Age structure and sustainability

• Demographically, this depends on the stability of the ratio between population in working age and population in retirement age

• ‘Support ratio’: how many persons aged 15-64 are there for a person aged 65 and over?

• ‘Old dependency ratio’: the opposite (how many persons aged 65 and over are there for a person aged 15-64)?

Age structure and sustainability

• The most important issue that links age structure to potential problems of sustainability is the pension system

• The equilibrium of a pay-as-you-go pension system depends on the fact that the total amount of contributions is equal to the total amount of pensions paid in any given year

Age structure and sustainability

• Population forecasts are designed also in order to assess the sustainability of population changes and the economic challenges given by demography

‘Support ratio’ Italy, Germany, Spain,UN projections 2002

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Italy

Spain

Germany

… this is population ageing

• If the support ratio decreases, solutions for a pension system:– Increase retirement age– Increase labour force participation (i.e. of women)– Decrease level of pensions– Increase level of contributions

• At the level seen, the development is not sustainable

… this is population ageing

• The impact on the labour force is also important: the labour force is ageing and, more important, shrinking

Why is the EU population ageing?

• The main reason is the decrease in fertility

• Second reason the increase in longevity

TFR (number of children per woman) Italy, Germany, Spain

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1980 1985 1990 1995 2000

Year

child

ren

Italy

Spain

West G.

East G.

Germany

Life expectancy at age 65 Italy, Spain (women)

13

14

15

16

17

18

19

20

21

1980 1985 1990 1995 2000

Year

year

s

Italy Spain

Why is the EU population ageing?

• “Lowest-low” fertility, defined when the average number of children per woman in a year (“period” TFR) drops below 1.3 has emerged in Europe in the 1990s (Kohler, Billari, Ortega, 2002)

• Forerunners: Italy & Spain. Then Central & Eastern Europe, Former USSR

Why is the EU population ageing?

• Long-term sustainable solution:– Increase in fertility combined with– Increase in immigration

• To be in equilibrium, TFR should be close to 2.1 (e.g. 1.8) and immigration compensate for the difference (close to U.K., U.S. solution)

• Of course, in the meanwhile medium- short-term solutions

Net migration rate (% of the population) Italy, Spain

-1.0

-0.5

0.0

0.5

1.0

1980 1985 1990 1995 2000

Year

%

Italy Spain

Potential for labour migration: Unemployment

Not surprisingly, employment fell notably at the start of transition; in addition, despite the recovery in GDP growth in the late ‘90s, employment fell by 1.5% during the 1995-1999 period and it is still on a downward trend (thus also exacerbating the demographic problems).

As a consequence, unemployment exploded in early transition years. Subsequently it decreased in 1995 to slightly below 10%, but then, due to further restructuring and an increase in productivity, it rose again in the late 1990s, reaching an average rate of 12.5% in 2000.

N.B. Due to the relevance of the informal and grey sectors, these figures have to be considered as a lower bound.

Potential for labour migration: labour costs

The European Commission however estimates that such phenomena will be limited, although with a diversified impact on the different Member States.

Although unit labour costs have increase significantly these are still at 25% of the EU average.

Unemployment and lower labour costs => potential for labour migration

At this purpose, transition periods in the Chapter related to free movement of persons have been negotiated, as it has been the case for the Southern enlargement

Key references

• Social Agenda 2005-2010: http://europa.eu.int/comm/employment_social/social_policy_agenda/social_pol_ag_en.html

• Green Paper “Confronting demographic change: a new solidarity between the generations”:http://europa.eu.int/comm/employment_social/social_situation/green_paper_en.html