Monday, January 23, 2006

Commentary: Europe Can Age Gracefully If Reforms Implemented Now

Writing in Business Week, Natascha Gewaltig says that Europe's graying population will put economic pressure on the euro zone soon, but that what is needed is the political will to implement reforms now. "The share of the working-age population (15 to 64) will fall from around 66.9% in 2004 to just 56% in 2050. At the same time, the share of the population older than 65 will increase to 30% from 17%." One key issue will be female labor participation rates increase, which would at least partially offset the effect of a decline in labor supply; however, that will not be enough according to Gewaltig, so that immigration will also have to play an increasingly important role. In addition,
relatively favorable demographic developments over the next 4 to 5 years mean the period until 2011 is a window of opportunity for governments to prepare their pension systems and labor markets for the upcoming challenges. Radical changes and reforms of the PAYG pension schemes in key countries will be necessary. Despite the life-expectancy increase, the entry level for pension schemes has remained widely unchanged -- but this will have to be increased for the plans to remain sustainable.

Nevertheless, the time spent in retirement is likely to increase in the long run, all else being equal, and the change in dependency ratios will make the current PAYG system unsustainable. Pension levels will have to be lowered, and private-pension provisions will need to become more important.
Source: "How Europe Can Age Gracefully" Business Week (January 23, 2006)

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