Old Europe: A Look ahead to the Twenty-first Century

One solution – to raise the age of retirement – presupposes a functioning labour market for older potential employees that in large parts of Europe does not exist. An overview of the problems of and solutions to an ageing Europe.

No one knows exactly how we will be living tomorrow. Economic forecasts for the year 2050 are not to be taken seriously, because growth, interest, and unemployment rates cannot be accurately predicted even for the year after next. When it comes to the weather, developments even two weeks ahead are no longer predictable. In the case of population changes, on the other hand, we are dealing with much slower processes that, however, advance with a degree of inexorability.

Demographic ageing is one of the most clearly discernible trends of the twenty-first century. In this area of social development the future is altogether predictable. We can see ahead for the next 45 to 50 years. For the young of today that is a large part of their life span. The schoolchildren of the year 2012, the work force of the year 2025, and the pensioners of the year 2050 are already among us. They have a name, they have an address. They could now already be sent a savings plan for their pensions or a future contract of employment. As far as contracts between generations are involved, there is the problem, however, that those who will one day have to honour it are not yet allowed to sign on the dotted line or have not even been born.

Over a relatively short period of half a century, it is possible to recognize the demographic effect of our behaviour of today on the population structure of tomorrow. Children not born today will be absent tomorrow as young people and the day after tomorrow as adults. As a result, 25-30 years later there will be fewer potential parents. That in turn means, in absolute figures, even fewer births in 2 to 3 decades from now.

Global ageing and European peculiarities

Demographic ageing is a global trend. The number of the elderly is growing almost everywhere in the world. The principal cause is rising life expectancy. Europe, together with Japan, is in the lead in this respect. Consequently, it is more or less certain that Europe’s population as whole is going to age considerably and is hardly increasing. The foreseeable development in neighbouring regions, in North Africa, the Middle East, and Central Asia, will be quite different. There, for the foreseeable future, the populations will be young and growing.

The member states of the EU and the European Economic Area (EEA), the European states of the former Soviet Union, and those of the Balkans face another common problem: in almost all of these countries the population of working age will at best stagnate, possibly even decline. As a result, the available workers will become increasingly scarce, which will in time have an adverse effect on economic performance and the social security system, because the number of old people is simultaneously also rising considerably.

In 2005, a total of 472 million people were living in Europe, that is, in the EU (then 25 member states), the EEA, and Switzerland. Of these, 317 million were of employable age – that is, between 15 and 65. The number actually employed was 227 million.

For the period up to 2050, the trend is fairly clear: without immigration, the population of western and central Europe would have declined by 57 million by 2050. There would then still be 415 million inhabitants. Because of the small numbers of children, the population of working age would shrink by 88 million, so that there would then only be 229 million people of employable age, as usually defined.

However, not all young people and adults are in fact gainfully employed or looking for work. If the proportion of those employed also remained the same, then the actual employed population of western and central Europe would decline by 66 million to a mere 161 million by 2050. Because in central Europe the number of the elderly (65 years and over) will increase by about 48 million by the year 2050, these 161 million people would have to maintain an elderly population growing at a correspondingly rapid rate. Other parts of Europe are equally affected by this development. In Russia and the European successor states to the Soviet Union, the shrinking of the population of employable age will proceed even more rapidly.

In contrast, population growth, at any rate until 2050, may be expected in North Africa, the Middle East, Turkey, and Central Asia. At the same time, an increasing number of people will reach employable age. Employment possibilities in these regions of the world, however, are limited, so that many young people and young adults are likely to remain unemployed or underemployed. In North Africa and the Middle East (without the Gulf States), for example, the group of 15- to 65-year-olds will increase from 195 million today to almost 290 million by 2015. By 2050 there are likely to be 365 million people of employable age in these two regions. In Turkey and Central Asia the growth is relatively and absolutely less.

The current situation in Europe

Among the 472 million inhabitants of western and central Europe in 2005, there were approximately 42 million immigrants, that is, people whose birthplace was in another part of Europe or overseas. In the early twenty-first century, the population of western and central Europe grew by about 2 million inhabitants per year. About 85 per cent of the growth was due to immigration from states outside the EU. In several Balkan states, however, and in all European successor states of the Soviet Union, the population shrank.

There are growing domestic populations in Ireland and in some countries where a large proportion of the population is Muslim. These are Albania, Macedonia, Turkey, and finally Kosovo, which may soon become independent. In another group of countries, in particular France and Scandinavia, the number of domestic inhabitants will remain the same. Large parts of central and southern Europe, however, are looking forward to a future in which local populations will decrease significantly.

The anticipated development in Russia is even more dramatic than that in western and central Europe. In 2005 Russia still had approximately 148 million inhabitants. These included around 15 million immigrants. Without massive further immigration, this country would only have about 100 million inhabitants by the middle of the twenty-first century.

The shrinking of the population, in particular the population of working age, will in the short or long term create a situation of competition between the countries of Europe. The question of who in future will perform the necessary work and where the workers will come from arises for Russia just as it does for the Czech Republic, for Hungary, Italy, Germany, or Austria.

The demographic development is easily described and easy to predict. There is, however – as the history of the last 100 years shows – a potential, if a limited one, for dramatic deviations from the anticipated course of events. In this period, three things were the cause of massive drops in population: wars, influenza epidemics, and mass expulsions and genocides. Today, in addition, a nuclear reactor disaster, in which large quantities of radioactive material were released, would have comparable catastrophic consequences for the population affected. The same is true for terminal viral diseases, which are passed on from person to person and against whose pathogens we have no effective medical remedies. Examples would be the Ebola Virus or the Bird Flu Virus.

Demographic ageing and increased life expectancy

Demographic ageing is not a biological process. Living creatures, such as ourselves, are subject to biological ageing. But we would still grow old in a society that was getting younger. Nevertheless, in the whole of human history there have always been significantly more young people than old. In the nineteenth century, the proportion of the total population under 20 years of age was almost 50 per cent. In the past, those over 65 were a small minority. This is a situation still found today in a number of developing countries. We, on the other hand, are on the threshold of a society in which for the first time there will be more old than young. In Europe that will remain so for the rest of our lives. There is no foreseeable process that could alter that in any way. Even immigrants could not change much, since as a rule they only come as adults, if young ones, and will age just like the locals.

Demographic ageing has two causes, which have nothing to do with one another. The first cause is a very positive one for us: we belong to the most long-lived generation in the history of humanity. No generation before us had such a high life expectancy. And it gets even better: as yet there is no end in sight to this development. Statistically life expectancy is continuing to rise at a rate of about two to three months per year. Since infant and child mortality are now very low, this essentially means a gain in life expectancy after the age of 50.

Overall, life expectancy in Europe doubled in the twentieth century. Even in the late nineteenth century death at an early age was no exception: many died in childhood and youth, some (from today’s perspective) as young adults. One need only think of Mozart, Büchner, Schiller, or Schubert. Today we can assume that most people who reach the age of 5 will also live to be 65, many even to be 70, 80, or 90. For our life plans the fact that we no longer need to reckon with death every day is crucial. So when today someone dies of cancer at the age of 45, or in a traffic accident or commits suicide, we think of him “dying before his time”. Historically, that is a very recent phenomenon.

Until well into the nineteenth century, there was no such thing as “dying before one’s time”. Because dying was the order of the day whatever one’s age. It was a familiar part of everyday life, because until the early part of the twentieth century many infectious diseases were terminal. In less-developed parts of the world, such diseases are still of major importance. In Europe, meanwhile, we have infectious illnesses “under control”. Instead we die of “civilizational illnesses” [Zivilizationskrankheiten], as they’re called. These include, in particular, heart and circulatory disease, especially heart attacks, and cancer. In the last 20 years, we have succeeded in reducing the threat even of these illnesses. A heart attack is no longer a death sentence. Rather more than half of all those affected survive their first coronary failure. Even with cancer there is better early diagnosis and therapies which promise to be increasingly effective.

Since we are increasingly successful in the field of early diagnosis and treatment of civilizational diseases, we are now approaching a future in which other illnesses will dominate: e.g. dementia, Parkinson’s disease, Alzheimer’s, geriatric diabetes, and incontinence. All of these are illnesses that adversely affect our quality of life, but which don’t kill us – at least not immediately. Hence the years gained mean not only a gain in life lived, they also have their price in the shape of a prolongation of chronic degenerative processes, which sooner or later mean we will need care.

In the course of the twenty-first century, our life expectancy is likely to rise by another 20 years. If we extrapolate the pace of recent decades – a plus of three months per year – then the gain would even be significantly greater. At any rate, it means that a child born now has a very good chance of living to see the twenty-second century.

Falling numbers of children

Demographic ageing also has a second cause; and that is more like bad news. We are not only the most long-lived generation humanity has so far produced, but we also live in the society with by far the least children. Never before in the history of mankind has there been a generation which had such a small number of children as ours.

In Germany and Austria, the average number of children is 1.4 per woman. In western Europe, the figures for Spain, Portugal, and Greece are even lower. In eastern central Europe, the figures are lowest in the Baltic States, in Hungary, and in Slovenia. The average is higher in France, Ireland, and Scandinavia, on the one hand, and, on the other, in countries and regions with a large Muslim population. This is particularly true of Albania, Kosovo, Macedonia, and Turkey, but not Bosnia.

In nineteenth-century Europe, each woman still had 4.5 children. That was nevertheless only half what would have been biologically possible given life expectancy at the time. This is an indication of historical forms of birth control long before the introduction of the contraceptive pill in the late 1960s and the legalization of abortion in the mid-1970s.

The last big wave of births occurred in the middle of the twentieth century, in the 1950s and 1960s: the post-war baby boom. From about 1970, the figures for numbers of children have been below the threshold of two children per family. Since then, the parent generation is no longer being completely replaced by a child generation and a “deficit” of potential parents is building up. This deficit did not become visible for a long time, because in the last few decades the baby boomer generation has been having children, so that there was no lack of potential parents. This phase is now more or less over.

Changes in the age structure

Our demographic future is strongly determined by past developments. Consequently, a bit of history can always be read from demographic data. Before the Second World War, the age structure of Europe still corresponded to that of a “genuine” pyramid. Today such a structure still exists in some developing countries. Such age pyramids arise, among other things, because people die at every age, predominantly of infectious diseases.

At the beginning of the twenty-first century, the age structure of our European society can no longer be called a “pyramid”. The centre of gravity has shifted from the young to the old. At the top of the age structure there are significantly more old women than old men. This is not solely due to the greater life expectancy of women in old age. Of decisive importance are also the late effects of the Second World War, which left a large number of dead among the male population. In countries such as Germany and Austria, there are complaints today about the problems of funding old age pensions and care, although on the male side, of those born before 1928, half a generation is missing. If there had been times of peace since the First World War, many more old men would be alive today. That would have meant more pensioners, male and female, whose keep we would have to finance out of current contributions and tax yield.

In addition, the age distribution displays two very “large” age groups: first, those born shortly before and after 1940, and second, those born in the late 1950s and 1960s, the baby boomers in other words. In the case of the younger group, these are already generations marked by a decline in births and a low number of children per family.

As long as the baby boom generation had children, there continued to be, despite a small number of children per family, a large number of births. Now, however, “small” age groups are reaching the age of parenthood. Consequently, there is no risk in predicting that the annual birth rates in Europe will continue to decline. This will have a lasting effect on the age structure of our society in the twenty-first century. And the baby boom generation – that is, the largest age groups that the twentieth century has produced, will dominate quantitatively for quite a while. One day, when the last members of the baby boom generation have died, years with high birth rates will be history. Then the big age jump in our history will also be over.

Economic repercussions of the ageing process

What does demographic ageing mean for the economy? Foreseeable at any rate is a shortage of local workers. In coming decades there will permanently be fewer young people leaving the educational system and entering working life with fresh knowledge. At the same time the group of the elderly leaving working life and going into retirement will almost inevitably grow. In all probability, that will lead to a lack of skilled and qualified employees in many European states. The dynamic outlined here means that the renewal of our knowledge, to the extent that it develops and is passed on within our state-financed educational system, will slow down. There are also indications that demographic ageing leads to a decline in the readiness to innovate, or at least in the innovation potential in a society.

Finally, it is clear that demographic ageing shifts sectoral demands. Ageing societies require fewer midwives and obstetricians, fewer kindergartens, schools, and discotheques, but more old people’s homes, mobile care services, and geriatric departments in hospitals. In tourism, package offers for whole families lose out in favour of city and cultural tours. Ageing societies require fewer nappies for children, but more reading glasses and dentures.

Not entirely clear from the viewpoint of today are the consequences of greater ageing for financial markets. Some consider these effects to be discernible. They assume that given lower interest rates in Europe, we shall in future invest in the still developing – and from the point of view of investors more profitable – markets of Asia and Latin America. Others assume a long-term effect as soon as the generation of the baby boomers go into retirement and want to convert their invested assets into cash in order to top up their pensions. Fairly uncontentious is a change in savings and investment behaviour. All empirical studies show that in the long term, shares have until now outperformed all other forms of investment in terms of profitability. That’s why it’s worthwhile for young people to invest a part of their savings in shares. Someone who still has fifty years of life in front of them can rely on the return on capital being higher.

Someone, however, who is over fifty and is going to retire in the next 10-15 years is unlikely to be interested primarily in long-term higher yields, but will want to close the presumed gap between what is provided by the state-guaranteed pension and the accustomed standard of living. Consequently, an interest arises in forms of investment which guarantee stable returns. We can assume, therefore, that in an ageing society investment behaviour will also become more conservative. For the baby boomer generation it is simultaneously a question of how the accumulated assets can be converted into regular income. For that, a part of the bond or share assets has to be sold and invested in another way. If we were dealing with a closed system, there would only be two solutions: the younger generation would have to significantly increase their rate of saving, or the assets coming onto the market will lose value.

This can be discussed using the example of the property market. Anyone who wishes to obtain an income from an apartment bought as an investment needs someone to live in it and pay an appropriate rent. Higher rents can hardly be obtained if the population of a region is stagnating or shrinking. Owners will try to sell property that cannot be let. If no rental income at a suitable level can be expected, then the apartment bought as an investment can only be sold to a person who wants to live in it. The less people there are living in a region, the less the demand for first residences. Concerning the realization of property assets in an ageing and shrinking society, the question then arises: does a larger proportion of the younger generation, coming after me, need two homes instead of one? If not, there is a surplus, which can turn a supposedly “safe” investment into a loss-making one.

The problem can be generalized: what happens when a large generation – in our case the baby boomer generation – steps down and tries to transfer its assets to a numerically smaller generation? In a closed financial or economic system, a depreciation of these assets would be the most likely result. With falling capital yields, the rate of interest would then correct itself in the following generation, because the assets are then worth less. European investors, however, can invest in good time in still underdeveloped/developing markets, as long as the returns on capital are higher than here.

It is at any rate foreseeable that a shrinking population means more public debt per head. An ever smaller number of adults has to “service” the same or a growing public debt – that is, pay interest – and later pay it off, that is, finance the repayment. There are already German federal states whose creditworthiness has been downgraded by international rating agencies, because there is less and less confidence that in regions like Mecklenburg-West Pomerania, Saxony-Anhalt, and the Saarland the shrinking populations will be able to service the debts of those states. That has immediate consequences. The rating to a large extent determines the rate of interest, so that the servicing of existing debts is already becoming more expensive today.

Finally, demographic ageing has considerable repercussions on our social security systems. Under current labour market conditions, ageing means that there will be more drawers of pensions, sickness, and care insurance benefits but fewer contributors. There is also likely to be a further rise in costs in the health services, because we will live much longer, but with the chronic-degenerative diseases already outlined above. At the same time, a growth in implicit public debt may be observed due to entitlements already guaranteed. This implicit public debt is not visible anywhere, but given the current legislative position, pensions, sickness, and care pay-outs may be anticipated

Challenges

The diagnosis is clear: Our society is ageing, because life expectancy is rising. And while that presents each one of us with the opportunity of a longer life, in sum it means ever more old people. This development will shape the coming fifty years. But we are not only living longer, but are also having on average fewer children than all the generations before us. As a result, the number of young is shrinking. Primary schools are already being closed. Secondary schools will be hit next. After that, the number of young people and young adults entering working life with fresh knowledge will fall. That means that a significant ageing and possible shrinking of the employed population is imminent. This will affect business just as much as public services. At the same time, the emphasis in general will shift from the young to the old. The number of over-sixties will double by 2050, the number of those over 80 even triple.

The development outlined here confronts pensions insurance with considerable funding problems, because, given our system of financing pensions on a pay-as-you-go basis, fewer people at working age contributing to the system must carry ever more elderly pensioners.

A rapidly growing number of old, and especially of very old people, also presents the health system with enormous challenges. Demographic ageing almost automatically causes higher health expenditure, even if the old people of tomorrow were to be healthier than those of today.

In particular, the reduction in civilizational diseases – notably cancers and heart and circulatory illnesses and problems – means that people not only get older, but also in old age suffer for a longer time from the already mentioned chronic degenerative diseases. As a result, we will need more care services.

Low numbers of children, fewer marriages, and rising divorce rates attenuate those family networks, which until now have provided care voluntarily. If a care emergency is not to result, this has to be replaced by professional care, which makes the long-term care of the chronically sick more expensive. The question arises, how this care of the old of tomorrow is to be funded: primarily through state care allowances – that is by a contributory system; or through a greater involvement of those in need of care and their families. The latter assumes a sufficient (pension) income in old age or individual coverage.

Ways out of the dilemma

There a number of answers to the above-mentioned challenges.

Prolongation of life working time

Today in Germany, Austria, Italy, and Greece, but also in a number of other countries, comparatively few women over the age of 55 and hardly any men over the age of 60 are still working. Retirement is then all the longer. Take the example of Austria. The average age at which retirement begins is 58. As in comparable countries of southern Europe and central eastern Europe, there are a considerable number of early retirees. The further life expectancy of those taking early retirement stands at 23 years for men and 27 years for women. Since life expectancy is still rising, however, Austrians starting retirement in 2006 have an average of 26 years (men) and 30 years (women) of a drawing a pension in front of them.

To allow people to drop out of working life so early and for such a long time will in future become a luxury that European societies can really no longer afford. What a contrast to today, when pensioning employees retiring at the earliest possible point in time is not only supposed to ease pressure on personnel costs and the labour market, but is also a fixed element of the life plan of the majority! A rise of the age at which retirement begins and an equalizing of male-female employment rates presupposes, however, a functioning labour market for older potential employees. In large parts of Europe, nothing of the kind exists as yet. Therefore, without such a labour market for older men and women, if the retirement age rose, the funding problem would merely be shifted from pension insurance to unemployment insurance.

What is crucial is that we have the chance to constantly acquire fresh knowledge in our professional lives. That is the essential condition in order to be professionally active for longer. What should also be reconsidered are all forms of payment which are primarily oriented to age and length of service, instead of work actually done. Existing wage and salary schemes automatically make older employees more expensive than younger ones – irrespective of whether they are more productive or not. Also necessary is a break with practice until now of constantly making workforces and management younger, while older workers are retired early or claim disability benefit.

Better utilization of domestic potential

Higher activity rates are not only possible with older workers. It would also be helpful if the young could complete their studies and vocational or professional training earlier. That makes a more rapid start in professional life possible. At the same time, we should in future do more to integrate women into working life again as soon as possible after the birth of children. That requires more family-friendly career paths and working time models. And it assumes a general provision of nurseries and all-day schools.

Selection of immigrants through pro-active immigration policies

Finally, the shrinking of the economically active population can be counteracted by recruiting skilled and qualified young adults from abroad. A precondition of that is a pro-active immigration policy, but also a climate of acceptance of immigrants. Otherwise those immigrants whom we need for economic reasons will not come to western and central Europe. Because almost all industrial societies have similar demographic problems, there is worldwide competition for attractive immigrants: not only between European economies, but also between Europe, North America, and Australia.

Active family policies

Beyond that, it is a question of ensuring that the number of children per family does not decline even further, but if possible rises again somewhat. For that to happen, we need family policies that aim at two things above all: making motherhood and work more compatible for women and encouraging men, through targeted incentives, to make a bigger commitment to caring for and bringing up their children (emotionally and in terms of time, and in the event of divorce or separation, also financially). However, because of the decline in births in the past, the number of potential parents is shrinking. Therefore no rise in the total number of births is to be expected as the result of family-friendly policies.

Abstaining from consumption during the active phase or at retirement age

The pensions reforms of recent years mean that we are presenting future generations of pensioners with the prospect of lower state-guaranteed payments. If they don’t do anything about it then they have to abstain from consumption on retiring. The alternative is obvious: the active generation of contributors can save up larger contributions today within the framework of private provision. That, however, means abstention from consumption in the present. At the same time, the risk is shifted: in addition to old-age security financed by contributions, there is now capital-financed old-age security; later perhaps a partly capital-secured sickness insurance. That means a transfer of a part of the risk from taxation-financed and contribution-financed pension and sickness insurance to the capital market and to private households. Their future living standard will depend less on the size of taxable earned income and more on the development of the share, bond, and property markets, where their private old-age provision is invested.

In this context, the financial services industry bears a special responsibility. This is especially true of retail banks, savings banks, insurance companies, and issuers of bonds and shares. They become central mediums of inter-temporal income redistribution, if the welfare state no longer wishes to entirely fulfil this task and the individual income earners and/or savers are overstretched by the investment decisions required.

Outlook

The solutions mentioned do not exclude one another. But they produce quite different results. Higher social security contributions and/or lower pensions enforce consumer abstention. The strategy of the full-employment society aims at more employment participation by mothers and the “young old” between 55 and 70. Permanent immigration, on the other hand, leads to a much more “colourful” society, in terms of ethnicity and religion, than we have previously been used to in many parts of Europe. Finally, the women’s and family policies outlined above lead to a society in which there is a better distribution of roles and spheres, opportunities, and burdens between the genders.

From a political perspective there is, however, an evident dilemma. The ageing of our society and the consequences of this development are already easily foreseeable today. What should be done is likewise quite clear. Yet many of the strategies mentioned are not especially popular and have vociferous opponents. The results are fatal. Most of us today see not the ageing society and its consequences as the problem to be solved, but consider most of the solutions discussed here as the problem.

Translated from German by Martin Chalmers

Tr@nsit online, 2007
Copyright © 2007 by the author & Transit – Europäische Revue. All rights reserved. This work may be used, with this header included, for noncommercial purposes. No copies of this work may be distributed electronically, in whole or in part, without written permission from Transit.