Although it went largely unnoticed by the
public, the EC routinely published its "2021
Ageing Report" in May. It contains projections for age-related public
expenditure as far as 2070. This work, which is now almost 400 pages long –
plus over 200 pages of methodology – is only available in English. Those who
dedicate themselves to the work have to become involved with many
"numbers". Four different expenditure blocks can be seen: pensions,
health, long-term care and education/training. Several scenarios were used here
as the basis: a basic scenario, in which it is assumed that the current
regulations will remain unchanged and a large number of alternative scenarios
and sensitivity tests.
The report anticipates that Europe's
population will have shrunk by five per cent by 2021. But the population
structure will also change. The proportion of the working age population (20 -
64) will drop from 265 million to 217 million. This means, despite the expected
increase in the labour force participation rate, a 15.5% decrease in the labour
supply. The increase in the participation rate can also be explained by the
unemployment rate dropping from 6.8% to 5.8%.
At the same time, life expectancy will
increase by 7.4 years for men and 6.1 years for women, which would amount to a
given convergence. The so-called "age dependency ratio" is projected
to increase by almost 25 percentage points over the projected period. This rate
describes the ratio of the over-65-olds to the working-age population. In plain
English, this means: whereas there are about three people of active age for
every person over 65 today, there will be only two in 2070.
It should be borne in mind that past
pension reforms have raised the retirement age, significantly in some cases,
and that this has led to an increase in older people participating in the
labour force, namely by 10 percentage points in the 55 - 64 age group, mainly
due to a higher number of women participating in the labour force. All in all,
the participation rate of this age group will increase from 78.4% to 80.7%.
What does this mean when it comes to
developing demography-related budget expenditure? According to the Ageing
Report, it means that all four spending areas combined would increase
age-related costs from 24% of GDP today to 25.9% in the basic scenario.
However, there will be considerable variations between Member States in this
respect. Germany is among the 15 countries where the increase is most
An itemised breakdown of the increase is
revealing. In the basic scenario, the "main driver" is health and
long-term care expenditure (2 percentage points), whereas the contribution to
pension costs is projected to fall back to its basic level after a temporary
increase. Expenditure on education and training is expected to fall slightly.
However, the long-term stability of the share of pension expenditure also comes
at a high price, i.e. through a substantial decline in the wage replacement
rate by about 10 percentage points in almost all Member States. It is not yet certain
that all Member States will keep to their reforms.
The composition of the "cost
drivers" is somewhat different in Germany's case. Pensions account for the
largest share at 2.1 percentage points, whereas health and long-term care costs
only account for an increase of 0.6 percentage points.
So much about the standard/exit scenario.
One of the risk scenarios clearly stands out. It considers possible
cost-driving factors in the health and long-term care sector, namely those that
have nothing to do with demographic changes. Such factors can push the increase
to up to five percentage points instead of the approximately two percentage
points in the basic scenario.