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Financial Times (London), June 11, 2004

Fewer Births Make Old Europe Fear for Its Future

Many governments concerned by slow population growth are hoping for a new baby boom. But policies to bring about social changes are expensive and controversial, writesStefan Wagstyl:

BYLINE: By JO JOHNSON, MICHIYO NAKAMOTO and STEFAN WAGSTYL

Hospitals in Estonia are braced for a baby boom. New maternity wards are being carved out of space allocated to other departments as the tiny Baltic state prepares itself for Europe's biggest surge in births in decades.

"Our hospitals are ready. We will have enough beds," says Eva Maria Niine, a 30-year-old gynaecologist, who is expecting her first baby next month.

The sudden rise in births follows a sharp increase in maternity allowances on January 1, under which the state pays most mothers their full salary for up to 12 months. In the first three months of 2004, births rose 15 per cent as many couples anticipated the allowances. For the year as a whole, doctors forecast an increase of 20 per cent.

The baby boom has been welcomed by most Estonians, who were afraid that recent very low birth rates might lead to national extinction. Meelis Atonen, the economy minister, says delightedly: "If you look around Tallinn you can see the benefits of our policies immediately - there are pregnant women everywhere."

Estonia is the latest country to try to respond to a challenge facing the whole developed world. Since the 1970s, birth rates have been falling in Europe, North America and Japan, as the generation of people born in the post-1945 baby boom took advantage of the spread of contraception to have fewer children than their parents.

At first, this produced big economic gains as more women went to work, helping to boost the labour force. But as the baby boomers move towards retirement, a smaller generation will take their place. Today there are 30 people of pensionable age for every 100 working-age adults in the developed world. By 2040, there will be 70, according to projections based on United Nations data.

That figure, though, masks big disparities around the world. In the US, where the population is rejuvenated by immigration, the figure will be only 47, but in Japan, Italy, Spain and much of eastern Europe it will be more than 100. Fewer births mean that in most developed countries the average age will increase. The Center for Strategic and International Studies, a US think-tank, says in a report: "The rapid ageing of the developed countries will pose a major challenge for global prosperity and stability during the first half the 21st century."

The problem is particularly acute in eastern Europe, which has seen outflows of migrants since the fall of communism, especially of young people of working - and parenting - age. Ukraine, for example, has suffered a population drop of 4m to 48m. For economists such declines may not matter, as the spaces can be filled by immigrants. But most voters shudder at the thought of their nations dying out. Gabriela Vukovic, a demographer at Hungary's Central Statistical Office, says: "It's a very real fear."

The population issue is creeping on to the European political agenda. Italy last year published a ground-breaking white paper on the welfare state, giving priority to managing the demographic transition and placing the family at the centre of political action. Hungary is preparing a white paper on the cost of ageing to its welfare system. Almost everywhere the rising costs of pensions are under discussion.

Odile Quintin, director-general of employment and social affairs at the European Commission, says: "We don't have a fertility policy at the European Union level, but we are beginning to address the effects of low fertility."

With the exception of Estonia, European governments have approached the issue with caution because the possible responses are controversial: postponing retirement, cutting pensions, boosting immigration and promoting births.

Europe has been falling short of babies for 30 years. According to UN data, the average European woman of child-bearing age is likely to have 1.4 children, down sharply from 2.0 in the early 1970s. The minimum needed for a stable population is 2.1.

The decline is explained largely by many women remaining in work and postponing child-bearing. In the 15 countries that made up the EU before enlargement, the average age of the mother at the birth of the first child rose from 24 in 1980 to 27 over the next two decades. Professional women often wait until their 30s, pushing up the average.

Until recently, public opinion surveys suggested couples wanted to have two children if they could. However, in a study published last year, the Austrian Institute for Family Studies showed that in Germany and Austria the average ideal family size had dropped to 1.7 children. The authors argued that, since these two countries had been among the first to see birth rates drop in the 1970s, they might now be leading the way to still lower norms. In other words, memories of the two-child family were fading.

While all European states face the same challenges, there are sharp differences in their handling of the issue of falling birth rates.

In the UK, France and Scandinavia, birth rates have fallen relatively little. In Britain, a big contributor is a high rate of teenage pregnancy, which stems population decline but brings social problems and is something the government wants to reduce.

In France, birth rates have been held up by pro-family policies going back decades, including benefits paid specifically to parents of three or more children and extensive subsidised childcare (see below).

In the last 20 years, Scandinavian states, led by Sweden, have boosted their fertility to French levels with policies including generous maternity and paternity benefits, job guarantees for working parents and childcare.

In southern Europe, it is a different story. Birth rates fell late, held back by traditional and religious values, but having fallen they are among the world's lowest, at 1.2 for Spain and Italy. In the past, Mediterranean women typically stopped work to get married and lived in extended families where they often cared for the old as well as children. Today, many stay single to avoid these responsibilities and "enjoy their freedom" - in the words of the Italian government's welfare white paper. The white paper urges changes, such as better maternity pay and childcare services, to allow women to continue working while bringing up children. Italy spends just 3.8 per cent of its gross domestic product on child-related social spending compared with an EU average of 8.5 per cent, the white paper says.

Governments have often been reluctant to try to boost fertility rates as they fear being seen to interfere in people's lives. Demographers see France is as a hard act to follow, given that its programmes took decades to develop. However, Sweden's recent success has raised hopes that it can serve as a model, especially as its policies are associated with a modern view of women as active participants in the work force. But such policies are expensive and require considerable social change.

Steven Sinding, director-general of the International Planned Parenthood Federation, the world's largest family planning charity, says: "The question is not whether European states can boost their fertility. It's whether they really want to do so."

Even if governments bite the bullet, the results may be modest. Few demographers expect any European state to return to the replacement fertility level of 2.1. Estonia's current performance is unlikely to last. But Francesco Billari, a demographer at Italy's Igier economic institute, says that small improvements are worthwhile because they slow the ageing of the population even if they do not prevent it.

Immigration can also help to some degree. Since 1989, inward migration has been the biggest contributor to population growth in the pre-enlargement EU, including large numbers from eastern Europe. The United Nations forecasts that migration will continue at current levels of 600,000 net a year to those 15 European countries. But this cannot begin to close the gap left by ageing, especially as most immigrants adopt the low-fertility habits of other Europeans. In the UK, David Willetts, the Conservative party spokesman on work pensions, estimated in a report last year that to keep its population young the EU would need 700m immigrants by 2050 - an unattainable total.

Nor will the east European states provide the answer, as they are also beginning to suffer population decline. The only high-fertility states near Europe are the Muslim countries of North Africa and Turkey. It is unlikely that politicians will open the doors soon to these states because of public concerns about immigration. If Turkey is accepted as a future EU member, it will not join for many years.

Given that changes in fertility and immigration will, at most, slow the changes in Europe's population, the further ageing of the continent seems inevitable. The biggest immediate impact is on pensions and health costs. CSIS, the US think-tank, estimates that with no big policy change the UK's public benefits to the elderly as a percentage of GDP will rise from 12 per cent in 2000 to 18 per cent in 2040, and from 13 per cent to 33 per cent in Spain.

Meanwhile, as older people retire, a bigger economic burden falls on remaining workers, which reduces productivity growth and limits the economy's capacity to finance welfare spending. Employers have aggravated the position by pushing for early retirement schemes. In France, just 38.5 per cent of men aged 55-64 worked in 2000, compared with 65.3 per cent in 1980.

Ageing tends to make people more cautious about spending, reducing consumption in the economy, and more risk-averse, limiting their entrepreneurial appetites.

Part of the answer lies in encouraging older people to work - and pay taxes - longer and to begin drawing pensions later. At the European Commission, Ms Quintin says this is an important element in the Lisbon Agenda, the EU's productivity-raising programme. She points to success in Finland where the percentage of older people working rose in the 1990s because of policy changes and a surge in economic growth. The Commission estimates that, if retirement ages rose by five years, the cost of publicly-funded pensions would not rise.

Governments have tried to encourage later retirement and have even nibbled at the cost of public pensions by reducing benefits for future pensioners. In the UK, private pension funds have closed generous defined-benefit schemes to new entrants and replaced them with more modest defined-contribution schemes.

However, these reforms have barely scratched the surface. People who have worked a lifetime expecting to retire reasonably early on good terms are unlikely to volunteer for anything less. But Oswald Metzger, a population expert and Green party politician in Germany, belives the public would be ready to confront the reality if politicians were more forthright on the issue. "Political leaders lack courage to act. They say that people do not want to accept what is happening in their societies. But they are wrong. People realise what is happening and are ready for change," he says.

Politicians are wary of the political power of the growing army of pensioners. In some countries, pensioners have formed pensioner parties, as in Slovenia, or are working through institutions such as trade unions. Nico van Nimwegen, deputy director of the Netherlands Interdisciplinary Demographic Institute, says: "Growing grey-power means that political parties will become more responsive to the needs of the old."

This means that with every year, radical cuts in pensioners' benefits will become more difficult. There are some radical answers, such as reducing the voting age to 16 or giving the parents of school-age children extra votes.

But a Europe that struggles to persuade 60-year-olds to keep working, will struggle to persuade them to give their grandchildren votes.

France devotes a higher percentage of its gross domestic product - nearly 4.5 per cent - to family policy than any other country in Europe. Family allowances were first introduced at the beginning of the 20th century for familles nombreuses - big families - to improve the birth rate.

Since the 1970s, France has shifted the focus towards redistribution of resources to low-income families and lone parents: family policy now has more social than demographic overtones. But pronatalism remains a cornerstone of much French social policy and there is a consensus that such initiatives remain worthwhile.

Underlying this philosophy is the longstanding obsession of what was once Europe's most populous country with the "hard" military and "soft" cultural power of its larger historical rivals - Germany, with a population of more than 81m, and the worldwide English-speaking community.

From conception to the age of 20, children in France entitle their parents to a welter of subsidies, allowances and tax breaks. Breeding for France is also one of the free leisure activities that has benefited most from the 35-hour working week and high youth unemployment.

Families with incomes of more than Euros 125,000 can reduce their tax bill by around Euros 2,000 per child and by more for a third child, who takes the size of the family above the replacement rate.

Furthermore, anyone living with at least two dependent children under 20 is eligible for family benefits of Euros 1,351 per year, rising to Euros 3,082 for three children. There is no means testing.

But making it easier to have children starts much earlier. During pregnancy the state will pay for Aids tests for both parents, a medical examination for the future father, seven pre-natal examinations and eight birthing classes. Nor is it a coincidence that French hospitals are so inclined to recommend epidurals. Pain-free birth is taken as a right, symbolic of the desire to limit the stresses of producing and raising children.

Mothers can take 16 weeks paid maternity leave for the first child, rising to 26 weeks for the third child. During this time, the state will pay the average of the woman's salary over the previous three months, less 20 per cent in social security charges, up to a monthly maximum of Euros 2,476. It is illegal to fire a woman who is pregnant or on maternity leave, except for "grave error" or if her contract can no longer be honoured for financial reasons unrelated to the pregnancy.

Last but not least, the government heavily subsidises childcare costs. On top of a cash payment that ranges from Euros 500-Euros 1,500, the state will allow 50 per cent of the cost of nannies, au pairs and special tutors to be tax-deductible. So get breeding.

Japan's birth rate is falling much faster than previously expected, raising concerns about the impact that the low number of births will have on the country's future economic vitality.

The Japanese government yesterday released its latest findings on the fertility rate of Japanese women, which show that the average number of children a woman will have during her lifetime has dropped from 1.32 in 2002 to 1.29. This is a much faster decline than the government had been expecting and is bound to affect Japan's newly enacted controversial pension scheme, which is based on a fertility rate of 1.39.

The government's report expresses alarm at the lower statistic and states that "the speed with which the birth rate is falling is creating a situation that undermines the very foundations of society, the economy and the sustainability of local communities".

But the Japanese government has been reluctant to increase immigration to address the problem, despite a recent white paper which noted that Japan would have to accept "massive numbers of foreigners and immigrant workers" or face negative economic growth. Instead it has launched programmes aimed at reducing the burden on working mothers.

In 1994, it adopted the "Angel Plan", which focused on building and expanding facilities, including childcare centres and family support centres. It also called for higher pay for working women on maternity leave, shorter working hours for men to allow them to participate in childcare and subsidies for women receiving fertility treatment.

The first Angel Plan was followed by more of the same in the "New Angel Plan" of 1999, which is soon to be succeeded by a third programme dubbed the "New, New Angel Plan".

At a provincial level, since the late 1990s several of Japan's prefectural governments have organised group dates, such as hiking trips and cruises, for single people in the hope of spurring more marriages and by extension babies.

But judging from the latest findings, the government's measures over the past decade may have been too little, too late. "The figures do not show whether these measures have had an effect," says Sumiko Iwao, professor at Musashai Kogyo University. Nonetheless, Prof Iwao believes that Japan's birth rate would have fallen even further, "if the government had not adopted those measures".

The fundamental problem is that fewer people get married and those that do marry, do so much later in life, reducing the number of children they are likely to have, she says. "This is a private matter so it is difficult for the government to do anything about it."

Michiyo Nakamoto


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