Abstract
In the face of demographic change there is an urgent need for financial, social and fiscal reforms. This article looks at Southern Europe, and the case of Spain in particular, for the efforts put forward to combat the challenges of demographic change. The author identifies innovative pension system reforms, public debt reduction and the extension of working life as top priorities. Reform in these areas is crucial if Europe is to ensure a dynamic economy in the future and avoid the pitfalls associated with looming demographic shifts.
The challenge of demographic change
Europe is today facing unprecedented demographic change. Demographic ageing, that is, the increase in the proportion of older people, is one of the main challenges that OECD countries, and in particular, the European Union Member States, will have to face in the years to come. The demographic profile of European countries is quite alarming, showing an increase in the older population that has significantly altered the demographic pyramid. 1
The most recent projections of the demographic trends in Europe (the EU member countries plus Norway and Switzerland) are the 2008-based national population projections ‘EUROPOP 2008 convergence scenario’ carried out by Eurostat (see [5]). However, demographic projections are often criticised or reviewed after a certain period, and they have to be viewed with a certain degree of caution. Eurostat itself considers that its population projection convergence scenario is ‘one of several possible population change scenarios’ based on assumptions of fertility, mortality and migration, population projections being ‘what-if scenarios’ aiming to provide information about the likely future size and structure of the population. For worldwide projections, see [8].
To be sure, the population is ageing as a result not only of low birth rates, but also of significant economic, social and medical progress, giving Europeans the opportunity to live longer lives in comfort and security. However, lower fertility rates and increased longevity could bring along with them a reduced labour input and lower productivity. Furthermore, the demographic challenge endangers the sustainability of pensions and other social protection schemes, straining public finances and forcing a rethinking of the European welfare state.
As a result of this situation, there is an urgent need for financial, social and fiscal reforms. Various plans of action and policy instruments have been considered by international economic agencies, such as (1) promoting fertility; (2) increasing work participation and extending working lives; (3) readjusting the pension parameter; and (4) diversifying sources of retirement income and encouraging private pensions.
Ageing is, of course, a multifaceted question which can be considered from different perspectives, including macro-economic effects, impact on pensions, health care reforms, migration and integration.
Although demographic development in years to come may vary from country to country, on the whole, ageing will increase spending pressures on public programmes, notably on health and pensions. It is to be noted that immigration has not proved to be a long-term solution in terms of offsetting declining fertility in the population and a reduction in the workforce. To ensure continual growth in living standards, Western societies will have to rely increasingly on higher productivity to countervail the effect of ageing, since employment will be marked by a decreasing workforce. This trend will particularly affect the countries of Southern Europe, with Spain being a quite interesting case in itself. Efforts to achieve long-term sustainability will have to be supplemented by innovative pension system reforms and public debt reduction, along with the extension of individuals’ working lives.
Causes of, and policy responses to, the ageing population in Europe
As has been emphasised by the European Commission [1], the ageing of the European Union's population is the consequence of several interconnected demographic trends:
Continuing low birth rates and declining growth of existing populations
The average number of children per woman (the current fertility rate) is low, at 1.5 children for the EU-25, well below the replacement rate of 2.1 needed to stabilise the population size in the absence of immigration [2, p. 3]. In almost every country, fertility is below population replacement level. In certain Southern and Eastern European countries, it is less than 1.3 children per woman. Spain has one of the lowest fertility rates of existing populations in Europe. However, Spain is one of the 14 EU countries expected to experience an increase in population from 2008 to 2060 due to immigration [5, p. 2,5].
Surveys have shown that families–-the structure of which varies, but which still constitute an essential part of European society–-do not find the environment in which they live conducive to childrearing. International comparisons underline the effectiveness of family and other policies consistently implemented by certain countries (notably, the Nordic countries) over several decades to create conditions that are supportive of those who wish to have children.
Continued increases in longevity and dramatic changes in the structure of society
The decline in fertility in recent decades followed the post-war baby boom, which is today causing a bulge in the segment of the population aged 45-65 years. The gradual progress of the baby boomers towards retirement age will lead to a substantial increase in the proportion of old people, who will need to be supported financially by a reduced working age population. This phenomenon will not disappear for several decades.
The baby boom generation has had fewer children than previous generations, as a result of many factors: difficulties in finding a job, the lack and cost of housing, the greater age of parents at the birth of their first child, changes in working life and family life choices.
A second factor to take into consideration is that healthy life expectancy continues to be on the rise, while the gap between male and female life expectancy is closing. This will entail a spectacular increase in the number of people surviving to the ages of 80 and 90, leading to many of them spending several decades in retirement and reaching an age frequently characterised by infirmity and disability, although the proportion of people in poor health in this age bracket could fall due to preventive health care treatment. Therefore, it will not be uncommon to see four surviving generations of the same family, although the individual members will not always live as close to each other as they did in the past.
As a consequence of these trends, the structure of society and families is also changing radically, with an increase in the number of ‘older workers’ (55-64), elderly people (65-79) and very elderly people (80+), with fewer children, young people and adults of working age. The proportion of people aged 65 years or over in the total population is expected to increase from 17.1 to 30%, and the number of people aged 80 years or over is projected to almost triple from 2008 to 2060 [5, p. 1].
To compensate for the expected drop in working age population, the employment rate will have to increase and the retirement age will have to continue to rise. European countries will not only have to reach but to exceed the objective set in the Lisbon Strategy, which established an employment participation rate of 70%. Greater employment participation, particularly by women and older people, will have to be accompanied by greater investment in human resources and higher productivity through economic reforms, research and innovation. Also, increased efforts are needed to integrate young people into the labour market and to support them as they pursue ‘non-linear’ careers, alternating between employment, study, unemployment and retraining or updating skills.
Demographic change is also accompanied by profound social changes affecting the composition of families, which is particularly evident in the growing number of elderly persons living alone. The increase in the number of very old dependent persons also raises new problems of an economic, social or even ethical nature.
The impact of immigration
Europe has become the recipient of major inflows of net migration from third countries, and it is set to remain an attractive destination for migrants over the coming decades. Eurostat's conservative projection is that around 40 million people will emigrate to the European Union between now and 2050 [2, p. 4]. Spain has had the greatest influx of immigrants in recent years among the EU countries.
As many migrants are of working age, they tend to bring down the average age of the population. However, longer-term repercussions remain uncertain. Over extended periods, immigration can only partially compensate for the effects of low fertility and extended life expectancy on the age distribution of the European population.
As for the EU in general, the impact of immigrants on population ageing in Southern Europe will depend on how well they integrate into the formal economy. The employment rate for immigrants continues to be lower than that of non-immigrants in many Member States. However, this is only partially true in the case of Spain.
Immigration may temporarily help reduce the negative budgetary impact of an ageing population when legally employed immigrants pay contributions into public pension schemes. However, economically active immigrants will also, over time, accumulate their own pension rights, making their longer-term contribution to a sustainable balance in public finances dependent upon the existence of well-designed pension schemes.
The consequences of ageing in Europe set against the background of a global expansion of the world's population
To be sure, Europe will not be ageing alone. Significant increases in dependency ratios will appear between now and 2050 in emerging economies such as China and India. However, the proportion of the worldwide population accounted for by the Member States of the EU will significantly decrease. Following the UN's key projections, an overall population increase will continue to take place, with the population reaching 9.2 billion by 2050, compared to 6.7 billion at present. Around 95% of global population growth will occur in the developing countries, and the population of the 50 least-developed countries is set to double, the fastest growth taking place in Africa [8]. If developing countries can exploit the ‘demographic dividend’ and integrate young working age people into the labour market, global production will increase and provide profitable investment opportunities for Europeans saving for their retirement. Conversely, the combination of a high birth rate and slow development could lead to instability in these countries and increase pressure to emigrate.
The impact of an ageing population on the welfare state: from challenge to opportunity
An ageing population represents a significant challenge to public authorities, requiring welfare state reform to adjust to the radical changes expected in the next 40 years. Never in history has there been economic growth without population growth. Increasing productivity, in particular through access to lifelong learning, and increasing employment participation, in particular by creating a truly European-wide labour market and greater occupational mobility, are two important ways of doing this, as are promoting an increase in the birth rate and the integration of immigrants.
Various projections show that although the working age of employed persons in the EU will continue to rise, there will be an increase in the employment rate until around 2017 [2, p. 5, 3, p. 9]. More than two-thirds of this increase will result from a higher number of women working, where the older women are being gradually replaced by better-educated younger women with greater involvement in working life. The remainder is accounted for by the substantial increase anticipated in the employment rate for older workers (aged 55-64 years). These expected positive developments will tend to create a ‘window of opportunity’ for implementing reforms before the effects of population ageing make themselves fully felt. However, higher employment rates can only offer a temporary respite before the full burden of the demographic changes will be felt subsequently.
Over time, Europe will increasingly have to rely on its productivity gains as a major source of economic growth. Older workers will constitute an increasing proportion of global labour and economic production resources. However, many countries still employ only a relatively small number of older workers owing to excessive recourse to early retirement, insufficient financial incentives for continuing to work offered by tax and social security systems, and poor management of age-related issues in the workplace. This is particularly reflected in the insufficient access to training for, and even discrimination against, older workers.
In fact, an older workforce and longer working lives need not imply less productive workers. Older workers are not necessarily less productive and less innovative. The decline in physical and mental capacity occurs only at an older age, is very gradual, and is subject to wide variations depending on the individuals concerned and can be reduced by preventive health policies. Moreover, it can be offset by greater experience, changes to work organisation and more effective use of information and communication technologies. In the context of an ageing society it is, therefore, of vital importance to provide quality training, thereby meeting the needs of a knowledge-based society, and to developing lifelong learning to ensure that individuals maintain their human capital.
Without a reform of current policies, ageing will lead to ever-greater pressures on public spending, particularly on pensions, health care and services for the elderly. There is a risk that overall public finances could become unsustainable in many EU countries, thereby compromising the future equilibrium of pension and social security systems in general. Citizens will have to play a much more active role as regards both the amounts they save for retirement and in choosing when to retire. Ageing will also bring about sharp increases in public spending on health and long-term care, even if much will depend on the extent of the future improvement in health of the elderly. Such an improvement will require, in particular, better-adapted health care services and a preventive approach to chronic diseases, which could be aided by the use of new technologies.
As in other EU Member States, the Southern European countries can prevent demographic decline or react to the falling birth rate by promoting demographic renewal. In all EU countries, couples would like to have more children. When consistently implemented, family and other policies can help reduce the inequality of opportunities offered to citizens with children and can offer assistance services for parents, in particular for the education and care of young children and in managing working hours. This, in turn, can provide both men and women with better opportunities for lifelong learning and for balancing their private and working lives. It is, therefore, necessary to facilitate access to affordable and quality childcare and generally to improve the work-life balance through flexible forms of work, making use of new technologies. At the Barcelona European Council in 2002, the EU Member States made a clear commitment to step up the provision of childcare; by 2010 this should be available to at least 90% of children between 3 and 6 years old and to at least 33% of children under 3 years of age [2, p. 8]. These national childcare facilities should now be put in place.
As has been correctly stated [6], it is no longer possible to have a successful welfare state without substantial reform. An open economy is completely compatible with a developed welfare system and indeed, it may be the very condition of an effective and developed welfare state. Reforming the welfare state requires us to look at it in terms of a social investment which develops people's capacities, rather than in the old manner of reactive and protective welfare. An active and ‘asset-based’ welfare state should therefore be concerned with developing assets that people have and can improve, such as education and lifelong learning. Investment in people should now be the foremost objective. This means fostering active labour market policies that encourage more flexible labour markets with human capital guarantees rather than passive welfare benefits. Investment in education, and particularly investment in children, is a crucial part of what an asset-based state should do, and it is also going to be crucial for the demographic challenge in Southern Europe.
Towards a dynamic economy: the future of pensions, immigration, health care and social expenditure in Spain
In the light of an ageing population, the future of pensions is a key issue in Spain, as it is throughout Southern Europe and the EU in general. The viability of the pension system beyond 2020 is a central question for the Spanish social security system, with projections clearly showing an increase in the number of pensioners due for retirement and permanent disability.
Perhaps the most realistic indicator in this respect is the old-age dependency ratio, as this takes into account relationships of dependence and the falling birth rate. According to the European Commission, in Spain the size of the 65+ population was 24% of the working age population in 2008, and this is predicted to rise to nearly 59% by 2060, similar to the figure for Italy but much higher than that for France and 17 points higher than that for the UK [5, p. 4].
Various governments have implemented major reforms of the pensions and social security systems in Spain in the last 20 years. The 1995 Toledo Pact, signed by the Spanish government, political parties, employers’ organisations and trade unions, reinforced the contributory nature of the system by increasing the number of years required for pension entitlement. The period of employment and the social security contributions used to calculate the amount of pension (the ‘regulatory base’) were also modified. Individual, privatised capitalisation has also been promoted through legislative changes as an alternative or additional pension scheme, although the viability of the public pension system continues to be a cornerstone of social policy in Spain. However, in view of demographic projections, the Spanish system will need to adapt in order to continue providing fair pensions.
Spain has experienced an unprecedented immigration boom during the last 10 years. Annual net increases of more than half a million in recent years have not been uncommon. Mainly due to immigration, the Spanish population has increased from 40 million inhabitants in 2000 to 45 million in 2008. Whether this trend will continue or not, and if so, with what intensity, are extremely important questions but consensus on the answers is difficult to predict. The recent massive immigration could have a lasting impact on population structure and on the Spanish social security system in the future.
The impact of immigration will depend substantially on the characteristics of the immigrant population. Usually, labour immigrants from less developed countries (Africa, Latin America and Eastern Europe) are relatively younger than the existing population, while those from Northern Europe (in particular Great Britain and Germany) are older due to a larger proportion of retired people.
From an economic perspective, the impact of immigration will depend on the situation of the labour market, and the productivity and the costs and benefits for the social security system of the immigrants. Usually, labour immigrants contribute to production and the social security system of the host country as they enter at young working ages. In many cases, they have school age children who will benefit from the free educational system in Spain. On the other hand, many of those who come from Northern Europe have retired. These persons receive their pensions from their countries of origin and spend a part of such pensions in Spain. They usually receive free health care benefits in Spain.
The most numerous age groups among the immigrant population are now between the ages of 25-44. This means that to maintain a similar age structure (or similar age-to-dependency ratio) as currently, given the ageing trends described above, the number of immigrants in the future will have to be ever larger when compared to the present to compensate for lower fertility rates.
As a consequence of the age differences between the two populations, labour market participation also varies substantially between Spaniards and immigrants. In sum, the differences between the immigrant and the existing populations are significant in both demographic and socio-economic aspects. The immigrant population is younger, participates more in the labour market, and occupies lower-skill jobs than the existing population. As stated above, this difference could help to alleviate some problems caused by population ageing, such as the imbalance in the social security system and the labour shortage in the workforce. However, various studies show that while the recent immigration boom and future immigration can lessen somewhat the burden of population ageing in Spain in the medium term, this may worsen in the long term, since more immigrants or higher fertility rates will be required to maintain the population age structure [7].
The key issue in this respect will be the capacity of current and future immigrants to integrate. While on the one hand immigration can contribute in the short and medium term to a better demographic balance and effect positive consequences for the economy, it requires an integration policy that is able to manage cultural differences positively. There will be a need for external unskilled labour in Spain, provided that the country's economic performance allows for it. Potential problems arising due to immigration are best avoided by promoting legal immigration, by attracting a more skilled labour force and by a successful integration policy, while at the same time fostering agreements with the countries of origin that respect the needs of both sides.
To ensure both the sustainability of public finances and the success of the Lisbon Strategy, the rate of employment must be increased. The relevant reforms of employment, education and training policies will have to be applied in the EU well beyond the original target of 2010. Greater efforts will be required to increase the number of women and older citizens who work, and to expand the flexibility of labour markets, lifelong learning and active labour market and social security policies. The future of the Spanish social security system is dependent not so much on levels of fund reserves available, but on a consistent increase in labour productivity.
Increasing the rate of participation of men and women older than 55 will be of crucial importance in coping with demographic ageing. Workplaces must be adjusted to the needs of older people. Working hours have to be more flexible. Companies have to be able to use their older workers’ experience, gained throughout a long working life, but without ignoring their changed needs and abilities. ‘Active ageing’, as promoted by international agencies, constitutes in itself a comprehensive and sustainable approach, which must include such tools as more flexible retirement schemes, continuous updating of skills, elimination of discriminatory prejudices because of age, easy access to lifelong learning and a substantial reform of the care systems. Spain should follow the lead of the European Union and other international agencies and make active ageing a priority investment for the future. The increased participation of people over age 65 in economic and social life on a voluntary basis will have to be achieved by means which have largely yet to be created.
A change of attitudes and behaviour is required among the different actors in order to achieve a more dynamic economy through a more dynamic labour market. A long-term national programme of lifelong learning and public communication and training should be put in place in order to change the perception of ageing, showing that access to continuing education and training in midlife can be improved, age discrimination can decline and the negative perception of ageing can be converted into a positive one. In addition, more flexible caring schemes must be made available to families, together with social services and networks of solidarity promoted within local communities.
We are at a point in time where the welfare state has to be modernised to accommodate the growing pressures of society and thus regenerate itself. Many of the current discussions on welfare reform are related to demographic change; childcare and care of the elderly; women's employment; unemployment, social exclusion and transition into paid work; migration.
Adapting the welfare state to the new circumstances and the demands of citizens will require a more decisive focus on preventive policies and investment in human capital. The challenge of demographic change is thus inextricably linked to public policies that concentrate on promoting active economies and active labour markets.
Footnotes