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EU considers impact of ageing population on COVID-19 recovery plans

Author: ICAEW Insights

Published: 24 Jun 2021

Faced with a declining working age population, EU countries need to address the economic and budgetary consequences of ageing when carrying out COVID-19 recovery reform and investment plans in order to preserve longer-term fiscal sustainability.

EU finance ministers agreed last week that ageing populations and steep increases in government debt due to the pandemic levels present significant challenges for the long-term sustainability of public finances in Europe. While warning against premature withdrawal of fiscal support, EU governments acknowledged the need to address age-related public expenditure. Post-COVID recovery plans and spending provide an opportunity to raise employment rates and productivity alongside measures to adapt pension, healthcare and long-term care systems. 

Fewer and older Europeans

A well-noted trend, Europe’s demographic ageing shows no sign of improving, with the EU total population expected to drop from 447 million in 2019 to 424 million in 2070. Consistently low birth rates and higher life expectancy are leading to a shrinking working age population, alongside an expanding number of those retired. According to Eurostat data, in 2019 more than one fifth of the EU27 population was aged 65 and over. The old are getting older too, with the share of those aged 80 or over projected to increase from 6 percent in 2019 to 15 percent in 2100. 

While the overall trend is clear, the demographic situation does vary from country to country. Ireland, France and Sweden have higher shares of young people (0 to 14 years old) than the EU average. On the other hand, Italy, Greece, Portugal and Finland have the highest share of persons aged 65 or older. The median age across the EU27 varies from 37.7 years in Cyprus and Ireland to 46.7 years in Italy – although the median age has been increasing in almost all EU countries (except Sweden) since 2009.

The data points to a rapidly worsening old-age dependency ratio for the EU, with just over three persons of working age for every person aged 65 or over in 2019. By 2070, this may be down to fewer than two working-age persons for every person aged over 65. 

The economic and fiscal consequences of ageing

The economic and budgetary impacts of Europe’s ageing population are spelled out in the European Commission’s 2021 Ageing Report issued last month. The report estimates that the total cost of ageing in 2019 was already at 24 percent of GDP. The detailed budgetary projections for government spending on pension, health care, long-term care and education, are likely to feed into the EU’s general coordination of economic policies (the so-called semester programme). The report is also influencing ongoing discussions about changes to the EU’s debt and deficit rules, currently on ice due to the pandemic. 

As the report points out, demographic trends will lead to dramatically different sources of GDP growth in the longer term, with growth having to rely on productivity increases. Labour input in almost all EU countries will not support potential growth. 

The fiscal impact will be significant for almost all EU27 countries, with the effects likely to become apparent in the next two decades. This is mostly driven by long-term care and health care spending. When it comes to public pension spending, past reforms, including measures to reduce the benefit ratio and increase retirement age, are projected to lead to a reduction in expenditure in 11 EU countries, including Greece, France, Spain, Italy and Poland. The Commission’s analysis comes with considerable uncertainties. 

A sustainable recovery for all generations

The EU’s post-pandemic recovery package, incorporating €750bn in loans and grants to support national reforms and investments, provides a helpful opportunity to also address the consequences of an ageing population. In the conclusions from their last Council meeting, EU finance ministers singled out the need for measures to raise employment rates and productivity, tackle the gender gap in the labour market while also adapting pension, healthcare and long-term care systems. 

Reflecting on the Council conclusions, Susanna Di Feliciantonio, ICAEW Head of European Affairs noted “addressing the long-standing demographic challenges to Europe’s fiscal sustainability will depend on the extent to which EU countries are able to embed difficult reforms within their recovery and resilience plans, alongside greening and digital priorities. 

“As our work on intergenerational fairness in Europe shows,” she continued, “this has to be done in a way that both tackles Europe’s future financial sustainability while ensuring a fair distribution of resources between generations. This will require difficult trade-offs between competing interests.”

Alison Ring, ICAEW Director, Public Sector, added “In the UK public finances are already burdened by high levels of debt and rising costs for health, social care and pensions. If the debt is not reduced it will be a burden for future generations. Governments around the world are facing some difficult choices but having a long-term fiscal strategy would be a start to addressing this issue.” 

Find out more on our work on sustainable public finances in Europe and on intergenerational fairness. Members can also keep up to date with our European regulatory and policy events and activities.

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