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7/27/2019 Maddaloni Musso Rother Westermann Warmedinger Prezentacija
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1
Macroeconomic implications ofdemographic developments
in the euro area
Angela Maddaloni, Alberto Musso, Philipp Rother,
Thomas Westermann, Melanie Ward-Warmedinger
13th Economic Conference, Dubrovnik, 28 June 2007
Disclaimer: Any views expressed are only the authors own and do not
necessarily reflect the views of the ECB or the Eurosystem
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The current situation
From The Economist, 14 June 2007:
Europe is fast becoming a barren, ageing, enfeebled place.
Vast numbers of old people, [..] will be looked after, or
neglected, by too few economically active adults, supplemented
by restless crowds of migrants. The combination of low fertility,
longer life and mass immigration will put intolerable pressure
on public health, pensions and social services, leading
(probably) to upheaval.
Maybe this looks a bit gloomy, but
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The current situation
Available projections suggest that all Western countries face the
prospect of population ageing
The problem is even more pronounced in the euro area, although
there are considerable differences across countries concerning
the pace of ageing
Important consequences for economic growth, labour markets,
public finances and possibly financial markets
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Overview
Look at the impact of population ageing for:
Economic growth
Labour markets
Public finances
Financial markets
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Impact on growth - demographic projections
Notwithstanding the high uncertainty surrounding population
projections, working age population growth is projected to turnnegative after 2010
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1950-55 1960-65 1970-75 1980-85 1990-95 2000-05 2010-15 2020-25 2030-35 2040-45
euro area
United States
working age population growth
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Impact on growth - demographic projections
Compared to the US, euro area dependency ratio is growing muchfaster. After 2050 every third person will be older than 64
0
5
10
15
20
25
30
35
40
45
50
55
60
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
euro area
United States
old age dependency ratio
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Impact on growth demographic projections
The net migration rate is expected to fall up to 2010 and thereafterto stabilise in the euro area
1
2
3
4
5
1995-00 2010-15 2025-30 2040-45
United States
euro area
Net migration rate (1,000 population)
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Impact on growth - backward
In the euro area the contribution of demographic factors to growth
decreased since 1980, reflecting increasing dependency ratio and adecline in labour productivity linked to ageing
Euro area growth accounting
-2
-1
0
1
2
3
4
5
67
1965 1970 1975 1980 1985 1990 1995 2000
Working age population contributionLabour productivity contributionLabour utilisation contributionReal GDP growth
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Impact on growth - backward
Working age population growth contributed to real GDP growth
in the US more than twice than in the euro area
US Growth Accounting
-2
-1
01
2
3
4
5
67
1965 1970 1975 1980 1985 1990 1995 2000
Working age population contributionLabour productivity contributionLabour utilisation contributionReal GDP growth
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Impact on growth forward-scenario 1
Assuming the labour productivity and labour utilisation evolve on
average as in the past, there will be a negative impact on euro areagrowth
Euro Area Growth Accounting
-2
-1
0
12
3
4
5
6
7
1965 1975 1985 1995 2005 2015 2025 2035 2045
W orking age population contributionLabour productivity contributionLabour utilisation contributionReal GDP growth
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Impact on growth forward-scenario 1
Same scenario for the US
US Growth Accounting
-2
-10
1
2
3
4
56
7
1965 1975 1985 1995 2005 2015 2025 2035 2045
Working age population contributionLabour productivity contr ibutionLabour utilisation contributionReal GDP growth
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Impact on growth forward-scenario 2
Assuming the labour productivity and labour utilisation grow in
line with more optimistic assumptions, still there will be a negativeimpact on euro area growth
-2
-1
0
1
2
3
4
5
67
1965 1975 1985 1995 2005 2015 2025 2035 2045
Working age population contributionLabour productivity contributionLabour utilisation contribution
Real GDP growth
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Overview
Go through the impact on:
Economic growth
Labour markets
Public finance
Financial markets
What are the options for reforms?
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Increase labour market participation, employment, productivity:there
issignificant potential for female participation
Labour markets: current situation
Source: Eurostat
Female participation rate
0
10
20
30
40
50
60
70
80
Belgium
German
y
Greece
Spain
Fran
ce
Irela
ndIta
ly
Luxembo
urg
Netherla
nds
Austria
Portu
gal
Finlan
d
Euro area average%
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and for an increased participation of 55-64 years old
Labour markets: current situation
Source: Eurostat
55-64 participation rate
0
10
20
30
40
50
60
Belgi
um
Germ
any
Greece
Spain
France
Irelan
dIta
ly
Luxemb
ourg
Nethe
rland
s
Austria
Portu
gal
Finlan
d
%
euro area average
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Reform needs: labour markets
Reduce disincentives to enter work
interplay of taxes and benefits, early retirement schemes
Encourage female labour market entry
increase flexibility of working hours and provision of childcare services
Encourage workers to remain at work later in life
encourage policies of gradual exit from work, part-time work, increases in
statutory retirement age
Invest in quality of education, research and development, increase
lifelong learning and tackle old age discrimination
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Reform needs: labour markets
The stabilisation of the old-age dependency ratios through
migration alone is unlikely, due to the large number of migrants
that would be required
The EC states that using migration to fully compensate the impact
of demographic ageing on the labor market is not a realistic
option.
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Overview
Go through the impact on:
Economic growth
Labour markets
Public finances
Financial markets
What are the options for reforms?
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Impact on public finances
The most important expenditure effects arise from public pension
systems and health and long-term care
The estimated fiscal impact of the increase in pension expenditures
(from different sources) find a cumulative increase in pensionexpenditure of more than 5 pp of GDP for most euro area
countries, with pressure rising rapidly after 2010 (for some
countries [GR, PT] up to 10 pp).
Looking at the outstanding stock of pension debt, it can be
estimated an incremental implicit pension liability of close to 50%
of GDP for the four largest euro area countries.
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Impact on public finances
Offsetting effects through unemployment and education
expenditure are small and uncertain
The EPC/European Commission projections may still turn out too
low (e.g. favourable assumptions re. labour productivity)
Recent projections by the OECD point to a much more gloomyscenario, especially concerning the cost increases of public
spending on health and long-term care.
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Reform options: public finances
Major reform needs in public pension systems and health care and long-
term care arrangements:Parametric reform of conventional pay-as-you-go pension systems
necessary, but most likely insufficient
Systemic pension reform: shift part of pension financing to funded
arrangements and reduce exposure to demographic risks
One option: notional defined contribution (PAYG) system combined with
funded pillar
Health care: raise efficiency through setting the right incentives for
all participating parties (insurers, providers, patients)
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Overview
Go through the impact on:
Economic growth
Labour markets
Public finance
Financial markets
What are the options for reforms?
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Impact on financial markets
Impact on prices and quantities due to changes in savings patterns and
savings allocations of people belonging to different generations
Changes in financial structures linked to ongoing pension reforms
Workers are required to save more and contribute to funded pension
arrangements
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Possible changes in savings patterns are based on the idea that
wealth follows a life-cycle pattern; moreover risk tolerancemay change with age
Impact on financial markets
0
0
0
0
1
1
1
1
1
16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80
age
wealth
current situation
future (2030)
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Impact on financial markets
Theoretical and empirical analysis suggests that a meltdown isunlikely
Forward-looking simulationsresults(usually based on closed-
economy assumptions)
models suggest that current workers will earn returns around 60 basis points
below historical norm (given the assumptions in the models, this would
represent an upper bound)
Empirical studies report ambiguous results results are different across countries, which would imply that the
relationship is affected by other fundamental factors
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Impact on financial markets
Will there be an asset meltdown? Probably not, but therecould be an impact on prices:
people may change their saving and investment behaviour (and invest more
in financial assets) especially if the benefits of public pension schemes are
significantly reduced
international capital flows could help to smooth imbalances in domestic
capital markets (for all kind of assets?)
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Impact on financial markets: housing
housing wealth as % of disposable income in the euro area
Source: ECB estimates based on national data
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0
50
100
150
200
250
300
350
400
450
500
financial wealth
housing wealth
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Impact on financial markets: housing
A significant portion of households income
is invested in housing
the relationship between house prices and ageing remain
largely an open question; difficult to disentangle the
effect of age from other characteristics (income, marital
status, education)
Recent developments in some countries (US,
UK but also most of euro area countries)
suggest that households may treat real estate
as a source of portfolio diversification
may be risky: a future house prices meltdown?
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Impact on financial markets: the retirement industry
Euro area households have invested their private savings more via
financial intermediaries (particularly retirement industry)
Source: Eurosystem, as a % of total financial assets
0
10
20
30
40
50
60
70
Belgium France Germany Italy Netherlands
% of savings
to institutionsin 1990
% savings
to institutions
in 2005
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31Source: OECD
The retirement savings industry
0
20
40
60
80
100
120
Belgium Germany Italy Japan Netherlands Sweden UK US
Pension funds assets, as % of GDP, 2004
Impact on financial markets: the retirement industry
Role played by institutional investors is expected to grow and this may
have a number of implications and possibly an impact on corporate
governance
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Impact on financial markets: the retirement industry
Likely increase in savings for retirement over the next decades
savings need to be invested and later on withdrawn to finance consumption of
elderly
Portfolio allocation of pension funds likely to exert significant pressures on
financial markets possible shifts towards less risky assets as people become older?
The extent of the impact is likely to depend on the financial structure and
in particular on the social security arrangements
if countries in continental Europe shift more strongly towards funded systems,financial asset prices could in theory show more pronounced swings related to
demographic changes
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Impact on financial markets: the retirement industry
Shift from defined benefits to defined contributions plans portfolio choices will be more aligned with individuals preferences
Revised industry regulations place more emphasis on riskmanagement
need to increase the supply of products to hedge against interest rate andinflation risk
long-dated bonds
inflation-linked products
financial innovation
Instruments to hedge against longevity risks are moreproblematic to develop
annuity
reverse mortgages
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Conclusions
Scenario analysis shows that projected demographic trends
imply a decline in average GDP growth in the euro area toaround 1% from 2020 to 2050
It is important to implement the European Employment
Guidelines to mitigate the impact of population ageing
Reforms of pension systems and health care arrangements are
needed to counteract pressures on public expenditures
Impact on financial markets will derive from changes in
portfolio sizes/allocations, the likely increase in the role of
financial intermediaries and the related adjustment in the supply
of some financial instruments