The Impact of Ageing Populations on the Economy, a European Perspective: From Baby Boom to Baby Bust?

Europe is ageing and this will have an impact on retirement systems (pay-as-you-go as well as funded), government expenditure and general economic growth. Theoretically, ageing populations could lower per capita GDP growth in Europe by around 0.4 per cent annually. However, this should be seen as a worst-case scenario; it is quite likely that some of the underlying assumptions will not fully materialize. Around two-thirds of the potential negative impact for Europe originates from a sharply declining work force relative to the non-working (dependent) population. Our overall conclusion is that if Europe continues its reforms, particularly to pension and labour markets, ageing populations should not have any impact on the economy. The biggest political challenge is to convince people that we cannot continue to live longer and work shorter without paying a price, in the form of lower living standards for workers and/or pensioners. The right combination of labour market and budgetary reform could deliver even stronger economic growth rates than we have experienced in Europe in the past. Our ®rst message is that the real problem is not the impact on the pay-as-you-go retirement systems, but on the overall economy itself. If you take away the negative impact of ageing populations on the overall economy, it is quite likely that you solve most of the other problems too. The second message is that we believe that, in ¯exible labour markets, ageing populations should lead to lower unemployment and higher labour force participation, without too much government intervention. A combination of lower unemployment and higher labour force participation can almost fully compensate for the negative effect of ageing on the economy