Europe : Population ageing threatens decades of decline for European economies

Europe’s pensions and healthcare systems could collapse and the region’s economic growth will falter unless governments, businesses and citizens take action to address the challenge of population ageing, according to Old Europe: Population ageing and the looming pensions crisis, a new report by the Economist Intelligence Unit. The report, which includes a barometer of demographic risk in 20 European countries, shows that southern Europe, Austria and the Czech Republic face the greatest threat from population ageing, but that far-reaching reforms are required across the region to avert the threat of economic decline.

Declining birth rates and higher life expectancy have made population ageing a global issue, but the problem is particularly severe in Europe. The region’s elderly dependency ratio (the proportion of people over 65 to people of working-age) is set to double by 2040 – a change that raises difficult questions about the future of retirement funding. Most Europeans will have to work longer and save harder before retiring, the report concludes.

Demographic change also has major implications for corporate Europe. In a survey of 167 senior European executives conducted for this report, 60% of respondents said their businesses had been damaged by under-performing company pensions. A further 80% of executives said defined benefit schemes will be unsustainable for most companies in the future. In addition to reducing their pension liabilities, companies also face a major challenge in attracting skilled workers as Europe’s labour market shrinks.

« Demographic decline will be the biggest social and economic challenge that Europe will face over the next fifty years. Governments need to pick up the pace of reform, but businesses and individuals must also rethink the traditional view of retirement, » says Daniel Franklin, editorial director of the Economist Intelligence Unit.

The report was written in co-operation with Freshfields Bruckhaus Deringer, Swiss Life Network and Towers Perrin; with additional support from BNP Paribas, Standard & Poor’s, World Gold Council. A complimentary press copy of the report is available from Sheila Allen, +44 (0)20 7830 1010, e-mail: sheilaallen@eiu.com

Demographic risk across Europe

As part of the research for the report, the Economist Intelligence Unit created a « barometer » of demographic risk to assess the severity of the problem that each country faces, compared with their readiness to address demographic change. The chart below shows that most European countries fall into one of three categories.

** SEE CHART on Demographic risk: old age dependency ratios and readiness for change

* Outlook fair: UK, Ireland, the Netherlands and the Nordics
These are the countries where populations are ageing more slowly and which are in the best position to manage the challenge of population ageing. The UK is forecast to have the lowest old-age dependency ratio and the lowest public pension burden of any European country in the report by 2050. As in the Netherlands, a strong private pension sector counts in the UK’s favour, although uncertainty over the future of occupational pensions remains an issue. However, the growing costs of the NHS and the need to boost saving rates (the lowest in Europe) are both areas that require urgent action, according to the report.

* Outlook unsettled: Belgium, France, Germany, Hungary, Poland, Portugal, Slovakia
France and Germany face a steeper demographic decline than the UK and an uphill struggle on reform. Both countries’ pay-as-you-go pension systems are unsustainable in the long-term, but attempts to scale back retirement benefits have progressed slowly in the face of strong public opposition. For all countries in this group, the trend towards early retirement will need to be reversed, and more efforts will need to be made to attract women and older workers into employment.

* Outlook stormy: Austria, Czech Republic, Greece, Italy and Spain
With rapidly ageing populations, and a mountain to climb in reforming their economies and welfare systems, these countries face the biggest threat of decline over the next 45 years. On current trends, Italy’s old-age dependency ratio will decline to the point where there will be just 1.5 active workers for each person over 65 by 2050. Spain and Greece face population ageing on a similar scale. Austria’s state pension eats up 14% of GDP, the highest proportion of any country in the report, while the Czech Republic must undertake root-and-branch change to its healthcare reform to avert a steep rise in costs as people live longer.

Key conclusions

The report dissects the problem of population ageing from three different perspectives: the challenges for governments, the challenge for companies and the challenges for individuals.

The challenge for governments
Further reform on pensions and healthcare will be painful but necessary for most European countries, according to the report. Retirement ages will need to be raised, and governments need to persuade individuals to take greater responsibility for their own wealth and healthcare in old age. To sustain economic growth, labour-market reform is needed to attract more people into employment and to raise productivity once they are there. Increased immigration and initiatives to increase low birth rates may also be required. Many of these measures will be deeply unpopular with electorates, but failure to act now will store up greater pain for future generations.

The challenge for companies
Companies need to minimise their future pension liabilities, with the result that more defined-benefit schemes are likely to be replaced with defined-contribution schemes in the near future. As skills shortages become more widespread, companies will also need to invest as much energy into attracting and retaining good employees as they do now for customers. In particular, companies will need to bring more women and older workers into employment, and create working environments that will appeal to the diverse workforce of the future.

The challenge for individuals
Europeans need to rethink the notion of retirement as a permanent holiday that begins at 60. To ensure a comfortable income for old age, many will have to save more now and accept longer working lives. Europeans will have to learn to invest wisely; they will also need to regularly update their skills to improve their prospects for late-life careers. Governments and the financial services industry can help by providing more incentives for saving, financial products that are more transparent and easier to manage, and opportunities for lifelong learning.

Old Europe: Population ageing and the looming pensions crisis
will be available from http://www.store.eiu.com and is priced at $195.

Copies are available for members of the press from Sheila Allen (contact details below).

For further information please contact:
Economist Intelligence Unit
Sheila Allen: +44 (0)20 7830 1010 sheilaallen@eiu.com / Gareth Lofthouse: +44 (0)20 7830 1150

Editor’s notes:

About the demographic risk barometer
The demographic risk chart shows the severity of the population ageing problem (indicated by the projected old-age dependency ratios for 2050) compared with a measure of readiness for demographic change for each country. The readiness index is based on a combination of quantitative data and qualitative data. The quantitative indicators included participation rates, effective retirement ages, the labour participation rate, private funded pension assets as a % of GDP, and total factor productivity growth over the past decade. Two qualitative ratings were also included in the index, one on the flexibility and adaptability of the labour force, and the second on the degree of restrictiveness of labour laws on hiring and firing practices.

About the survey respondents
The Economist Intelligence Unit conducted a survey of 167 senior European executives in May 2004. The survey included a cross-section of senior executives, 15% of whom were chief executive officers (CEOs), chief operating officers or managing directors. A mixture of large and small and medium-sized enterprises participated in the survey, representing over 20 industries.

About the Economist Intelligence Unit
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of over 500 analysts, we continuously assess and forecast political, economic and business conditions in 195 countries. As the world’s leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies. More information about the Economist Intelligence Unit can be found on the web at www.eiu.com.