Ageing burdens Europe

2013-04-26 00:00

LONG after the debt crisis is over, Europe will be grappling with an even more serious problem — how to pay for growing numbers of old people.

The population of some countries is stagnant or already shrinking, notably Germany’s. That will reduce savings and potential economic growth. The workers who remain are getting older and so are less productive. That will hold back living standards. And the ranks of retirees are swelling. That will threaten the financing of pensions and health care.

In the 27 countries of the European Union, each pensioner is today supported on average by four people of working age. By 2050, this old-age support ratio will have fallen to just 2:1, according to United Nations and EU projections.

Latvia, which has applied to join the euro in 2014, is but an extreme example of these trends. By 2060 there will be four Latvians of working age for every three aged 65. Because of emigration and low fertility, the Baltic state’s population shrank by 14%, or 340 000 people, between 2000 and 2011, prompting warnings of an existential threat to the nation.

“I hope that the country can manage. But the alarm bell has rung,” said Mihail Hazans, an economics professor at the University of Latvia and the country’s leading demographer.

Many European countries are raising the retirement age. And some, including Britain, have favourable population profiles.

But Martins Kazaks, chief economist with Swedbank in Riga, said governments have yet to grasp the magnitude of the policy shifts required.

“If you define the tipping point as the point of no return, then in some respects we have passed it,” Kazaks said.

Apart from putting pension systems on a more sustainable footing, investing in education and training so that workers are more productive should be a policy priority, economists say. So should expanding child care to allow more women to join or stay in the workforce.

How to share out the cost of ageing spells potential political trouble, pitting cosseted pensioners against younger generations who are overtaxed and overworked.

Edward Hugh, an economist in Barcelona, said that the sovereign debt crisis gripping the developed world is at root about how to meet implicit liabilities for ever older populations: expectations of future levels of health care and pension provision may prove too optimistic.

As such, Hugh is critical of policymakers in Europe and at the International Monetary Fund for neglecting the impact of demographic change.

Recession-hit Portugal also illustrates the vicious economic and fiscal circle that Hugh identifies in countries on the periphery of the euro zone as a result of demographics.

Portugal’s fertility rate has been below the 2,1 replacement rate — the number of children each woman needs to have to maintain current population levels — since the early eighties. By 2050, Portugal is projected to have more people aged 60 or over than any other EU member.

Also, some 100 000 to 120 000 Portuguese are emigrating every year to look for better-paid work, depleting the tax base and adding to the strain of financing the welfare state.

“One of the biggest problems we have is holding on to employees,” said Joao Carlos Costa, general manager of Arpial, a metal-working firm in Lisbon.

Jose Cesario, secretary of state for Portuguese communities abroad, puts a brave face on the drain of brain and brawn.

Emigrants acquire valuable skills and remitted some 2,7 billion euros in 2012. Influential members of the Portuguese diaspora of around five million can also act as “ambassadors” for the country, Cesario said. But he acknowledged that both Switzerland and Luxembourg had urged him to slow the flow of emigration.

“We can get emigrants to come back only if we have economic development, but we cannot do that without them,” Cesario said. If he had the solution, Portugal would not be in the situation it is, he added.

The same goes for Latvia.

“It’s a big challenge for Latvia, both for the economy and for our society,” Prime Minister Valdis Dombrovskis said. “We need to concentrate on economic growth and job creation.”

The government hopes to lure back a third of those who have left since the turn of the century, by 2030. Given that Latvia is one of the poorest countries in the EU, that will not be easy.

As in Portugal, a vicious economic circle becomes hard to break.

— Reuters.

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