population ageing a threat to the welfare state? · population ageing – a threat to the welfare...

Population Ageing – A Threat to the

Welfare State?

Tommy Bengtsson

Centre for Economic Demography

School of Economics and Management [email protected]

Eurostat/UNECE Work Session on Demographic Projections,

Rome, 2013-10-29

mailto:[email protected]

OECD 2009

Global ageing 2000 and 2050:

Elderly (65+) in relation to the labour force (20-64)

2

1

http://en.wikipedia.org/wiki/File:Flag_of_Italy.svg

Lund University / Centre for Economic Demography

1st Population Ageing = Past

• Caused by falling fertility

• Increase in life expectancy slowed down population ageing since more years were gained in ages below 65 years than above

• Increase in old age dependency ratio was fully compensated for by the decline of youth = the total dependency ratio went down


2nd Population Ageing = Present

• Caused by reductions in mortality among the elderly

• Both old age and total dependency ratio will increase, the latter from 70 to 85 until 2050 in Sweden ( ~ 20 % increase)

• What are the consequences? To fully understand, we need to analyse consumption and production for each age group


Production and consumption by age

production

consumption

20 years 65 years age

Production and consumption by age:

Sweden 2003

Forsell et al 2008

0

100

200

300

400

500

600

0 10 20 30 40 50 60 70 80 90 100

consumption

production

Private and public consumption by age:

Sweden 2003

0

100 000

200 000

300 000

400 000

500 000

600 000 0

3

6

9

12

15

18

21

24

27

30

33

36

39

42

45

48

51

54

57

60

63

66

69

72

75

78

81

84

87

90

93

96

99

total

public:

health

care

private

Forsell et al 2008

education

0

50

100

150

200

250

300

350

400

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Aggre

gate

Life C

ycle

Deficit

Projected life cycle deficit:

Sweden 2007-2050, 2007=100

Bengtsson & Scott 2010

250 %

increase

dep ratio

20 %

increase Assumptions:

2050 e0 men 84, women 86

2029 TFR 1.83 then stable


Increase in life cycle deficit

• Health care costs has been increasing by more than

1 % per year per capita in real value over recent

decades

• If it continues, then the life cycle deficit will grow with a

factor of at least 400 % instead of 250 % until 2050

• 0.3-0.5 percent annual increase in GDP/capita needed

to compensate

• Most of the change takes place within

the next 20 years


What can we do about it?

• Higher immigration?

• Higher fertility?

• Productivity increase?

• Increase in working hours?

• Reduced consumption?



• Higher immigration? Too little!

• Higher fertility?







• Higher fertility? Too late!







• Higher fertility? Too late!

• Productivity increase? Too difficult!




Increase in working hours?

• 65% of those aged 20-64 years work today

• 41 weeks per year in EU, 45 in the US

• Life expectancy at age 65 years is increasing

• Thus there should by possibilities to increase working

hours in all ages, which must be matched by an

increase in the capital stock

Everything else equal, retirement age in Sweden has to

increase by 5.5 years until 2040-50 to keep

consumption from falling ( ~ 1.3 month per years)

Age at retirement and exit from labour force:

different OECD countries in 2008

Olsson 2011

54

56

58

60

62

64

66

68

Icel

and

Jap

an

USA

Swed

en

No

rway

Port

uga

l

Irel

and

Gre

at B

rita

in

Ge

rman

y

Fin

lan

d

Net

her

lan

ds

Den

mar

k

Gre

ece

Cze

ch

Ital

y

Spai

n

Fran

ce

Pola

nd

Hu

nga

ry

age at exit

retirement age

Exit age for those working at age 50 years:

different OECD countries 1990-2010

Karlsson &

Olsson 2012

57

58

59

60

61

62

63

64

65

66

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Japan

Sweden

USA

Greece

Germany

Italy

France

Netherlands

Proportion with labour income by age in EU

counties 2006/7

Klevmarken 2010 0

10

20

30

40

50

60

70

80

90

50–54 55–59 60–64 65–69 70–74 75–79 80–

Sweden

France

Netherlands

Austria

Germany

Greece

Italy

Exit age: Sweden 1970-2010

males

both sexes

females

Retirement age changed

from 67 to 65 years

SOU 2011:05

1963

68 years

Early retirement

programs

New pension

system


How much has the recent increase in age at

exit from the labour force affected income at

older ages?


Haodong Qi forthcoming

Labour income by age 1985-2003:

Sweden

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1

6

11

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86

91

96

10

1

1985 1995 2003


Age at exit from the labour force of 1939

year’s men by education: Sweden

Education

Age at exit Later exit Extra

years of

schooling

Primary 61.7 0 0

Secondary 62.9 1.2 3

Tertiary 63.5 1.8 6

Research

(PhD)

65.0 3.3 10


Will the present increase in age at exit from

the labour force solve the funding problem

of population ageing?

• Costs for the elderly goes also up


Haodong Qi forthcoming

Consumption by age 1985-2003:

Sweden

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

0

4

8

12

16

20

24

28

32

36

40

44

48

52

56

60

64

68

72

76

80

84

88

92

96

10

0

1985 1995 2003


Will the present increase in age at exit from

the labour force solve the funding problem

of population ageing?

• Costs for the elderly also goes up

• So does age at entry into labour force


Average age at leaving education and

time to find work: EU countries 2012

Education

Age at leaving school,

years

Time to find work,

months

low EU

mean

high Low EU

mean

high

Primary 14.3 Bulgaria

17.3 18+ Northern

Europe

4.3 Sweden

9.8 24.3 Slovak

Republic

Secondary 19.9 21.3 Germany

3.0 UK

7.3 11.0 Italy

Tertiary 22.0 UK

26.0 Denmark

5.1 10+ Italy,

Greece

Albissini & Cascioli 2012


European challenges, welfare issues

• Pension systems need to be reformed

– Pay-as-you-go system supplemented by funded

systems. Stronger link between contributions and

benefits

– The Swedish system is contribution based with a break

at 11 % of GDP. Swedish system is stable from an

actuarial point of view, but pensions will decline unless

retirement age increase

• Social care systems need to be reformed

– Family versus public? Contribution based as well?

• Health care systems need to be reformed

– But is it really possible to make similar reforms

as in pension systems?


European challenges, labour market

issues

• Incentives and opportunities to work at older ages

• Life time learning instead of early retirement

programs

• Incentives and opportunities for young and

immigrants to get into the labour force faster

• Improvements in educational programs

• Shorten time to finding work by vocational training,

internship, etc

• Flexicurity?

• LABOUR DEMAND


Forecasting issues

• How sensitive are our forecasts of life cycles deficits to

mortality assumptions?

• How sensitive are they to assumptions on age-specific

production and consumption?


Projected life cycle deficit with 2003 net

consumption using different mortality forecasts:

Sweden 2007-2050

100

150

200

250

300

350

400

450

2007 2017 2027 2037 2047

2013

2007

320 % increase

250 % increase

70 %

difference

e0 in 2050:

2013 men 85 women 87

2007 men 84 women 86


Projected life cycle deficit with latest mortality

forecast: different production and consumption

patters, Sweden 2007-2050

320 %

increase

80 %

increase

240 %

difference

100

150

200

250

300

350

400

450

2007 2017 2027 2037 2047

2003

1995


Increase in life cycle deficit, revised

• Health care costs has been increasing by more than

1 % per year per capita in real value over recent

decades

• Life cycle deficit will grow with a factor of at least 400 %

500 % instead of 250 % until 2050

• 0.3-0.5 0.4-0.7 percent annual increase in GDP/capita

needed to compensate

• Most of the change takes place within

the next 20 years


European challenges, forecasting issues

– Mortality decline underestimated in almost all forecasts

– Official forecasts rarely take age-specific consumption

and income into account

Political measures taken to account for population ageing

are therefore not in par with future problems:

• Pension systems are sometimes able to coop with

population ageing regardless of future changes

• Funding of social and health care much more

problematic!



– Mortality forecasts are very important!



– Mortality forecasts are very important!

– Even more important is to take age-specific

consumption and production into account!

population ageing a threat to the welfare state? · population ageing – a threat to the welfare...

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