Standard Life Investments

Weekly Economic Briefing


The greyest generation


The Eurozone is not getting any younger; in the latest instalment of the Ageing Report, the European Commission (EC) projects that the median age in the currency union will rise from 41 for men and 44 for women in 2013 to 45 and 48 respectively by 2060. The total population is projected to grow 1.6% in total over the period, but the profile of the population will look quite different than it does today. In particular the working age population (20-64) is set to decline by a full 13% between 2013 and 2060, representing a very significant demographic drag (see Chart 6). Add to this the increase in life expectancy by 6.5 years for men and 5.5 years for women, and it should come as no surprise that the EC is projecting an increase in the demographic dependency ratio: the number of people above 65 as a proportion of the working age population rising from 29.3% in 2013 to a whopping 51.1% in 2060. This shift in the age profile is set to bring considerable challenges to fiscal policy and the growth outlook over the period.

(Not) forever young The cost of ageing

In its baseline scenario, the EC estimates that the cost of this age-related fiscal spending on pensions, healthcare, long-term care and education will rise by 1.9 percentage points (ppts) as a share of GDP in the period to 2060. An increase in expenditure on healthcare and long-term care is largely responsible for this spending surge, rising 0.9ppts and 1.3ppts respectively. Interestingly, the cost of spending on public pensions as a proportion of GDP is set to increase through the period before declining to the same level as 2013 by the end of the projection period. A reduction in unemployment benefits, due in part to a smaller workforce, of 0.4ppts brings total age-related spending for the Eurozone 1.5ppts higher as a percentage of GDP by 2060 than the 2013 level. Of course, these aggregate numbers obscure a more diverse range of age-related fiscal spending needs in individual member states (see Chart 7), each of which have varying space and/or will to expand or reform fiscal policy to reflect these demands.

In the baseline scenario for Germany, for example, age-related spending is set to rise by 5.1ppts, significantly more than the average Eurozone rate. Pension spending plays a major role in this acceleration, increasing as a proportion of GDP by 2.7ppts over the period. Meanwhile, France illustrates the other extreme: the cost of age-related spending is set to fall by 1.3ppts over the period, with pension spending forecast to decline by 2.8ppts from its elevated level of 14.9% in 2013. The good news is that public pension servicing costs are actually forecast to decline in a number of member states, including Italy and Spain, thanks in part to pension reforms that have already been enacted. Going forward, whether, and how much, individual countries are willing to enact often unpopular reforms to the retirement age, working week and pension system; improve healthcare system efficiencies; and fund these rising costs will be important. One difficulty with long-term policy strategy is that governments can be punished in the shortrun and, so lack the incentives to take such important policy steps. The recent upswing in populist support risks further incentivising centrist parties to favour short-term gains.

Stephanie Kelly, Political Economist