The Economist (UK), September 30, 2004
Old Europe; Demographic Change;
The trouble with ageing
AMERICANS have long seen Europe as the old world.
Now they have another reason to count the difference.
Europe is ageing much faster than the new world.
The old world faces a daunting demographic
challenge. This year's expansion of the European
Union from 15 to 25 countries increases its
population from 380m to 455mway ahead
of America's 295m. Yet by 2050, the United
States will have almost caught up: if forecasts
prove correct, there will be 420m Americans,
compared with 430m Europeans.
The main reason is that European women have fewer
children. In both America and Europe, the post-war
baby boom gave way to a bust in the 1970s,
and fertility fell below the replacement rate
of just over two per woman. But American birth
rates have since recovered to replacement level,
while the birth rate is just 1.5 in the EU;
in Germany, Spain and Italy it is only 1.3
(see chart 1).
Populations age when people live longer and have
fewer children. Life expectancy is rising at
roughly the same pace in most rich countriesalthough
not in Russia (see box on next page). So it
is low fertility that explains why Europe's
population is ageing faster than America's.
In Germany, the median age will rise from 40
in 2000 to 47 by 2050; in Italy, it will reach
50 as early as 2025. In America, by contrast,
it will rise only from 35 in 2000 to 40 in
Europe's rapid ageing will inflict economic pain.
For a start, there will be a big decline in
the number of workers. In Italy, for example,
the working-age population will shrink by 20%
between 2005 and 2035, and a further 15% by
2050. Unless there are offsetting changes in
employment rates and productivity, falling
numbers of workers will drag down economic
growth. Adverse demographics mean that Europe's
growth will be half a percentage point lower
in 2050 than now, according to estimates in
this week's IMFWorld Economic Outlook.
Even as numbers of workers fall, the numbers
dependent on them will rise. In Italy, the
population aged 65 and over will jump by 44%
between 2005 and 2050. Combine that with a
decline of over 30% in the working-age population,
and the result will be a spectacular jump in
the dependency ratio, from 32% in 2005 to 67%
by 2050. In France, even though fertility has
been higher, the dependency ratio will still
jump, from 28% to 51% over the same period
(see chart 2 on next page).
This soaring elderly dependency ratio will test
European budgets to the limit. Looming ahead
is a big rise in spending not only on pensions
but also on health and long-term care. According
to the European Commission, adverse demographic
change may push up public spending by between
five and eight percentage points of GDP (in
the EU 15) by 2040. It will be hard to get
taxpayers to foot that bill. Most European
countries already suffer from too heavy a tax
burden, and governments are running into resistance
to higher taxes.
As if all this were not enough, the demographic
challenge facing Europe may be even greater
than most of the projections suggest. Population
forecasters have been caught on the hop by
unexpectedly big improvements in longevity.
Medical breakthroughs may continue to raise
life expectancy beyond the levels built into
What can be done? One response is to try to alter
the demographics by encouraging immigration
of younger workers. But immigration on the
scale needed to stop dependency ratios from
rising would be politically unimaginable. Germany,
for example, would need to take in an average
of 3.6m immigrants a year between 2000 and
2050, according to UN estimates.
An alternative strategy is to try to raise birth
rates. In the past few years fertility has
risen a little in Italy and Spain. Recent attempts
to encourage more births by increasing financial
support for parents seem to have been quite
successful in France and Estonia. Whether this
approach would work in the longer term is less
certain. The effect is often to change the
timing of child-bearing, rather than the number
of births: women bring forward the decision
to have children but keep to the number they
Birth rates are now especially low in Mediterranean
countries where relatively few women work;
and a lot higher in Scandinavia, where most
women work. Scandinavian countries appear to
have found ways, such as enhanced child-care
facilities, to make it easier for women to
reconcile work with raising children. But such
measures assume that women are otherwise being
foiled in their desire, on average, to have
a family of two. Awkwardly, recent evidence
from Germany suggests that women may actually
want fewer children than the two-child norm.
All this suggests that population ageing, although
a demographic problem, requires an economic
rather than a demographic solution. Faster
productivity growth would help, but it would
be foolish to bank on it. Indeed growth in
output per worker may well fall in ageing economies,
given the link between innovation and youth.
Entrepreneurship tends to be stronger in more
youthful populations, says Sylvester Schieber,
research director at Watson Wyatt, an actuarial
That leaves two possible economic remedies. The
first is to push more of the working-age population
into jobs. At the Lisbon summit in 2000, EU
leaders set themselves targets for 2010 of
reaching an overall employment rate of 70%,
and of 50% for 55-64-year-olds. Last year,
these rates had risen to 65% and 42% respectively,
still short of the Lisbon objectives, let alone
of America's rates of 71% and 60%. Raising
employment rates is desirable on competitiveness
grounds, as well as in response to ageing.
The second remedy would be to increase the size
of the working-age population by raising the
retirement age. Since Europeans tend to retire
before the official state-pension agein
Germany, for example, at 60 rather than 65there
is plenty of scope for this. But proposals
to raise the retirement age are deeply unpopular.
German politicians were swift to distance themselves
from a recommendation by a commission last
year that the retirement age should be raised
These economic remedies are hard, but also vital.
Europe still has much work to do to make the
labour-market and pension reforms that are
needed to counter the adverse effects of its
<< The Economist -- 9/30/04 >>
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