European Commission report on Impact of ageing on public expenditure:
EU Member States are gearing up for structural reforms in their social protection systems in order to achieve the targets that were set in the revised Lisbon strategy, which focuses on promoting growth and jobs. The ageing of the European population was also singled as one of the major challenges -together with globalisation- for Europe in the preparatory document for the Hampton Court summit of European leaders (October 2005) and will be again on the agenda during the Spring Summit at the end of March 2006.
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In order to support Members States in their efforts, the European Commission has produced a number of documents which allows Member States to compare their efforts with other countries in a similar situation.
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A first document is the Report by the Economic Policy Committee and the European Commission on the impact of ageing populations on public spending containing age-related public expenditure projections for all 25 Member States covering pensions, health care, long-term care, education, unemployment transfers and, where possible, contributions to pensions/social security systems. The report restates that meeting the Lisbon employment targets will help curtail the economic effects of ageing. The report also projects that employment rates will continue to increase up to 2017, but as of 2018- the size of the working population and the employment rate will decrease. As a result of these employment trends, potential GDP growth is projected to decline. As the employment rate declines, labour productivity will have to become the main source of economic growth.
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Overall, population ageing is projected to lead to increases in public spending in most Member States by 2050 on the basis of current policies, although there is a wide degree of diversity across countries. For the EU15 and the Euro area as a whole, public spending is projected to increase by about 4 percentage points between 2004 and 2050, while for the EU10, the increase in the overall age-related spending is projected to rise by only about 1.5 percentage points. This apparently low budgetary impact of ageing is mainly due to the sharp drop in public pension spending in Poland, which (in common with several other EU10 countries) is partly the result of the switch from a public pension scheme to a private funded scheme. Excluding Poland, age-related spending in the other EU10 countries would increase by more than 5 percentage points of GDP. Most of the projected increase in public spending will be on pensions, health care and longterm care and potential offsetting savings in terms of public spending on education and unemployment benefits are likely to be limited. The budgetary impact of ageing in most Member States will start to become apparent as of 2010.
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However, the largest increases in spending are projected to take place between 2020 and 2040.
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A second document is the Commission staff working document on Sustainable Financing of Social Policies in the EU . The 2005 European Council gave a mandate to the European Commission to look at the issue of sustainable financing of the European Social model. The document shows that Member States spend more than 60% of general government spending on social protection, education and health or more than 1/3 of GDP.
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Increased international pressure from globalisation and population ageing are singled out as 2 major factors, which put the financial sustainability of social protection systems in Europe under pressure. Ageing will lead to increased spending on social policy and will also lead to a reduction of the growth potential of the economy (by 0.75% from the current level of 2%) as a result of the declining labour supply. It sets out the challenges in the area of pensions, health care and longterm care. The Commission also addresses the question of tax competition between Member States and potential
difficulties in raising revenue.
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Council of Europe Report on Population Ageing and its Challenges to Social Policy
A rather different view on the cost of demographic ageing is presented in the publication of the Council of Europe Population ageing and its challenges to social policy . This analysis states that it should be possible to counterbalance most, if not all, of the negative effects related to older age structures by taking appropriate measures. It stresses the need for a long-term perspective, for intergenerational solidarity and a life-course perspective. Changing current early retirement practices alone is not a sufficient measure. More attention needs to go to work conditions and job satisfaction.
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Without neglecting the physical conditions of a given job, more attention should be paid to the numbers of years worked rather than the age of entering retirement, in other words a more flexible work-retirement transition.
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The publication also addresses the debate around rising health care expenditure in relation to population ageing and highlights that other factors besides age structure determine health care expenditure, such as drugs over-consumption, price setting mechanisms and prescription behaviour of the medical community. The report calls for a more rational use of health resources, a recommendation AGE is campaigning for.
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Note from AGE: Whilst the two documents published by the Commission tend to blame today s and future older people for costing too much to society, the Council of Europe report presents a more positive image of ageing and has the merit of identifying where the real challenges are: the need to improve working conditions and job satisfaction to keep older workers at work longer; the need to address drug over consumption and price setting mechanisms in the health sector.
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The report makes a series of recommendations to ensure that social protection systems can continue to protect each and everyone of us from life risks such as unemployment, sickness and old age.
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Links to the main documents:
Report by the Economic Policy Committee and the European Commission on the impact of ageing populations on public spending, including overviews of the impact of ageing per country.
http://europa.eu.int/comm/economy_finance/epc/epc_sustainability_ageing_en.htm
Commission Paper on Sustainable Financing of Social Policies in the European Union.
http://register.consilium.eu.int/pdf/en/05/st16/st16086.en05.pdf
Council of Europe report on Population ageing and its challenges to social policy
http://www.coe.int/t/e/social%5Fcohesion/population/European%5FPopulation%5FConference/
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By Geert DeCock, AGE Platform
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