Speakers of the session
William R. White
Previously, Economic Adviser and Head of the Monetary and Economic Department,Bank for International Settlements (BIS)
Principal Economist, Head Private Pensions Unit, Financial Affairs Division, Organisation for Economic Co-operation and Development (OECD)
António de Lecea
Principal Advisor, Acting Director, Investment, Growth and Structural Reforms, European Commission
President, Federal Financial Supervisory Authority, Germany (BaFin)
Chief Executive Officer Corporate Life & Pensions, Zurich Insurance Company Ltd.
Managing Director and Chief EMEA Economist, Standard & Poor’s Ratings Services
Head of Public Policy, Fidelity Worldwide Investment
Objectives of the sessionThis plenary session is focused on the economic challenges and the impacts on existing pension systems posed by the ageing population. The session will also address the contribution of the financial industry to these issues.
Points of discussion
What are the key impacts of the ageing population on EU economies and exiting retirement systems?
- What are the impacts of the ageing population on economies (e.g. labour market, public spending)? Do these impacts differ across Member States?
- Are savings in the EU generally sufficient to cover retirement needs with increasing ageing? Have sufficient reforms been undertaken in EU Member States to address these issues? Do occupational pensions or/and private pensions guarantee retirement needs?
- What should be the EU priorities for making decisive progress in addressing the issues posed by ageing populations in the EU on existing retirement systems? What progress can be made at the European level and which issues can be tackled only by Member States?
What are the implication of greater longevity for the financial sector in Europe?
- What should be the respective roles of the State and of the financial industry to cover retirement needs with increasing ageing? On what conditions can private pension products adequately complement state systems in the current monetary and economic context?
- How to enable insurers, asset managers, pension funds to manage the risks and opportunities related to greater longevity? What is the impact of ageing on investment behaviour and how to take this into account?
Background of the session
Dramatic changes in the age structure projected in the EU
Due to the dynamics of fertility, life expectancy and migration, the age structure of the EU population will change strongly in the coming decades. The overall size of the population is projected to be slightly larger by 2060 but much older than it is now. According to the 2015 Ageing Report published by the EU Commission last year, the EU population is projected to increase (from 507 million in 2013) up to 2050 by almost 5% when it will peak (at 526 million) and will thereafter decline slowly (to 523 million in 2060).
In terms of drivers of the population changes, total fertility rates are projected to rise for the EU as a whole, though remaining below the natural replacement rate (this is the case in all Member States). At the same time, the projections show large and sustained increases in life expectancy at birth. In the EU, life expectancy at birth for males is expected to increase by 7,1 years over the projection period, reaching 84,8 in 2060. For females, it is projected to increase by 6,0 years, reaching 89,1 in 2060. Net immigration flows are projected to continue; first increasing to 1,364,000 by 2040, and thereafter declining to 1,037,000 people by 2060.
The demographic old-age dependency is set to nearly double over the long term
As a result of these different trends among age-groups, the demographic old-age dependency ratio (people aged 65 or above relative to those aged 15-64) is projected to increase from 27,8% to 50,1% in the EU as a whole over the projection period1. This implies that the EU would move from having four working-age people for every person aged over 65 years to about two working-age persons.
This ageing has already had major consequences in terms of the balance of pension systems, but these impacts will grow in the future
Although extensive reforms have already been adopted in most European Union countries (raising the retirement age, increasing contributions and freezing or even reducing certain benefits, readjusting special systems or specific benefits, introducing automatic links between retirement age and life expectancy, etc.), there is still a long way to go and further unpopular reforms will be required.
Population ageing puts upward pressure on public spending. The long-term budgetary projections show that population ageing poses a challenge for the public finances in the EU. According to a recent study published by Citi in March 2016, Government debt in 20 industrialised countries stands at $44 trillion, but after factoring in public pensions and other retirement liabilities, the debt levels triple to a staggering $ 122 trillion. To that end sustaining and accelerating efforts to boost investment and productivity remains crucial.
Otherwise, population ageing affects the solvency of Defined Benefits (DB) funded pensions as their assets may fail to cover their liabilities, as they need to pay pension benefits for a longer retirement period; and the adequacy of Defined Contribution (DC) funded pensions as the assets accumulated may be lower than expected to finance retirement.
Other impacts of population ageing on labour market developments, consumption and economic growth
The labour supply will decline because of the projected population trends and the number of employed may diminish. The total labour supply in the EU (and in the euro area) is projected to nearly stabilise between 2013 and 2023 (age group 20-64), while it is projected to decline by 8,2% between 2023 and 2060, representing roughly minus 19 million people. In the euro area, the projected fall in labour supply between 2023 and 2060 is 9,2% equivalent to about 14 million people.
As elderly people have higher levels of medical consumption, this is already compromising -and will further compromise in the future - the balance of health insurance systems. In addition, the range of care and treatments offered will need to adapt to different types of consumption, with a greater focus on chronic illnesses such as diabetes or high blood pressure. In addition, although the increase in life expectancy primarily concerns “healthy life expectancy”, the number of dependent people will rise sharply: for instance, current forecasts in Germany indicate that the number of dependent people could increase by 80% by 2050 to reach 4.5 million. This will result in additional costs (according to a recent OECD report, their care costs are expected to double or even triple by 2025) and will require the large-scale deployment of appropriate care structures. In addition, ageing will increase disability rates and Income Protection gaps.
The changes in the types of consumption and requirements will also impact production capacity, which will need to adapt: the buoyant economic sectors with an elderly population are not the same as for a young population. Ageing is expected to translate into stronger levels of consumption for housing, domestic services and healthcare, while spending on clothing, food and equipment will fall. In addition, as the propensity to save is stronger among seniors (except for very elderly segments), there is a risk of growth slowing down if these additional savings are not invested effectively.