Grey new world: Europe on the road to gerontocracy?

A.L. Bovenberg

June 21, 2007

2

Dependency ratio 2000 -2050 (65+\20-64)

0,1

0,2

0,3

0,4

0,5

0,6

0,7

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Netherlands Italy France Germany

Spain Sweden United Kingdom

3

Average and median age in the EU

4

Trends in fertility, 1960 and 2005

0

0,5

1

1,5

2

2,5

3

3,5

EU

-25

DE

ES

FR IT SE

UK

US

*

JA*

CA

*

2005

1960

5

Lower fertility

• Feminization of work Better exploitation of female human capital Lower fertility reduces burden supporting

young dependents

• Social innovation required combine work and family

reduce opportunity costs of children in terms of lost human capital of parents

compensate lower investment in human capital children more work and more funding of pensions

6

Trends in life expectancy at 65, males

8

10

12

14

16

18

20

FR

*

IT*

ES

*

UK

*

DE

SE

US

*

CA

JA*

change 1960-2003

1960

7

Increased longevity

• Human capital more durable Longer horizon

• Realization of several ambitions Combine care and career

• Social innovation required better maintenance of human capital more flexible working patters and more

flexible wages elderly

8

Mean age of women at first childbearing, 1980 and 2003

22

23

24

25

26

27

28

29

30

DE

ES

*

FR

*

IT*

SE

UK

*

US

*

JA*

1980

2003

9

0

5

10

15

20

25

France Italy Germany UK US Japan

1970

2004

Retirement period, 1970 and 2004

10

Modern life course

• Traditional life course of adults two seasons summer and winter

• Two new more moderate life seasons Young adulthood = spring: delay of parenthood Active seniorhood = autumn: delay of mortality and

morbidity Thus: people spend more time in households without

young kids • Compression of working life in ‘rush-hour of life’

(=summer) Longer adolescence: social adulthood delayed

beyond biological adulthood Longer retirement: social aging precedes biological

aging

11

Distribution of time over life cycle, the Netherlands, female

0

10

20

30

40

50

60

70

80

9019

75

1980

1985

1990

1995

2000

leisure

working

learning

12

Political challenges • Older voters block necessary reforms

Treasure human capital and later retirement More flexible working careers and wages Exploit fall to support summer More inclusive labor and housing markets

• Politics conflicts with economics Vicious circle of early retirement, low fertility,

slow innovation and political instability

13

Linking retirement age to longevity

• Measures age appropriately• Avoids large inactive class of politically powerful

citizens • Diversifies income sources elderly • Reduces political risks and conflicts• Maintains human capital better• Requires labor-market reforms to be legitimate

14

Stronger position for young parents

• Give parents one voting right per minor child More inclusive policies: protect outsiders

• Institute risk-sharing rules with lower fertility NDC systems

reduce pensions with lower fertility more public benefits for parents with

children: investments in human capital Adults save more for retirement

elderly rely more on labor and capital income rather than public transfers

15

Conclusions • Economics

Maintain and accumulate human capital More inclusive labor and housing markets Transfer passive public support in fall to preventive support

in summer Diversify income sources of seniors

• Politics State-contingent constitutional rules for sharing

demographic risks • Future (implicit) rules and norms shaped by current economic

incentives Implement reforms now

to create a large future working constituency with a stake in flexible labor and capital markets

to allow citizens to anticipate changes