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Budgetary Sustainability of Ageing Belgian and European Answers

Budgetary Sustainability of Ageing Belgian and European Answers. International Conference ‘Population Ageing. Towards an Improvement of the Quality of Life?’ Organised by the Belgian Platform on Population and Development Brussels, 1 March 2007. Micheline Lambrecht.

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Budgetary Sustainability of Ageing Belgian and European Answers

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  1. Budgetary Sustainability of AgeingBelgian and European Answers International Conference ‘Population Ageing. Towards an Improvement of the Quality of Life?’ Organised by the Belgian Platform on Population and Development Brussels, 1 March 2007 Micheline Lambrecht

  2. Themes of the Intervention • The Actors (FPB – Eurostat – EU DG ECFIN – AWG - EPC) • The Belgian Ageing Policy • The European Ageing Policy • The Impact of Ageing on Public Expenditure for the EU25 Member States • Main Conclusions The speaker would like to express her thanks to Mr Carone from DG-ECFIN, Ms Fasquelle , Ms Vandevoorde and Ms Van Brussel from the FPBfor their collaboration in the preparation of these slides.

  3. The Actors FPB – Eurostat – EU DG ECFIN – AWG - EPC

  4. The Actors: the Belgian Federal Planning Bureau (FPB) main tasks relating to ageing • Short-term, Medium-term and Long-term forecasts (for up to 50 years - MALTESE model) of demography and age-related expenditure • Secretary of the Belgian Ageing Committee constituted by the Act of 5 September 2001 • Belgian representative in the Ageing Working Group of the EU • Various analyses to test political measures, shock impacts and trends, at the request of the government, social partners or members of parliament

  5. The Actors: Eurostat • The European institute of statistics, located in Luxemburg • Makes regularly population forecasts in collaboration with the national institutes of statistics and associated institutes (for Belgium: Statistics Belgium and FPB) • A new team was constituted at the beginning of 2004 • It published, in April 2005, EUROPOP2004, population forecasts until 2050 for the 25 EU members • It made for the AWG, adapted forecasts incorporating more life-expectancy convergences between the EU15 countries and actualized migration hypotheseshttp://epp.eurostat.ec.europa.eu

  6. The Actors: the EU DG ECFIN and the EPC • The EU Directorate-General for Economic and Financial Affairs (DG ECFIN) makes support studies for the Economic Policy Committee (EPC) which is responsible to and advices the European Ministers of Economy and Finances. • DG ECFIN assumes the Secretariat and delivers studies in support of the several working groups constituted around the EPC, as the one working on Ageing Populations and Sustainability (AWG).

  7. The Actors: the AWG • The EPC’s ‘Working Group on Ageing Populations and Sustainability’ (AWG), constituted in December 1999, saw its mission redefined in February 2007. • It comprises national representatives of the Member States, the Commission services (DG ECFIN), Eurostat, observers from other international organisations as the OECD (which avoids double work), ECB and if relevant, the IMF, the WB and other EU Committees, in particular the Social Protection Committee. It receives its mission from the EPC and regularly reports to it. • The President of the AWG is Henri Bogaert, Commissioner for the Belgian FPB. • The core business of the AWG is to: • contribute to assess the long-term sustainability of public finances, through the LT age-related budgetary projections, appropriate indicators and peer reviews of the new major pension reforms • analyse, on request of the EPC, various consequences of ageing on LT fiscal sustainability, macroeconomic aggregates

  8. The Belgian Ageing Policy

  9. How to resume the federal Belgian ageing strategy ? • Fiscal sustainability • Incentives to work more, also in the new work schemes, and longer • Global management of social security • Limited welfare adaptations of the existing pensions • Analysis and control of health expenditure • Reduction of public debt and constitution of an ageing fund • Social sustainabilitywithin the framework of the three pillars pension system: • Consolidation of the first pillar, support of the lowest pensions • Development of a more generalized and guaranteed second pillar • Fiscal incentives inside the third pillar

  10. THE MALTESE SYSTEM OF MODELS Number of beneficiaries Average amount DEMOGRAPHIC PROJECTION By age group and gender DEMOGRAPHIC SCENARIO MACROECONOMIC SCENARIO SOCIODEMOGRAPHIC SCENARIO SOCIODEMOGRAPHIC PROJECTION By age group and gender MACROECONOMIC PROJECTION: Employment, GDP, wages, … SOCIAL BENEFITS EXPENDITURE BY SCHEME AND REGIME HEALTH CARE EXPENDITURE SOCIAL SECURITY ACCOUNTS Revenues, expenditure, balance, debt SOCIAL POLICY SCENARIO GENERAL GOVERNMENT ACCOUNTS Revenues, expenditure, balance, debt BUDGETARY POLICY SCENARIO

  11. The European Ageing Policy

  12. The European Ageing strategy • Focus on the employment rate (Lisbon, 2000) • objectives: 70% men and women, 60% women, 50% older workers • decrease of early retirement • long life learning • « Three-pronged strategy for pensions » (Stockholm, 2001): • Higher employment rate • Lower public debts • Pensions reforms • Focus on the pensions reforms (Laeken, 2001) • adequation • fiscal sustainability • modernization • Progressively, more analysis of health expenditure

  13. The Impact of Ageing on Public Expenditurefor the EU25 Member StatesA common work of MS in AWG, Eurostat, DG ECFIN, EPC http://europa.eu.int/comm/economy_finance/epc/epc_sustainability_ageing_en.htm(all full reports with their summaries and annexes)

  14. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Real interest rate General Methodology of the 2005 AWG Exercise Pensions National models

  15. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  16. The Demographic Evolutions: Belgium / European UnionMain Demographic Parameters (1)Eurostat AWG baseline (EUROPOP2004, adapted) 2004 2050 Fertility (TFR): Belgium 1.6 1.7EU15 1.5 1.6EU10 1.2 1.6 Life expectancy - Men Belgium 75.5 82.3EU15 76.4 82.1 EU10 70.1 78.7

  17. The Demographic Evolutions: Belgium / European UnionMain Demographic Parameters (2)Eurostat AWG baseline (EUROPOP2004, adapted) 2004 2050 Life expectancy - Women Belgium 81.6 87.5EU15 82.2 87.0EU10 78.2 84.1 Net migration (thousands) Belgium 24 19EU15 1347 778EU10 -3 101

  18. The Demographic Evolutions: Belgium / European UnionTotal Population and Age Structure millions - Eurostat AWG baseline Total 0-14 15-64 65+ 2004 2050 2004 2050 2004 2050 2004 2050 Belgium 10,4 10,8 1,8 1,6 6,8 6,3 1,8 3,0 EU15 382,7 388,3 62,4 52,7 255,1 221,3 65,2 114,2 EU10 74,1 65,5 12,4 8,6 51,7 37,8 10,1 19,1 EU25 456,8 453,8 74,8 60,4 306,8 259,1 75,3 133,3

  19. The Demographic Evolutions: Belgium / European UnionOld Age Dependency Ratios(65+/15-64)x100Eurostat AWG baseline 2004 2050 Belgium 26.4 47.6 EU15 25.6 51.6 EU10 19.5 50.5 EU25 24.5 51.4

  20. A Summary of the EU25 Demographic Evolution(2006 EPC/Commission Report on Ageing and Giuseppe Carone from DG ECFIN) • Total population: 457 mill. in 2004, 471 mill. in 2030, 454 mill. in 2050 • Most numerous age cohorts: age 36 in 2004, age 57-59 in 2050 • Population aged 65+ doubles until 2050 (from 75 to 133 millions in 2050) • Old age dependency ratio (65+/15-64): doubles from 25 to 51 2004 2050 89 89 85 85 81 81 77 77 73 73 69 69 65 65 61 61 57 57 53 53 49 49 45 45 41 41 37 37 33 33 29 29 25 25 21 21 17 17 13 13 9 9 5 5 1 1 4000 0 1000 4000 3000 1000 3000 4000 3000 0 1000 2000 3000 2000 2000 2000 1000 4000 Males Females Males Females .

  21. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  22. Labour participation • Participation rates are projected using the cohort methodology developed by the OECD : • taking into consideration life profiles by gender, derived from the observation of the cohorts observed from 1998 to 2003 • This method also defines probability to enter or leave the labour market (starting from the 1997-2003 observations) • Also, women participation rates are bound to increase in the future: • they reach steadily a higher education level, which encourages to to remain in a well-paid job • they have less children • Healthy ageing, perspectives of living longer and national pension reforms encourage the older workers to remain longer at work • The impact of the recent pension reforms on the exit age is taken into consideration

  23. Impact of Recent Pension Reforms on the Labour Exit Age (2003 - 2025)

  24. Participation Rates in 2003 and Increase until 2050 Total 15-24 25-54 55-64 (15-64) Belgium 65.0 35.2 82.3 28.9+5.0 +1.7 +6.3 +16.0 EU15 70.4 48.2 83.5 44.2 +5.7 +1.4 +5.1 +17.8

  25. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  26. Unemployment and Employment Hypotheses • The unemployment definition used by the EC is the one used in the Labour Force Surveys. • The unemployment rates will converge to their minimal structural rates in 2008 (the average for the EU15 is 7%), and will then remain constant (Belgium will reach 6.5 in 2013; additional delays are anticipated for countries where this minimum is superior to the EU15 average). • The baseline scenario keeps the other employment parameters constant : - total hours worked - various distributions: public – private, wage-earners – self-employed, full-time – part-time.

  27. AWG Employment and Unemployment Projections (Belgium)

  28. Projected employment rates and Lisbon targets for the EU25 The Consequences of Ageing Populations on Employment and Growth Source: 2006 EPC/Commission report on ageing.

  29. The Consequences of Ageing Populations on Employment and Growth(source: Giuseppe Carone from DGECFIN) Projected time frame for meeting the Lisbon employment target 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 TARGET ALREADY REACHED IN 2004 Denmark Netherlands Sweden UK 2035 EU12 EU10 2023 Slovenia 2020 EU25, Slovakia 2020 EU25 2018 Spain 2015 EU15, Czech Republic 2015 EU15 TARGET NOT REACHED IN 2050 (7MSs) Belgium France Hungary Italy Luxembourg Malta Poland 2014 Lithuania 2013 Estonia 2011 Latvia 2010 Germany 2009 Ireland 2007 Finland 2006 Portugal 2005Austria, Cyprus

  30. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  31. Labour Productivity and Potential Growth • A production function is used to combine the evolutions of the population, the labour productivity and the capital intensity. • There will be a slow down of the labour productivity to 1.7 % as from 2030 for the EU15 countries (that is the Total Productivity Factor 1.1 multiplied by 0,65, where 0.65 is the share of the labour factor) and to 1.9% for the EU10 countries.

  32. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  33. The GDP Growth and its Determinants GDP growth Labour productivity Employment 04-10 11-30 31-50 04-10 11-30 31-50 04-10 11-30 31-50 Belgium 2.4 1.8 1.5 1.5 1.8 1.7 0.9 0.0 -0.2 EU15 2.2 1.8 1.3 1.31.81.7 0.9 -0.1 -0.4 EU10 4.5 3.0 0.9 3.6 3.1 1.9 0.9 -0.1 -1.0 EU25 2.4 1.9 1.2 1.5 2.0 1.7 0.9 -0.1 -0.5

  34. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  35. The Real Interest Rate • Projections are made with constant prices of 2004. • The long-run real interest rate has been fixed at 4%. • Unlike Belgium, the DG ECFIN did not make any projection of the public debt or the interests to be paid, in order not to interfere with the exercises of the Stability Pact.

  36. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG - Exercise

  37. Unemployment Benefits The central scenario combines different elements: • the ratio between the unemployed and employed persons, as calculated • the GDP per head • a constant ratio between the average unemployment benefit per head and the GDP per person employed, equal to 14.4, as observed during the period 1998-2002

  38. Unemployment Benefitsin % of GDP 2002 2010 2030 2050 2002-2050 Belgium 2.30 2.03 1.77 1.76 -0.54EU15 1.04 0.80 0.68 0.68 -0.37 EU10 0.33 0.35 0.18 0.18 -0.15 EU25 1.01 0.79 0.61 0.61 -0.40

  39. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  40. Health Care Expenditure The baseline scenario combines different elements: • the evolution of the population • the importance of health care expenditure relating to each age • the link between health care expenditure and growth (GDP per head), with an elasticity of 1.1 at the beginning of the period and a move towards 1 at the end of the period • a higher health care expenditure at the end of life (death-related costs)

  41. Age-Related Health Care Expenditure Profilesin the EU15 and the EU10Source: 2006 EPC/Commission report on ageing

  42. Health Care Expenditure in % of GDP 2004 2010 2030 2050 2004-2050 Belgium 6.2 6.4 7.1 7.6 1.4 EU15 6.4 6.5 7.5 8.1 1.6 EU10 4.9 5.2 5.8 6.2 1.3 EU25 6.4 6.6 7.4 7.9 1.6

  43. Health Care ExpendituresResults of different scenarios

  44. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  45. Long-Term Care Expenditure The central scenario combines different elements: • the evolution of the population • the dependency, assuming that the healthy life expectancy gains are half the gains of the total life expectancy • the link between health expenditure andgrowth (GDP per head) is fixed at an elasticity of 1

  46. The Long-Term Care Age ProfilesSource: 2006 EPC/Commission report on ageing

  47. The Projection of the Dependent Populationin the EU25 Informal or no care Formal care in institutions Formal care at home 30000 % change 2004-2050 25000 +98 20000 % change 2004-2050 in thousands 15000 +21 +110 10000 +38 5000 +130 +55 0 2004 2050 2050 - constant disability scenario

  48. Long Term Care Expenditure in % of GDP 2004 2010 2030 2050 2004-2050 Belgium 0.9 0.9 1.3 1.9 1.0 EU15 0.9 0.9 1.1 1,5 0.6 EU10 0.2 0.3 0.3 0.5 0.3 EU25 0.9 0.9 1.1 1.5 0.6

  49. 1.5 1.6 1.4 1.2 1 0.8 0.7 0.8 0.6 0.5 0.6 0.4 0.2 0 Pure ageing Constant Cost - GDP Increased AWG GDP per disability per capita formal care reference capita scenario Change in Long-Term Care Expenditure 2004-2050Results in Different scenarios(in percent of GDP; EU25)

  50. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

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