Demographic Uncertainty and the Sustainability of Social

Welfare Systems

Jukka Lassila

ETLA

Finland

DEMWEL

• EU’s 5th Framework research project

• Partners from Belgium, Denmark, Finland, France, Germany, the Netherlands, Spain and UK.

• Utilizes population research in UPE (another 5th framework project)

Population ageing in Europe is due to

• Changes in fertility– current fertility leads to negative growth– baby-boom cohorts retire

• Decreases in mortality

• Forecasts made in the 1940's missed the baby-boom in all industrialized countries,

• improvements in life expectancy have been underestimated in most industrialized countries,

• the decline in fertility in the 1990's in the Mediterranean countries was not anticipated by the national forecasters,

• migration has surprised forecasters in many countries such as the Netherlands.

Quantifying demographic uncertainty

• Use forecast errors– too few actual forecasts– generate baseline forecasts afterwards

• Fertility: assume the current value to persist

• Mortality: assume the decline observed in most recent 15 years to continue

Forecast of the Old Age-dependency Ratio in Finland

Expenditure on social welfare and health care in Finland, % of GDP

If demographic projections are uncertain,

• how uncertain are the ageing cost projections?

• how should that affect policy targets? How does it affect the use of policy instruments? Can new instruments be designed?

• how can economic methods deal with demographic uncertainty?

Combining stochastic population simulations with an economic model creates a useful tool

What if we are unlucky in future demographics?– spell out now how sustainability will be upheld

What if we are lucky in future demographics?– avoid too high taxes now (e.g. excess funding for

pensions)

– Whatif we are lucky?

Wise ageing policies

should be prepared

for a worse demographic future than the expected one