2009 Ageing Report:Economic and budgetary projections for the EU-27Member States (2008-2060)
Code:
D23
Primary project information
Lead:
European Commission (DG ECFIN)
Additional project partners:
Economic Policy Committee (AWG)
Type of activity:
Report
Date conducted:
N/A
Date of Publication:
2009
Duration:
N/A
Summary:
This report analyses the drivers of health expenditure across EU Member States looking at the organisational features of health systems. It identifies main challenges in the context of rising demand and constrained resources enhanced by the recent economic crisis. It also identifies good practices that may lead to greater cost-effectiveness in the health system. This Joint EPC/EC Report aims to understand the drivers of health expenditure and therefore expenditure differences across EU Member States. It does so by looking not just at demographic influences, as past reports by the EPC/EC have done, but going beyond that and looking at organisational features of health systems. Understanding what may explain the performance of countries' health systems can help find the right policies to strengthen the financial sustainability, access and quality of health services in a rapidly ageing world. Rising demand and constrained resources enhanced by the recent economic crisis makes cost-effectiveness one of the most important goals in this area. Cost-effectiveness is crucial if countries are to ensure universal access and equity in health, health financing and utilisation. As a result of the wide analysis of the strengths and weaknesses of the health systems in the EU, the report points to several policy challenges facing health systems across the EU. These need to be addressed resolutely in the coming years. The report also identifies a number of good practices that may lead to greater cost-effectiveness of health systems (i.e. getting more value for money out of the resources allocated to the sector) no matter what future burden demographic developments may hold.
Financed by:
European Commission
Budget:
N/A
Research area/market/industry/sector:
health sector; health expenditure
Main report (full title):
2009 Ageing Report:
Economic and budgetary projections for the EU-27
Member States (2008-2060)
Economic and budgetary projections for the EU-27
Member States (2008-2060)
GRAND CHALLENGES
Economic Challenges:
Two types of shocks were considered. First, temporary shocks are simulated in two alternative scenarios: a rather optimistic “rebound”, recovery included for illustrative purposes, and in addition a “lost decade” scenario. These scenarios entail two different assumptions on the duration of the shock. The “rebound recovery” assumes that the European economy will rebound soon and will already have returned to the pre-crisis level of GDP in 2020. The “lost decade” scenario, assumes that it could take until 2020 to get back to the growth rates (but not the GDP level) set in the AWG baseline. Second, a permanent shock to the growth potential of the EU economies is simulated in a “worst case” scenario. This assumes that the current crisis will lead to a permanently higher unemployment rate (1 p.p.) and a permanently lower labour productivity growth rate (about 1.5%)
compared with the baseline (1.7%).
The temporary shock scenarios have an impact on the long-term growth potential. Potential GDP growth for the EU27 coincides with the AWG baseline from 2020. Over the projection period 2007- 2060, the average revision of potential GDP growth in the “lost decade” scenarios is 0.2 p.p. per year for the EU27. In the “permanent shock” worst case scenario, a larger downward revision of the average annual GDP growth by 0.4 p.p. over the whole projection period would materialize (see
Graph 2). Labour participation rates to increase but labour supply will decline because of the future population trends. For the EU as a whole, the participation rate (of people aged 15 to 64) is projected to increase by 3.5 percentage points, from 70.6% in 2007 to 74.1% in 2060.The labour force in the EU would increase by 3.7% between 2007 and 2020. This is mainly due to the rise in the labour supply of women. However, the positive trend in female labour supply is projected to reverse after 2020 and, as the male labour supply drops too, the overall labour force is expected to decrease by as much as 13.6%, equivalent to around 33 million people. According to the assumptions, the unemployment rate would be reduced slightly, the employment rate would increase but the number of workers would shrink. Overall, a reduction in the EU unemployment rate of around 1 ½ percentage points is assumed.the employment rate (of people aged 15 to 64) in the EU would increase from 65.5% in 2007 to 66.6% in 2010, 69% in 2020, and almost 70% in 2060. However, the number of people employed1 would record an annual growth rate of only 0.4% until 2020, before reversing to a negative annual growth rate of a similar magnitude until 2060. Labour input (hours of work) is projected to decline. It would increase by 5.4% until 2020. and fall by 12.9%till 2060.The ratio of elderly non-workers to workers will rise steeply. Total factor productivity is assumed to converge to 1.1%. A sharp decline in potential growth rate is projected. Even without incorporating the potential negative impact of the current economic crisis, the annual average potential GDP growth rate in the EU is projected to fall from 2.4% in the period 2007-2020, to 1.7% in the period 2021-2040 and to a meagre 1.3% in the period 2041-2060.While all EU Member States would experience a future slowdown in their potential growth rates, owing to the adverse impact of demographic trends, growth rates would differ substantially from country to country. The sources of economic growth are also projected to change: labour productivity will become the key driver of growth in the EU. Total hours of work – the labour input – are projected to increase up to the 2020s. Thereafter, demographic ageing, with a reduction in the working-age population, is expected to act as a drag on growth. Over time, labour productivity will become the only driver of growth in the EU. On the basis of current policies, age-related public
expenditure is projected to increase on average by about 4 ¾ percentage points of GDP by 2060 in the EU. For the EU, the projections show an increase in public pension expenditures of 2.4 p.p. of GDP over the period 2007-2060. The lion’s share of the projected increase in public pension expenditure is due to old-age and early pensions, while, given their limited size, a smaller increase is projected for other pension expenditure, mainly disability and survivor pensions, which increase only slightly (0.1 p.p. of GDP) in the euro area. The demographic transition to an older population is the main driver behind the projected increase in public pension expenditure. However, some factors, also related to past reforms of pension systems,
are expected to mitigate the increase: a tightening of the eligibility for a public pension, higher employment rates, reduced generosity of pensions relative to wages. In sum, the projections reveal that pension policies in a majority of EU Member States are: (i) reducing the generosity of public pension schemes to make these programmes financially more sustainable in
view of the demographic trends; (ii) pushing up the statutory retirement age in a gradually phased way for old-age pensions; (iii) restricting access to early retirement schemes by strengthening the incentives to prolong working lives, which leads to a containment of the increase in old-age and early pensions spending.According to the “AWG reference scenario” public expenditure on health care is projected to grow by 1.5% of GDP (from 6.7% in 2007 to 8.2% in 2060) in the EU on average, while for individual countries the increase ranges from less than 1% of GDP in Cyprus, Bulgaria and Sweden to more than 3% of GDP in Malta.
The projected increase in health care spending is driven mostly by the change in the demographic structure of the population Its impact is measured by the “pure demographic scenario” which projects an average increase of 1.7% of GDP. However, as empirical evidence suggests, it is the health status, rather than age, which is the predominant causal factor behind health care spending. Under more optimistic assumptions about the health status evolution (illustrated by the “constant health scenario”), the demographic pressure on health care expenditure could be reduced by over a half, to only 0.7% of GDP. Caution should be exercised; however, as there is inconclusive evidence that a strong improvement in health status will benefit older persons, especially as regards chronic illnesses. The increase in living standard conditions is another important driver of health care costs, An extra 0.4% of GDP increase will be added to the pure demographic effect. (pp. 17-35)
compared with the baseline (1.7%).
The temporary shock scenarios have an impact on the long-term growth potential. Potential GDP growth for the EU27 coincides with the AWG baseline from 2020. Over the projection period 2007- 2060, the average revision of potential GDP growth in the “lost decade” scenarios is 0.2 p.p. per year for the EU27. In the “permanent shock” worst case scenario, a larger downward revision of the average annual GDP growth by 0.4 p.p. over the whole projection period would materialize (see
Graph 2). Labour participation rates to increase but labour supply will decline because of the future population trends. For the EU as a whole, the participation rate (of people aged 15 to 64) is projected to increase by 3.5 percentage points, from 70.6% in 2007 to 74.1% in 2060.The labour force in the EU would increase by 3.7% between 2007 and 2020. This is mainly due to the rise in the labour supply of women. However, the positive trend in female labour supply is projected to reverse after 2020 and, as the male labour supply drops too, the overall labour force is expected to decrease by as much as 13.6%, equivalent to around 33 million people. According to the assumptions, the unemployment rate would be reduced slightly, the employment rate would increase but the number of workers would shrink. Overall, a reduction in the EU unemployment rate of around 1 ½ percentage points is assumed.the employment rate (of people aged 15 to 64) in the EU would increase from 65.5% in 2007 to 66.6% in 2010, 69% in 2020, and almost 70% in 2060. However, the number of people employed1 would record an annual growth rate of only 0.4% until 2020, before reversing to a negative annual growth rate of a similar magnitude until 2060. Labour input (hours of work) is projected to decline. It would increase by 5.4% until 2020. and fall by 12.9%till 2060.The ratio of elderly non-workers to workers will rise steeply. Total factor productivity is assumed to converge to 1.1%. A sharp decline in potential growth rate is projected. Even without incorporating the potential negative impact of the current economic crisis, the annual average potential GDP growth rate in the EU is projected to fall from 2.4% in the period 2007-2020, to 1.7% in the period 2021-2040 and to a meagre 1.3% in the period 2041-2060.While all EU Member States would experience a future slowdown in their potential growth rates, owing to the adverse impact of demographic trends, growth rates would differ substantially from country to country. The sources of economic growth are also projected to change: labour productivity will become the key driver of growth in the EU. Total hours of work – the labour input – are projected to increase up to the 2020s. Thereafter, demographic ageing, with a reduction in the working-age population, is expected to act as a drag on growth. Over time, labour productivity will become the only driver of growth in the EU. On the basis of current policies, age-related public
expenditure is projected to increase on average by about 4 ¾ percentage points of GDP by 2060 in the EU. For the EU, the projections show an increase in public pension expenditures of 2.4 p.p. of GDP over the period 2007-2060. The lion’s share of the projected increase in public pension expenditure is due to old-age and early pensions, while, given their limited size, a smaller increase is projected for other pension expenditure, mainly disability and survivor pensions, which increase only slightly (0.1 p.p. of GDP) in the euro area. The demographic transition to an older population is the main driver behind the projected increase in public pension expenditure. However, some factors, also related to past reforms of pension systems,
are expected to mitigate the increase: a tightening of the eligibility for a public pension, higher employment rates, reduced generosity of pensions relative to wages. In sum, the projections reveal that pension policies in a majority of EU Member States are: (i) reducing the generosity of public pension schemes to make these programmes financially more sustainable in
view of the demographic trends; (ii) pushing up the statutory retirement age in a gradually phased way for old-age pensions; (iii) restricting access to early retirement schemes by strengthening the incentives to prolong working lives, which leads to a containment of the increase in old-age and early pensions spending.According to the “AWG reference scenario” public expenditure on health care is projected to grow by 1.5% of GDP (from 6.7% in 2007 to 8.2% in 2060) in the EU on average, while for individual countries the increase ranges from less than 1% of GDP in Cyprus, Bulgaria and Sweden to more than 3% of GDP in Malta.
The projected increase in health care spending is driven mostly by the change in the demographic structure of the population Its impact is measured by the “pure demographic scenario” which projects an average increase of 1.7% of GDP. However, as empirical evidence suggests, it is the health status, rather than age, which is the predominant causal factor behind health care spending. Under more optimistic assumptions about the health status evolution (illustrated by the “constant health scenario”), the demographic pressure on health care expenditure could be reduced by over a half, to only 0.7% of GDP. Caution should be exercised; however, as there is inconclusive evidence that a strong improvement in health status will benefit older persons, especially as regards chronic illnesses. The increase in living standard conditions is another important driver of health care costs, An extra 0.4% of GDP increase will be added to the pure demographic effect. (pp. 17-35)
Economic Challenges Shortlist:
potential impact of the economic crisis on the long-term budgetary projection results; Labour participation rates to increase but labour supply will decline because of the future population trends. labour productivity and potential growth rates; public spending on pensions and healthcare show an increase
Societal Challenges:
The ratio of children and young people to the working-age population is expected to shrink over the coming decades, pointing to fewer students relative to the working population. The baseline scenario estimating the pure consequences of expected demographic changes indicates a potential for a small decline in public expenditure on education in the EU as a whole (from 4.3% of GDP in 2007 to 4.1% of GDP in 2060) and in almost all the Member States.
However, the baseline projection does not take into account that public expenditure on education as a share of GDP could even increase, when incorporating the assumptions that there will be changes in education policy aiming at the necessary improvement in the quality of education, reduction in class sizes, increases in the attainment level of education of future generations, implementing life long learning initiatives or attempts to prevent the outflow of qualified staff by offering faster growing salaries. Indeed, current objectives on education policy and targets in EU Member States, such as the recently adopted targets for higher educational attainment and reduced drop-out rates, suggest that educational spending might well increase rather than fall. The population would increase (from 495.4 million in 2008) by almost 5% by 2035, when it would peak (at 520.1 million). A steady decline would then take place, with the population shrinking by nearly 3%, to 505.7 million by 2060.In 2060, there would be more than twice as many elderly than children.In 2060, children would still outnumber very old persons, but by a small margin: the number of very old people would amount to 80% of the number of children.The projections show a significant reduction in the population aged 15-64 and an increase in the number of elderly persons aged 65 or more. The working-age population, which is conventionally defined as aged between 15 and 64 years, would start to decline as of 2010 and, over the whole projection period, it would drop by 15 per cent in the EU. The number of elderly people will almost
double, rising from 85 million in 2008 to 151 million in 2060 in the EU. The number of oldest-old (aged 80 years and above), is projected to increase even more rapidly, almost tripling from 22 million in 2008 to 61 million in 2060. This will lead to a doubling of the old-age dependency ratio in the EU. Only a modest recovery in the total fertility rate, which is the average number of births per woman over her lifetime, is assumed for the EU, from 1.52 births per woman in 2008 to 1.57 by 2030 and
1.64 by 2060. In the euro area, a similar increase is assumed, from 1.55 in 2008 to 1.66 in 2060. In all countries, the fertility rate would remain below the natural replacement rate of 2.1 births per woman that is needed in order for each generation to replace itself. This will result in slow growth and in most cases actual declines in the population of working-age. The fertility rate is projected to increase in all Member States, except in the few where total fertility rates are currently above 1.8, namely France, Ireland, Sweden, Denmark, the UK and Finland, where it is assumed to decrease but remain above 1.85, or remain stable. The largest increases in fertility rates are assumed to take place in Slovakia, Poland and Lithuania, which had the lowest rates in the EU in 2008; here, the increase would occur gradually, approaching the current EU average rates only
in 2060. For the EU as a whole, life expectancy at birth for men would increase by 8.5 years over the projection period, from 76 years in 2008 to 84.5 in 2060. For women, life expectancy at birth would increase by 6.9 years, from 82.1 in 2008 to 89 in 2060, implying a narrowing gap in life expectancy between men and women. The largest increases in life expectancy at birth would take place in the most recent EU Member States, according to the assumptions. It is assumed that some catching-up will take place, with increases in life expectancy of more than 10 years over the projection period – a bigger increase than in the rest of the EU. Overall however, life expectancy at birth is projected to remain below the EU average in all new Member
States – except in Cyprus – throughout the projection period, especially for men. For life expectancy at birth for men, it would narrow from 13.1 years in 2008 to 5 years in 2060. For women, the reduction in the differential is smaller, from 7.7 years in 2008 (84.3 in France to 76.6 in Romania) to 4.1 years in 2060 (90.1 in France to 86.5 in Bulgaria).
Life expectancy at the age of 65 would increase by 5.4 years for men and by 5.2 years for women over the projection period, for the EU as a whole. In 2060, life expectancy at age 65 would reach 21.8 years for men and 25.1 for women. Most children today would live into their 80s and 90s. Over the projection period, annual net inflows to the EU are assumed to total 59 million people, of which the bulk (46.2 million) would be concentrated in the euro area. The trend is assumed to decelerate over the projection period, falling from about 0.33% of the EU population to 0.16% in 2060. In many Member States, the size of net migration determines whether the population still grows or has entered a stage of decline. The zero migration population scenario shows how the labour force (aged 15 to 64) would gradually fall behind the level in the baseline scenario in the absence of net migration: by 2030, the labour force would be 10% lower and 20% lower in 2060. Making the best use of the global labour supply through net migration will be increasingly important and requires ensuring that immigrants are effectively integrated into the EU’s economy and society.
Net migration flows are assumed to be concentrated in a few destination countries: Italy (12 million cumulated to 2060), Spain (11.6 million), Germany (8.2 million), and the UK (7.8 million). According to the assumptions, the change of Spain and Italy from origin to destination countries is confirmed in coming decades. Estonia, Lithuania, Latvia, Poland, Bulgaria and Romania, which are currently experiencing a net outflow, would see it taper off or reverse in the coming decades.(pp. 17-35)
However, the baseline projection does not take into account that public expenditure on education as a share of GDP could even increase, when incorporating the assumptions that there will be changes in education policy aiming at the necessary improvement in the quality of education, reduction in class sizes, increases in the attainment level of education of future generations, implementing life long learning initiatives or attempts to prevent the outflow of qualified staff by offering faster growing salaries. Indeed, current objectives on education policy and targets in EU Member States, such as the recently adopted targets for higher educational attainment and reduced drop-out rates, suggest that educational spending might well increase rather than fall. The population would increase (from 495.4 million in 2008) by almost 5% by 2035, when it would peak (at 520.1 million). A steady decline would then take place, with the population shrinking by nearly 3%, to 505.7 million by 2060.In 2060, there would be more than twice as many elderly than children.In 2060, children would still outnumber very old persons, but by a small margin: the number of very old people would amount to 80% of the number of children.The projections show a significant reduction in the population aged 15-64 and an increase in the number of elderly persons aged 65 or more. The working-age population, which is conventionally defined as aged between 15 and 64 years, would start to decline as of 2010 and, over the whole projection period, it would drop by 15 per cent in the EU. The number of elderly people will almost
double, rising from 85 million in 2008 to 151 million in 2060 in the EU. The number of oldest-old (aged 80 years and above), is projected to increase even more rapidly, almost tripling from 22 million in 2008 to 61 million in 2060. This will lead to a doubling of the old-age dependency ratio in the EU. Only a modest recovery in the total fertility rate, which is the average number of births per woman over her lifetime, is assumed for the EU, from 1.52 births per woman in 2008 to 1.57 by 2030 and
1.64 by 2060. In the euro area, a similar increase is assumed, from 1.55 in 2008 to 1.66 in 2060. In all countries, the fertility rate would remain below the natural replacement rate of 2.1 births per woman that is needed in order for each generation to replace itself. This will result in slow growth and in most cases actual declines in the population of working-age. The fertility rate is projected to increase in all Member States, except in the few where total fertility rates are currently above 1.8, namely France, Ireland, Sweden, Denmark, the UK and Finland, where it is assumed to decrease but remain above 1.85, or remain stable. The largest increases in fertility rates are assumed to take place in Slovakia, Poland and Lithuania, which had the lowest rates in the EU in 2008; here, the increase would occur gradually, approaching the current EU average rates only
in 2060. For the EU as a whole, life expectancy at birth for men would increase by 8.5 years over the projection period, from 76 years in 2008 to 84.5 in 2060. For women, life expectancy at birth would increase by 6.9 years, from 82.1 in 2008 to 89 in 2060, implying a narrowing gap in life expectancy between men and women. The largest increases in life expectancy at birth would take place in the most recent EU Member States, according to the assumptions. It is assumed that some catching-up will take place, with increases in life expectancy of more than 10 years over the projection period – a bigger increase than in the rest of the EU. Overall however, life expectancy at birth is projected to remain below the EU average in all new Member
States – except in Cyprus – throughout the projection period, especially for men. For life expectancy at birth for men, it would narrow from 13.1 years in 2008 to 5 years in 2060. For women, the reduction in the differential is smaller, from 7.7 years in 2008 (84.3 in France to 76.6 in Romania) to 4.1 years in 2060 (90.1 in France to 86.5 in Bulgaria).
Life expectancy at the age of 65 would increase by 5.4 years for men and by 5.2 years for women over the projection period, for the EU as a whole. In 2060, life expectancy at age 65 would reach 21.8 years for men and 25.1 for women. Most children today would live into their 80s and 90s. Over the projection period, annual net inflows to the EU are assumed to total 59 million people, of which the bulk (46.2 million) would be concentrated in the euro area. The trend is assumed to decelerate over the projection period, falling from about 0.33% of the EU population to 0.16% in 2060. In many Member States, the size of net migration determines whether the population still grows or has entered a stage of decline. The zero migration population scenario shows how the labour force (aged 15 to 64) would gradually fall behind the level in the baseline scenario in the absence of net migration: by 2030, the labour force would be 10% lower and 20% lower in 2060. Making the best use of the global labour supply through net migration will be increasingly important and requires ensuring that immigrants are effectively integrated into the EU’s economy and society.
Net migration flows are assumed to be concentrated in a few destination countries: Italy (12 million cumulated to 2060), Spain (11.6 million), Germany (8.2 million), and the UK (7.8 million). According to the assumptions, the change of Spain and Italy from origin to destination countries is confirmed in coming decades. Estonia, Lithuania, Latvia, Poland, Bulgaria and Romania, which are currently experiencing a net outflow, would see it taper off or reverse in the coming decades.(pp. 17-35)
Societal Challenges Shortlist:
projection results for public spending on education; Population structures become increasingly dominated by old people rather than young; Only a modest recovery in total fertility rates; life expectancy continues to increase; inward net migration to the EU continues, but on a decelerating trend
Summary of relevant aspects
Background information:
Being active, healthy and participative well into old age is now a realistic prospect for very large numbers of citizens for the first time in European history. But an ageing population also raises challenges for our societies and economies, culturally, organisationally and from an economic point of view. Policy makers worry about how living standards will be affected as each worker has to provide for the consumption needs of a growing number of elderly dependents. The seriousness of the challenge depends on how our economies and societies respond and adapt to these changing demographic conditions. Looking ahead, policy makers need to ensure long-term fiscal sustainability in the face of clearly anticipated risks, as well significant uncertainty. This is all the more true as Europe is in the midst of the deepest recession in decades, which is putting an unprecedented stress on workers and companies and is set to have a major impact on the sustainability of public
finances.
In 2001, the Stockholm European Council emphasised the need for the Council to “regularly review the long term sustainability of public finances, including the expected strains caused by the demographic changes ahead”. In 2006, the ECOFIN Council gave a mandate to the Economic Policy Committee (EPC) to update and further deepen its common exercise of age-related expenditure projections by autumn 2009, on the basis of a new population projection by Eurostat, which was released in April 2008. In light of this mandate, the EPC developed a work programme with broad arrangements to organise the budgetary projection and reach agreement on its assumptions and methodologies. The projections of all expenditure items are made on the basis of common macroeconomic assumptions endorsed by the EPC and of a “no policy change” assumption, i.e. reflecting only already enacted legislation. This report presents the expenditure projections covering pensions, health care, long-term care, education and unemployment transfers for all Member States. This is the third time since 2001 that long-run economic and budgetary projections aimed at assessing the impact of ageing population have been released. This projection exercise builds on, updates and further improves the previous exercises so as to enhance comparability across countries, consistency across expenditure items and the economic basis for the underlying assumptions. The work has been guided by the principles of simplicity, comparability, consistency, prudence and transparency. (p. 17)
finances.
In 2001, the Stockholm European Council emphasised the need for the Council to “regularly review the long term sustainability of public finances, including the expected strains caused by the demographic changes ahead”. In 2006, the ECOFIN Council gave a mandate to the Economic Policy Committee (EPC) to update and further deepen its common exercise of age-related expenditure projections by autumn 2009, on the basis of a new population projection by Eurostat, which was released in April 2008. In light of this mandate, the EPC developed a work programme with broad arrangements to organise the budgetary projection and reach agreement on its assumptions and methodologies. The projections of all expenditure items are made on the basis of common macroeconomic assumptions endorsed by the EPC and of a “no policy change” assumption, i.e. reflecting only already enacted legislation. This report presents the expenditure projections covering pensions, health care, long-term care, education and unemployment transfers for all Member States. This is the third time since 2001 that long-run economic and budgetary projections aimed at assessing the impact of ageing population have been released. This projection exercise builds on, updates and further improves the previous exercises so as to enhance comparability across countries, consistency across expenditure items and the economic basis for the underlying assumptions. The work has been guided by the principles of simplicity, comparability, consistency, prudence and transparency. (p. 17)
Scenarios
Scenario 1:
According to the “AWG reference scenario” (a prudent scenario which takes into account the combined impact of ageing, potential improvements in health status, and the effect of changes in the national income), public expenditure on health care is projected to grow by 1.5% of GDP (from 6.7% in 2007 to 8.2% in 2060) in the EU on average, while for individual countries the increase ranges from less than 1% of GDP in Cyprus, Bulgaria and Sweden to more than 3% of GDP in Malta. According to the “AWG reference scenario” based on current policy settings, public spending on long-term care is projected to double, increasing from 1.2% of GDP in 2007 to 2.3% of GDP in 2060 in the EU as a whole. The projected absolute changes range from less than ¼% of GDP in Bulgaria, Estonia, Cyprus, Portugal and Romania to more than 2% of GDP in Greece, the Netherlands, Finland, Sweden and Norway, reflecting very different approaches to the provision/financing of formal care.
Given that the initial level of spending affects to a large extent the projected increase in p.p. of GDP, an increase in relative terms (from 60% of the initial level in the UK to over 200% in Romania, Malt (and Slovakia) illustrates somewhat better the degree of the challenge facing European societies. The AWG/EPC macroeconomic scenario was finalized in 2008 and does not incorporate the sharp deterioration of economic activity in Europe. Factoring in this large deterioration in macroeconomic
prospects would imply a downward revision of EU GDP over a number of years at the beginning of the projections, although it would only have limited effects over the remainder of the period up to 2060, at least to the extent that long-run growth potential is only temporarily affected. In order to simulate the order of magnitude of the risks related to the ongoing economic crisis, alternative simulation scenarios were devised that complement the baseline scenario of the AWG. (pp.28-30)
Given that the initial level of spending affects to a large extent the projected increase in p.p. of GDP, an increase in relative terms (from 60% of the initial level in the UK to over 200% in Romania, Malt (and Slovakia) illustrates somewhat better the degree of the challenge facing European societies. The AWG/EPC macroeconomic scenario was finalized in 2008 and does not incorporate the sharp deterioration of economic activity in Europe. Factoring in this large deterioration in macroeconomic
prospects would imply a downward revision of EU GDP over a number of years at the beginning of the projections, although it would only have limited effects over the remainder of the period up to 2060, at least to the extent that long-run growth potential is only temporarily affected. In order to simulate the order of magnitude of the risks related to the ongoing economic crisis, alternative simulation scenarios were devised that complement the baseline scenario of the AWG. (pp.28-30)
Scenario 2:
The projected increase in health care spending is driven mostly by the change in the demographic structure of the population. Its impact is measured by the “pure demographic scenario” which projects an average increase of 1.7% of GDP. However, as empirical evidence suggests, it is the health status, rather than age, which is the predominant causal factor behind health care spending. Under more optimistic assumptions about the health status evolution (illustrated by the “constant health scenario”), the demographic pressure on health care expenditure could be reduced by over a half, to only 0.7% of GDP. Caution should be exercised; however, as there is inconclusive evidence that a strong improvement in health status will benefit older persons, especially as regards chronic illnesses. (p. 29) Pure demographic scenario attempts to isolate the “pure” effect of an ageing population on health care spending. It assumes that age-specific morbidity rates do not change over time or, in
practical terms, that age-related public health care spending per capita (considered as the proxy for morbidity rate72) remains constant in real terms over the whole projection period. Since this constancy in health status is accompanied by a gradual increase in life expectancy underlying demographic projections, all gains in life expectancy are implicitly assumed to be spent in bad health, while the number of years spent in good health remains constant. As such, this scenario is in line with the expansion of morbidity hypothesis discussed above. The constant age profile is applied to the population projections with an assumption that the costs evolve in line with GDP per capita. Such evolution of unit cost levels can be considered to be neutral in macroeconomic terms – if no change in the age structure of the population occur, the share of health care sector in GDP would remain the same over the projection period. (p.118)
practical terms, that age-related public health care spending per capita (considered as the proxy for morbidity rate72) remains constant in real terms over the whole projection period. Since this constancy in health status is accompanied by a gradual increase in life expectancy underlying demographic projections, all gains in life expectancy are implicitly assumed to be spent in bad health, while the number of years spent in good health remains constant. As such, this scenario is in line with the expansion of morbidity hypothesis discussed above. The constant age profile is applied to the population projections with an assumption that the costs evolve in line with GDP per capita. Such evolution of unit cost levels can be considered to be neutral in macroeconomic terms – if no change in the age structure of the population occur, the share of health care sector in GDP would remain the same over the projection period. (p.118)
Scenario 3:
Two types of shocks were considered. First, temporary shocks are simulated in two alternative scenarios: a rather optimistic “rebound”, recovery included for illustrative purposes, and in addition a “lost decade” scenario. These scenarios entail two different assumptions on the duration of the shock. The “rebound recovery” assumes that the European economy will rebound soon and will already have returned to the pre-crisis level of GDP in 2020. The “lost decade” scenario, assumes that it could take until 2020 to get back to the growth rates (but not the GDP level) set in the AWG baseline. Second, a permanent shock to the growth potential of the EU economies is simulated in a “worst case” scenario. This assumes that the current crisis will lead to a permanently higher unemployment rate (1 p.p.) and a permanently lower labour productivity growth rate (about 1.5%)
compared with the baseline (1.7%). The temporary shock scenarios have an impact on the long-term growth potential. Potential GDP growth for the EU27 coincides with the AWG baseline from 2020. Over the projection period 2007- 2060, the average revision of potential GDP growth in the “lost decade” scenarios is 0.2 p.p. per year for the EU27. In the “permanent shock” worst case scenario, a larger downward revision of the average annual GDP growth by 0.4 p.p. over the whole projection period would materialize. The loss in GDP per capita in the “lost decade” scenario relative to the baseline is around 8% in 2020 and this loss is carried over the rest of the projection period, since the growth projection remains broadly unchanged as of 2020. In the “rebound” scenario, there is no loss in wealth accumulation since the recovery is assumed to be materialized completely by 2020. Finally, a more marked reduction in the GDP per capita level is observed in the “permanent shock” scenario where GDP per capita in 2060 is 18% lower than in the AWG baseline, reflecting persistently lower growth. In terms of budgetary impact, the question of whether the shock is temporary or permanent determines its potential magnitude. An assessment of the public budget impact of these alternative scenarios has been carried out based on elasticities calculated for the sensitivity analysis. This provides only a preliminary indication of the impact of the alternative crisis scenarios. The “lost decade” scenario reveals that the age-related government expenditure increases faster over the first decade of the projection period, and then stabilises relative to the AWG baseline. Between 2007 and 2020, the total increase in age-related expenditure would be 0.9 p.p. of GDP higher relative to the AWG baseline that would persist for a number of years and vanish in the long run. The “permanent shock” scenario shows a constant widening of the expenditure-to-GDP ratio compared with the baseline. Between 2007 and 2020, age-related public expenditure would increase by 1.1 p.p. of GDP more relative to the AWG baseline. Over the entire projection period however, the public age-related spending-to- GDP ratio would be 1.6 p.p. of GDP higher compared with the AWG baseline. (p.32)
compared with the baseline (1.7%). The temporary shock scenarios have an impact on the long-term growth potential. Potential GDP growth for the EU27 coincides with the AWG baseline from 2020. Over the projection period 2007- 2060, the average revision of potential GDP growth in the “lost decade” scenarios is 0.2 p.p. per year for the EU27. In the “permanent shock” worst case scenario, a larger downward revision of the average annual GDP growth by 0.4 p.p. over the whole projection period would materialize. The loss in GDP per capita in the “lost decade” scenario relative to the baseline is around 8% in 2020 and this loss is carried over the rest of the projection period, since the growth projection remains broadly unchanged as of 2020. In the “rebound” scenario, there is no loss in wealth accumulation since the recovery is assumed to be materialized completely by 2020. Finally, a more marked reduction in the GDP per capita level is observed in the “permanent shock” scenario where GDP per capita in 2060 is 18% lower than in the AWG baseline, reflecting persistently lower growth. In terms of budgetary impact, the question of whether the shock is temporary or permanent determines its potential magnitude. An assessment of the public budget impact of these alternative scenarios has been carried out based on elasticities calculated for the sensitivity analysis. This provides only a preliminary indication of the impact of the alternative crisis scenarios. The “lost decade” scenario reveals that the age-related government expenditure increases faster over the first decade of the projection period, and then stabilises relative to the AWG baseline. Between 2007 and 2020, the total increase in age-related expenditure would be 0.9 p.p. of GDP higher relative to the AWG baseline that would persist for a number of years and vanish in the long run. The “permanent shock” scenario shows a constant widening of the expenditure-to-GDP ratio compared with the baseline. Between 2007 and 2020, age-related public expenditure would increase by 1.1 p.p. of GDP more relative to the AWG baseline. Over the entire projection period however, the public age-related spending-to- GDP ratio would be 1.6 p.p. of GDP higher compared with the AWG baseline. (p.32)
Scenario 4:
2. High life expectancy scenario is built as a sensitivity test for measuring the impact of alternative assumptions on mortality rates (life expectancy at birth being one year higher at the end of projection period than in the baseline demographic scenario). The scenario is methodologically identical to the “pure demographic scenario”, but alternative inputdata on demography and GDP are used. (p.119)
Actions/solutions implied:
Coping with the challenge posed by an ageing population will require determined policy action along the three-pronged strategy decided by the Stockholm European Council in 2001, i.e.: (i) reducing debt at a fast pace; (ii) raising employment rates and productivity; and (iii) reforming pension, healthcare and long-term care systems. (p. 24) Pension reforms implemented in recent years in some Member States are having visible positive impacts (most recently in the Czech Republic, Hungary, Denmark and Portugal). They have sharply reduced the projected increase in public pension expenditure in recent years, diminishing the budgetary impact of ageing. Nonetheless, in some countries, the scale of reforms has been insufficient and they need to be pursued further to cope with the inexorable increasing share of older persons in Europe. At the same time, implementing other measures, for instance promoting higher employment rates of older workers that contribute to more adequate retirement incomes in the future might be required in order to ensure the lasting success of already implemented pension reforms. (p. 25) cost-saving technical progress might play a role in the future. In this context, the effective management of technology seems to be of utmost importance; otherwise the expenditure savings resulting from lower unit costs could easily be outstripped by the costs of meeting additional demand for new and better treatments. In any case, the increase in expenditure resulting from higher quality treatments in the future can be expected to be borne by those generations that benefit from these technological developments. (p. 29) In sum, these simulations illustrate that at this juncture, characterized by very subdued economic activity and exceptional uncertainty as to the prospects, there is a very real need to put in place all necessary policies to avoid the current financial crisis turning into a permanent shock to the key determinants of potential growth (employment and labour productivity) as this would have a strong negative impact on future GDP, per capita income levels and budgetary conditions. Europe’s ability to get out of the slump fast and restore sound public finances will depend crucially on its ability to deploy targeted and well co-ordinated policy responses, as stressed by the European Economic Recovery Plan5 and illustrated by the “rebound” scenario. The current situation must be used as an opportunity to combine determined efforts to overcome the recession with reforms that will restore confidence in the longer-term outlook for public finances, by strengthening investment in a more sustainable economy and society and by putting ageing-related spending on a sustainable path. This is particularly important if Europe wants to exploit the narrow window of opportunity – a period of about ten years during which employment growth remains possible – before dependency ratios begin to rise rapidly. Hence, getting the policy response right in aco-ordinated manner would limit the loss of wealth creation in Europe and would also lead to less expenditure than would otherwise be the case. Indeed, delays in implementing the needed policies would require stronger measures to achieve the same fiscal outcome by mid-century. It will be particularly important, therefore, to intensify the reform agenda in view of the longer-term challenges outlined above, so as to emerge stronger from the current economic crisis, and to get our economies back on a path of long-term growth. For this to happen, a comprehensive exit strategy built on structural reforms across the board will be necessary to restore credibility and confidence in the public finances.
Once out of the crisis, in planning a new fiscal course, due account needs to be taken of the diagnosis of the problems related to ageing. To start to bend back the curve of long-term costs, and to get our economies back on a path of long-term growth, modernization of pensions and health care as well as expanding the degree to which existing factors of production have been used so far is the key. (p. 32-33)
Once out of the crisis, in planning a new fiscal course, due account needs to be taken of the diagnosis of the problems related to ageing. To start to bend back the curve of long-term costs, and to get our economies back on a path of long-term growth, modernization of pensions and health care as well as expanding the degree to which existing factors of production have been used so far is the key. (p. 32-33)
Who benefits from the actions taken?:
governments, society, healthcare systems
Keywords:
Geographic scope: