1] Prelude
- Economic & Budgetary Projections for all EU Member States (2022-2070)
- INSTITUTIONAL PAPER 279 | APRIL 2024 | EXECUTIVE SUMMARY
2] MANDATE / PRINCIPLES / PROCESS
To assess the long-term sustainability of public finances in the EU Member States, the ECOFIN Council mandated the Economic Policy Committee (EPC) to update its comprehensive long-term budgetary projections by the summer of 2024.
The update of the Ageing Report, a joint report by the EPC and the European Commission (DG ECFIN), should be based on new population projections by Eurostat. The report is prepared by the EPC’s Ageing Working Group (AWG). It was first published in 2006 and has been updated every three years since then.
The Ageing Report is a unique exercise in that it provides detailed economic and budgetary projections for the EU Member States and Norway up to 2070 based on common assumptions and methodologies. The report provides a vast set of comparable and internally consistent information for 28 countries.
These give insight into the timing of population ageing, its economic implications and the associated budgetary challenges. Such pressures are already manifest in many countries and are expected to accelerate as large cohorts of baby boomers retire, life expectancy continues to rise and fertility rates remain low from a historical point of view.
Being a joint EPC-Commission product, the Ageing Report provides a shared assessment between the Member States and the Commission on how ageing costs might develop in the future, considering the latest information and legislated reforms. The projections are therefore a cornerstone of various surveillance processes at the EU level. They inform the coordination of economic policies, in particular under the European Semester, the implementation of the Recovery and Resilience Facility, the annual assessment of the sustainability of public finances and fiscal surveillance under the Stability and Growth Pact.
3] Overview Of Projection Exercise
The preparation of the triennial update of the report includes two phases. In a first phase, the Commission and the Member States in the AWG agree on the underlying assumptions and projection methodologies (see Graph 1), which are subsequently endorsed by the EPC.
These assumptions and methodologies were published in November 2023 in a separate volume. In a second phase, the age related spending projections are prepared, the results of which are presented in this report and in the accompanying pension fiches for each country.
The underlying assumptions and projection methodologies, agreed jointly with the Member States, cover all key drivers of ageing costs. The EUROPOP2023 population projections by Eurostat serve as a starting point of the exercise. In addition, based on common methodologies, macroeconomic assumptions are prepared for each country.
These cover economic growth and its drivers, namely changes in labour productivity (total factor productivity and capital deepening) and in the labour force (participation, employment and unemployment rates), as well as interest rates and inflation. The statistical annexes at the end of this report provide a country-by-country overview of the demographic and macroeconomic projections.
The budgetary projections cover four items: public spending on pensions, health care, long term care and education. They are the subject of this report. For pensions, Member States prepared projections based on national models, which were the subject of an in-depth peer review by the Commission and the AWG.
This approach allows capturing the specificity of each country’s public pension system, while ensuring cross-country consistency since the projections are based on shared assumptions and methodologies. Based on common models, the Commission prepared the health care, long-term care and education projections, which were discussed and agreed within the AWG. All budgetary projections were endorsed by the EPC in January 2024.
The Ageing Report’s baseline projections are based on a general ‘no-policy-change’ assumption, reflecting legislated measures. They illustrate what the future is likely to look like if current policies remain unchanged. Nonetheless, projecting economic and budgetary developments over a period of years involves a considerable degree of uncertainty as the results are strongly influenced by the underlying assumptions.
For this reason, a series of sensitivity tests and alternative scenarios is conducted around the baseline to assess the responsiveness of the projections to changes in the main demographic and economic parameters. In addition to the tests covering demographic and macroeconomic variables, specific policy scenarios apply for each expenditure item.
This report is structured in three parts:
- Part I presents the long-term budgetary projections for pensions, health care, long-term care and education. It concludes with the total cost of ageing, bringing together the four expenditure items from the previous chapters. Each chapter presents the baseline figures, the impact of the sensitivity tests and alternative scenarios, and revisions compared to the 2021 Ageing Report.
- Parts II & III contain statistical annexes with, respectively, cross-country tables and country fiches. They give an overview of the main assumptions and macroeconomic projections, as well as projection results for the four items by country and at the aggregate EU and euro area level.
4] Main Pension Aspects
The pension chapter presents:
- The main features of public pension systems in the EU;
- Expenditure projections up to 2070;
- Changes compared to the previous update.
Public pensions represent a substantial share of government spending. Given the direct link between the size of the older population and the number of pensioners, projections for the latter and for average benefits help identify pressures on public finances stemming from rising pension expenditure in the medium to long term.
Since the state plays a central role in the pension provision in all EU Member States, the projections focus on public schemes. A broad definition applies: all schemes that are statutory and administered by the government are considered, i.e. pension benefits for which the state is the ultimate guarantor, thus bearing the costs and risks attached to the scheme.
The set-up of public pension systems varies significantly across the EU (see Sections 1.2 to 1.4), complicating cross-country comparisons. These differences stem from historically different views on the role of pension systems in providing retirement income and different approaches on how to achieve this.
Moreover, many countries have introduced comprehensive pension reforms in recent decades, as reflected in the projections (see Sections 1.5 to 1.8). Section 1.9 compares the latest projections with those from the 2021 Ageing Report.