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Budgetary Sustainability of Ageing Belgian and European Answers

Budgetary Sustainability of Ageing Belgian and European Answers. International Conference ‘Population Ageing. Towards an Improvement of the Quality of Life?’ Organised by the Belgian Platform on Population and Development Brussels, 1 March 2007. Micheline Lambrecht.

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Budgetary Sustainability of Ageing Belgian and European Answers

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  1. Budgetary Sustainability of AgeingBelgian and European Answers International Conference ‘Population Ageing. Towards an Improvement of the Quality of Life?’ Organised by the Belgian Platform on Population and Development Brussels, 1 March 2007 Micheline Lambrecht

  2. Themes of the Intervention • The Actors (FPB – Eurostat – EU DG ECFIN – AWG - EPC) • The Belgian Ageing Policy • The European Ageing Policy • The Impact of Ageing on Public Expenditure for the EU25 Member States • Main Conclusions The speaker would like to express her thanks to Mr Carone from DG-ECFIN, Ms Fasquelle , Ms Vandevoorde and Ms Van Brussel from the FPBfor their collaboration in the preparation of these slides.

  3. The Actors FPB – Eurostat – EU DG ECFIN – AWG - EPC

  4. The Actors: the Belgian Federal Planning Bureau (FPB) • In October 1959, creation of the Programming Bureau in the Ministry of Economic Affairs to plan public expenditure • Act of 15 July 1970, creation of the ‘Planning Bureau’ under the authority of the Prime Minister and the Minister of Economic Affairs – Mission: elaborate a five-year plan, in collaboration with the social partners (enterprises and trade unions) and the regional economic councils, compulsory for the public sector and the holdings, to be voted by the Parliament (two exercises voted until 1980) • Act of 21 December 1994, creation of the ‘Federal Planning Bureau’ according to its new quantitative tasks, assigned for some missionsto the ‘National Accounts Institute’, consisting of the FPB, Statistics Belgium and the National Bank

  5. Current Main Tasks of the FPB (1) • Short-term economic forecasts (for 2 years - Preparation of the budget – MODTRIM model) • Medium-term economic forecasts (for 5-8 years – HERMES model) • Long-term forecasts of demography and age-related expenditure (for up to 50 years – Secretary of the Belgian Ageing Committee constituted by the Act of 5 September 2001; Belgian representative in the Ageing Working Group of the EU - MALTESE model) • Economic, social and environmental indicators (input-output tables, green national accounts, transport accounts, elaboration of data banks) • Various analyses to test political measures, shock impacts and trends, at the request of the government, social partners or members of parliament

  6. Current Main Tasks of the FPB (2) • Development of a federal sustainable development approach (special Task Force established by the Act of 5 May 1997) • Energy forecasts used by control organisms (Act of 5 September 1999) • Studies for the federal Ministry of Mobility and Transport • Participation in international studies as a national representative or within research networks

  7. The Actors: Eurostat • The European institute of statistics, located in Luxemburg • Makes regularly population forecasts in collaboration with the national institutes of statistics and associated institutes (for Belgium: Statistics Belgium and FPB) • A new team was constituted at the beginning of 2004 • It published, in April 2005, EUROPOP2004, population forecasts until 2050 for the 25 EU members • It made for the AWG, adapted forecasts incorporating more life-expectancy convergences between the EU15 countries and actualized migration hypotheseshttp://epp.eurostat.ec.europa.eu

  8. The Actors: EU DG ECFIN and EPC • The EU Directorate-General for Economic and Financial Affairs (DG ECFIN) makes support studies for the Economic Policy Committee (EPC) which is responsible to and advices the European Ministers of Economy and Finances. • DG ECFIN assumes the Secretariat and delivers studies in support of the several working groups constituted around the EPC. • These working groups work on the Country Reviews for the Broad Economic Policy Guidelines (CRWG), the Methodology to assess the Lisbon structural reforms (LIME), the Output Gaps OGWG), the Quality of Public finances (QPFWG), the Labour Market (LMWG), Ageing Populations and Sustainability (AWG). They consist of expert representatives of the various EU countries and other international organizations.

  9. The Actors: the AWG • The EPC’s ‘Working Group on Ageing Populations and Sustainability’ (AWG), constituted in December 1999, saw its mission redefined in February 2007. • It comprises the Member States (representatives from ministries of finances, planning bureaus, central banks…), the Commission services (DG ECFIN), observers from the OECD (which avoids double work), ECB. It cooperates with Eurostat, the national institutes of statistics and if relevant, the IMF, the WB and other EU Committees, in particular the Social Protection Committee. It receives its mission from the EPC and regularly reports to it. • The President of the AWG is Henri Bogaert, Commissioner for the Belgian FPB. • The core business of the AWG is to: • carry out the long-term (LT) age-related budgetary projections • contribute to assess the long-term sustainability of public finances, notably through the LT projections, appropriate indicators and peer reviews of the new major pension reforms • analyse, on request of the EPC, various consequences of ageing on LT fiscal sustainability, macroeconomic aggregates

  10. The Belgian Ageing Policy

  11. The Belgian Ageing Policy • At the beginning of the eighties, Belgian society is getting aware of the future ageing of the population (less young people, more aged ones, and less people of working age supposed to finance the pensions): • Banks and insurance companies promote loudly their own pension products • Successive Ministers of Pensions (Mainil, Busquin, Dehaene) require the first studies • International organisms (IMF, OECD, EU) analyse more thoroughly the threat essentially what concerns the pension systems, without too many shades of meaning • Then the successive Belgian Ministers of Pensions and Social Affairs take measures, based on simulations realized with the MALTESE model of the FPB • 1990 (Min. Vanderbiest , Detiège): flexible retirement age for male workers aged 60 to 64 • 1994: (Min. Dehaene) global management of the various systems of social security • 1996 (Min. Willockx, Colla): reassurance of basic protections within the framework of the first (legal) pillar; to observe EU requirements, progressive alignment of women’s legal retirement age to 65 • 2001(Min. Vandenbroucke): constitution of an ‘Ageing fund’ to face the future financing of pensions, commitment to reduce public debt, creation of an ‘Ageing Committee’ and drawing up of annual reports (the FPB assumes the Secretariat of the Ageing Committee) • 2003 (Min. Vandenbroucke): reinforcing and democratization of the second pillar (pensions funds) • 2004-2005 (Min. Demotte): creation of a Belgian Health Care Knowledge Centre associating the field actors; strong measures to limit the increase of health expenditure, due to various factors such as technology, wages but already the increasing ageing of the population • 2006 (federal government), various measures within the framework of a ‘Generations Pact’’: financial encouragements to work longer even after the legal retirement age, financial efforts to encourage the new career schemes and to support the lowest pensions (for the self-employed, women with interrupted careers, part-time workers, older pensioners), increase of the fiscal reductions on pension savings to support this third pillar

  12. How to sum up the Belgian ageing strategy ? • Fiscal sustainability • Incentives to work more, also in the new work schemes, and longer • Global management of social security • Limited welfare adaptations of the existing pensions • Reduction of public debt and constitution of an ageing fund • Analysis and control of health expenditure • Social sustainabilitywithin the framework of the three pillars pension system: • Consolidation of the first pillar, support of the lowest pensions • Development of a more generalized and guaranteed second pillar • Fiscal incentives inside the third pillar

  13. THE MALTESE SYSTEM OF MODELS (1) Number of beneficiaries Average amount DEMOGRAPHIC PROJECTION By age group and gender DEMOGRAPHIC SCENARIO MACROECONOMIC SCENARIO SOCIODEMOGRAPHIC SCENARIO SOCIODEMOGRAPHIC PROJECTION By age group and gender MACROECONOMIC PROJECTION: Employment, GDP, wages, … SOCIAL BENEFITS EXPENDITURE BY SCHEME AND REGIME HEALTH CARE EXPENDITURE SOCIAL SECURITY ACCOUNTS Revenues, expenditure, balance, debt SOCIAL POLICY SCENARIO GENERAL GOVERNMENT ACCOUNTS Revenues, expenditure, balance, debt BUDGETARY POLICY SCENARIO

  14. THE MALTESE SYSTEM OF MODELS (2) The Authors The Maltese system is the result of a team’s work at the FPB: • Michel Englert, Head of the General Directorate • Greet De Vil, Nicole Fasquelle, Marie-Jeanne Festjens, Christophe Joyeux, Micheline Lambrecht, Maritza Lopez-Novella, Bertrand Scholtus, Sakia Weemaes Michel Englert and, mostly Micheline Lambrecht, represent Belgium at the AWG.

  15. The European Ageing Policy

  16. The European Ageing strategy • Focus on the employment rate (Lisbon, 2000) • objectives: 70% men and women, 60% women,50% older workers • decrease of early retirement • long life learning • « Three-pronged strategy for pensions » (Stockholm, 2001): • Higher employment rate • Lower public debts • Pensions reforms • Focus on the pensions reforms (Laeken, 2001) • adequation • fiscal sustainability • modernization • Progressively, more analysis of health expenditure

  17. The Impact of Ageing on Public Expenditurefor the EU25 Member StatesA common work of MS in AWG, Eurostat, DG ECFIN, EPC http://europa.eu.int/comm/economy_finance/epc/epc_sustainability_ageing_en.htm(all full reports with their summaries and annexes)

  18. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Real interest rate General Methodology of the 2005 AWG Exercise Pensions National models

  19. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  20. The Demographic Evolutions: Belgium / European UnionMain Demographic Parameters (1)Eurostat AWG baseline (EUROPOP2004, adapted) 2004 2050 Fertility (TFR): Belgium 1.6 1.7EU15 1.5 1.6EU10 1.2 1.6EU25 1.5 1.6 Life expectancy - Men Belgium 75.5 82.1EU15 76.4 82.1 EU10 70.1 78.7

  21. The Demographic Evolutions: Belgium / European UnionMain Demographic Parameters (2)Eurostat AWG baseline (EUROPOP2004, adapted) 2004 2050 Life expectancy - Women Belgium 81.6 87.5EU15 82.2 87.0EU10 78.2 84.1 Net migration (thousands) Belgium 24 19EU15 1347 778EU10 -3 101

  22. The Demographic Evolutions: Belgium / European UnionTotal Population and Age Structure millions - Eurostat AWG baseline Total 0-14 15-64 65+ 2004 2050 2004 2050 2004 2050 2004 2050 Belgium 10,4 10,8 1,8 1,6 6,8 6,3 1,8 3,0 EU15 382,7 388,3 62,4 52,7 255,1 221,3 65,2 114,2 EU10 74,1 65,5 12,4 8,6 51,7 37,8 10,1 19,1 EU25 456,8 453,8 74,8 60,4 306,8 259,1 75,3 133,3

  23. The Demographic Evolutions: Belgium / European UnionOld Age Dependency Ratios(65+/15-64)x100Eurostat AWG baseline 2004 2050 Belgium 26.4 47.6 EU15 25.6 51.6 EU10 19.5 50.5 EU25 24.5 51.4

  24. A Summary of the EU25 Demographic Evolution(2006 EPC/Commission Report on Ageing and Giuseppe Carone from DG ECFIN) • Total population: 457 mill. in 2004, 471 mill. in 2030, 454 mill. in 2050 • Most numerous age cohorts: age 36 in 2004, age 57-59 in 2050 • Population aged 65+ doubles until 2050 (from 75 to 133 millions in 2050) • Old age dependency ratio (65+/15-64): doubles from 25 to 51 2004 2050 89 89 85 85 81 81 77 77 73 73 69 69 65 65 61 61 57 57 53 53 49 49 45 45 41 41 37 37 33 33 29 29 25 25 21 21 17 17 13 13 9 9 5 5 1 1 4000 0 1000 4000 3000 1000 3000 4000 3000 0 1000 2000 3000 2000 2000 2000 1000 4000 Males Females Males Females .

  25. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  26. Labour participation • Participation rates are projected using the cohort methodology developed by the OECD : • taking into consideration life profiles by gender, derived from the observation of the cohorts observed from 1998 to 2003 • this method also defines probability to enter or leave the labour market (starting from the 1997-2003 observations) • Also, women participation rates are bound to increase in the future: • they reach steadily a higher education level, which encourages to remain in a well-paid job • they have less children • Healthy ageing, perspectives of living longer encourage the older workers to remain longer at work • The impact of the recent pension reforms on the exit age is taken into consideration

  27. Impact of Recent Pension Reforms on the Labour Exit Age (2003 - 2025)Source: 2006 EPC/Commission report on ageing and Giuseppe Carone, DG-ECFIN

  28. Participation Rates in 2003and Increase until 2050 Total 15-24 25-54 55-64 (15-64) Belgium 65.0 35.2 82.3 28.9+5.0 +1.7 +6.3 +16.0 EU15 70.4 48.2 83.5 44.2+5.7 +1.4 +5.1 +17.8 EU10 65.4 36.2 83.1 34.5+6.4 +1.7 +6.2 +18.3 EU25 69.6 45.8 83.4 42.7+5.9 +2.2 +5.3 +17.7

  29. Ageing or Retirement Problem? Adult Life Spent in Retirement – Men(source: Giuseppe Carone from DG ECFIN)

  30. Ageing or Retirement Problem? Adult Life Spent in Retirement – Women(source: Giuseppe Carone, DG-ECFIN)

  31. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  32. Unemployment and Employment Hypotheses • The unemployment definition used by the EC is the one used in the Labour Force Surveys. • The unemployment rates will converge to their minimal structural rates in 2008 (the average for the EU15 is 7%), and will then remain constant (Belgium will reach 6.5 in 2013; additional delays are anticipated for countries where this minimum is superior to the EU15 average). • The baseline scenario keeps the other employment parameters constant : - total hours worked - various distributions: public – private, wage-earners – self-employed, full-time – part-time.

  33. AWG Employment and Unemployment Projections (Belgium)

  34. Projected employment rates and Lisbon targets for the EU25 The Consequences of Ageing Populations on Employment and Growth Source: 2006 EPC/Commission report on ageing.

  35. The Consequences of Ageing Populations on Employment and Growth(source: Giuseppe Carone from DGECFIN) Projected time frame for meeting the Lisbon employment target 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 TARGET ALREADY REACHED IN 2004 Denmark Netherlands Sweden UK 2035 EU12 EU10 2023 Slovenia 2020 EU25, Slovakia 2020 EU25 2018 Spain 2015 EU15, Czech Republic 2015 EU15 TARGET NOT REACHED IN 2050 (7MSs) Belgium France Hungary Italy Luxembourg Malta Poland 2014 Lithuania 2013 Estonia 2011 Latvia 2010 Germany 2009 Ireland 2007 Finland 2006 Portugal 2005Austria, Cyprus

  36. Economic Dependency Ratios Demographic older Economic older age Economic total age dependency dependency ratio dependency ratio ratio (non-empl. 65+/tot.empl.) (tot.non-empl./tot.empl.) 2003 2025 2050 2003 2025 2050 2003 2025 2050 Belgium 26 36 47 43 55 71 156 150 164 EU15 25 36 52 38 49 70 136 125 147 EU10 19 33 50 34 45 73 132 126 145 EU25 24 25 51 37 48 70 136 125 147

  37. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  38. Labour Productivity and Potential Growth • A production function is used to combine the evolutions of the population, the labour productivity and the capital intensity • Until 2009, the part of the investments in the GDP is held constant. The total factor productivity (TFP) is assumed to be 1.1 in 2030 in the EU15. After this transition period, the capital/labour ratio remains constant as from 2030 onwards • This leads to a convergence in the labour productivity , equal to 1.7% as from 2030 for the EU15 countries (that is 1.1 x 0,65, where 0.65 is the share of the labour factor) and to 1.9% for the EU10 countries

  39. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  40. The GDP Growth and its Determinants GDP growth Labour productivity Employment 04-10 11-30 31-50 04-10 11-30 31-50 04-10 11-30 31-50 Belgium 2.4 1.8 1.5 1.5 1.8 1.7 0.9 0.0 -0.2 EU15 2.2 1.8 1.3 1.3 1.8 1.7 0.9 -0.1 -0.4 EU10 4.5 3.0 0.9 3.6 3.1 1.9 0.9 -0.1 -1.0 EU25 2.4 1.9 1.2 1.5 2.0 1.7 0.9 -0.1 -0.5

  41. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  42. The Real Interest Rate • Projections are made with constant prices of 2004. • The long-run real interest rate has been fixed at 4%. • Unlike Belgium, the AWG did not make any projection of the public debt or the interests to be paid, in order not to interfere with the exercises of the Stability and Growth Pact.

  43. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG - Exercise

  44. Unemployment Benefits The central scenario combines different elements: • a constant ratio between the average unemployment benefit per head and the GDP per person employed, equal to 14.4, as observed during the period 1998-2002 • the ratio between the unemployed and employed persons, as calculated • the GDP per head

  45. Unemployment Benefitsin % of GDP 2002 2010 2030 2050 2002-2050difference in percentage point of GDP Belgium 2.30 2.03 1.77 1.76 -0.54EU15 1.04 0.80 0.68 0.68 -0.37 EU10 0.33 0.35 0.18 0.18 -0.15 EU25 1.01 0.79 0.61 0.61 -0.40

  46. Hypotheses Projections Labour force Cohort method Unemploymentbenefits Health care Total of the age-related spending GDP Population 2004-2050 AWG scenariosEurostat (adaptation from EUROPOP2004) UnemployementConvergence to the NAIRUEmployment Long-term care Education Labour Productivity Production function Pensions National models Real interest rate General Methodology of the 2005 AWG Exercise

  47. Health Care Expenditure The baseline scenario combines different elements: • the evolution of the population • the importance of health care expenditure relating to each age • the link between health care expenditure and growth (GDP per head), with an elasticity of 1.1 at the beginning of the period and a move towards 1 at the end of the period • a higher health care expenditure at the end of life (death-related costs)

  48. Age-Related Health Care Expenditure Profilesin the EU15 and the EU10Source: 2006 EPC/Commission report on ageing

  49. Health Care Expenditure in % of GDP 2004 2010 2030 2050 2004-2050difference in percentage point of GDP Belgium 6.2 6.4 7.1 7.6 1.4 EU15 6.4 6.5 7.5 8.1 1.6 EU10 4.9 5.2 5.8 6.2 1.3 EU25 6.4 6.6 7.4 7.9 1.6

  50. Increase in Health Care ExpenditureResults of different scenariosin percentage point of GDPSource:Giuseppe Carone, DG-ECFIN

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