Europe’s ageing burden far less than in the US or China

GREYING Europe has long been considered an outlier in global demographics. But the rising cost to its governments in terms of bills for pensions and healthcare is more manageable than assumed, and less than in rival economies in America and China.

In a detailed report on the rising cost to the public purse from Europe’s ageing population, Brussels-based think tank Bruegel this week outlined a trajectory through 2070 using the latest country-by-country data from the European Commission.

Familiar problems and necessary remedies recur: pressure on Budgets due to longer lifespans, the need to raise retirement ages gradually and for better-funded pension and care systems, and more targeted employment-based inward migration.

Indeed, one eye-catching line from the report is that it now looks likely the baby-boomer generation will have experienced longer retirement than either their parents or their children.

But perhaps the most remarkable takeaway is how relatively contained Europe’s fiscal burden appears in aggregate.

That is not to put a gloss on a worrisome problem – one raising the prospect of falling workforces, weighing on the continent’s potential growth, and with little hope of a reversal of alarming birth rate declines.

But the context of where Europe fits into the global picture – at least in terms of its fiscal exposure – is certainly very different from prevailing gloomy narratives.

Bruegel’s report calculates that, on average, the 27 European Union members’ ageing-related costs will rise by just over 1 per cent of gross domestic product over the next 45 years, with categories including pensions, long-term care, healthcare and education.

Curiously but intuitively, the projected baby bust means falling education costs register as a saving for the whole bloc.

The circa one percentage point of GDP rise in costs the report outlines – about 210 billion euros (S$316.2 billion) relative to this year’s GDP – was then compared to equivalent estimates for the US and China.

Bruegel used the latest long-term US estimates from the Congressional Budget Office to show federal government and healthcare expenditures rising about four to five percentage points of GDP through 2055. And it used the International Monetary Fund’s annual economic surveillance estimates for China to show government pension spending alone rising by about nine points of GDP through 2052.

“It is not... the cost of European welfare states that is ‘out of control’ as the whole world ages,” authors David Pinkus and Jacob Funk Kirkegaard noted. “The real risks lie elsewhere.”

Under control?

One caveat, much like EU-wide estimates of debt to GDP, is that the average for the bloc masks big variations from country to country.

While smaller economies from Hungary to Luxembourg may see a five to 10 percentage point rise in costs towards 2070, there are surprising two-point drops in the projected costs incurred by Italy and France. Germany, the EU’s biggest economy, sits somewhere in the middle of that, with a two-point rise.

There are numerous investment takeaways from such a long-term view. The dour view of potential growth puts enormous pressure on innovation and productivity advances that Europe has been lagging on. And how this year’s German and EU-wide defence spending plans and stimulus spending are made to work will be a big factor in how that happens.

But in fragile public bond markets wary of long-term debt sustainability and credit ratings firms scoring the risks, the relatively modest European bill should be food for thought. REUTERS