Europe

Many countries are going to face this choice in the foreseeable future giving their aging populations (African countries might among the few exemptions in this respect), with China and the U.S. are being hit harder than Europe, according to a recent report (opens pdf) on the rising cost to the public from Europe's ageing population, Brussels-based think Breugel outlined the trajectory through 2070, using the latest country-by-country data from European Commission.

The report deals with familiar problems: pressure on budgets due to longer life spans, the need to raise retirement ages gradually and for better-funded pension and care systems, and more targeted employment-based inward migration. On major conclusion made is that the baby-boomer generation -usually those born from 1946 to 1964- will likely enjoy a generally more favourable retirement than either their parents or children. However, diverging life expectancies across the income distribution makes it complicated to raise average retirement ages in many EU countries, the report says.

Key summary:

• Breugel's report calculates that on average the 27 EU members' ageing-related costs - with categories such as pensions, long-term care, healthcare and education- will rise by just over 1% of GDP over the next 45 years.
• For the two other large global economies United States and China, the burden of an aging population is much more severe: Bruegel used the latest long-term U.S. estimates from the Congressional Budget office to show Federal government and healthcare expenditures in the U.S. will be rising about 4-5% of GDP through 2055. And it used the International Monetary Fund's annual economic surveillance estimates for China where ageing-related spending is expected to rise by about five to more than nine times as much as in Europe.
• While projected cost increases in age-related public spending in the EU are manageable in all members, there are substantial differences between countries, ranging from a hike of over 10 percentage points of GDP in less populated countries like Luxembourg, to an expected decline of over two percent of GDP in Italy over the next five decades.
• Most of the variation between projected ageing-related spending increases in EU countries originates with pensions and long-term care. In contrast, projected expenditure increases in healthcare costs are quite uniform across countries, as are expected declines in education expenditure from fewer children.
• The budgetary implications for at least the more comprehensive European welfare states vary greatly, depending on who entering migrants are. According to the report, the EU migration policy design must strive to ensure a composition of employment-based inward migration that will most likely contribute positively to the fiscal outlooks of EU countries.
• The report also suggests to continue the already ongoing gradual shift towards a greater share of funded pension benefits in total retirement income. Carefully designed given their higher risks, more funded pensions in the EU could also unlock capital for productive investment, as EU households tend to keep a large share of their savings in currency and deposits and financial markets remain small in the EU relative to the U.S.