Age-related government expenditure, 2007-2035 (percentage of GDP)


Pension 2007

2007-2035

10,0

4,4

10,4

1,4

13,0

1,4

6,6

1,9

10,2

1,7

11,1

2,1

Healthcare 2007

2007-2035

7,6

1,0

7,4

1,4

8,1

1,0

4,8

0,9

6,7

1,0

6,7

1,0

LT care 2007

2007-2035

1,5

0,7

0,9

0,7

1,4

0,5

3,4

2,8

1,2

0,6

1,2

0,6

Unemployment benefits

2007

2007-2035

1,9

- 0,4

0,9

- 0,3

1,2

- 0,3

1,1

- 0,4

0,8

- 0,2

1,0

- 0,2

Education 2007

2007-2035

5,5

- 0,1

3,9

- 0,5

4,7

0,0

4,6

- 0,2

4,3

- 0,3

4,2

- 0,3

Total 2007Total 2007

2007-20352007-2035

26,526,5

5,65,6

23,623,6

3,63,6

28,428,4

2,72,7

20,520,5

6,96,9

23,123,1

2,72,7

24,324,3

3,23,2

Annexes


50

Average gross public pension expenditure in 2000 and 2007 (% of GDP)


Annexes

16

14

0

2

4

4

8

10

12

200

0

200

7

200

0

200

7

200

0

200

7

200

0

200

7

BE DE NL FR

Old age pension

Other pensions

51

Total expenditure on health per capita vs GDP per capita, 2007

Source: Eurostat and OECD Health data

Annexes

52

At-risk-of-poverty rate by age group, 2008


Annexes

53

Total, public and private expenditure on health as % of GDP, 2007

Source: Eurostat

Annexes

(RHS)

Documents

1 Ageing populations: a real challenge for Europe. Frank Lierman, Chief Economist Dexia Bank SRI Roadshow May 2011