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The economic impact of population ageing and pension reforms

Carolin Nerlich and Joachim Schroth

Economic Bulletin Articles, 2018, vol. 2

Abstract: This article examines the macroeconomic and fiscal implications of population ageing in the euro area and looks at how pension reforms can help to address these challenges. According to Eurostat’s latest projections, population ageing is set to continue and even intensify in the euro area over the next few decades. This ongoing process, which stems from increases in life expectancy and low fertility rates, is widely expected to lead to a decline in the labour supply and productivity losses, as well as behavioural changes, and is likely to have an adverse effect on potential growth. Moreover, by causing increases in precautionary savings, ageing can be expected to have a dampening impact on interest rates over an extended period of time. Population ageing also entails changes in relative prices, mainly owing to shifts in demand, with demand for services rising. Furthermore, euro area countries are also projected to experience further upward pressure on public spending on pensions, health care and long-term care as their populations age. Although many euro area countries implemented pension reforms following the sovereign debt crisis, further reforms appear to be necessary in order to ensure fiscal sustainability in the long run. In this respect, measures that increase the retirement age can be expected to dampen the adverse macroeconomic effects of ageing, as they will have a favourable impact on the labour supply and domestic consumption. In contrast, increasing the contribution rate or reducing the benefit ratio could have less favourable macroeconomic implications. JEL Classification: H55, J11, J14, E62

Keywords: old-age workers; population ageing; public expenditure; public pension (search for similar items in EconPapers)
Date: 2018-03
Note: 508107
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Handle: RePEc:ecb:ecbart:2018:0002:2