The macroeconomic impact of ageing, EU immigration policy and pension expenditures

The EU faces ageing-driven fiscal strain, slower growth and rising pension costs, making employment-focused migration increasingly vital.

The European Union population is ageing increasingly rapidly, with dependency ratios and shares of the elderly in the total population rising across the continent. While aggregate projected increases in age-related public spending in the EU are manageable, there are substantial differences between EU countries. A low probability of a sustained rebound in fertility rates effectively leaves the EU with continuingly high positive net-migration levels as the only route to mitigate the economic effects of ageing. EU potential growth rates are set to fall, driven down by shrinking labour forces and likely slowing total factor productivity, adding to the fiscal challenges from an ageing population.

Facing slowing growth and rising fiscal costs from ageing, and with only net migration as a possible offsetting policy lever, it is particularly economically important for EU countries to ensure that inward migration leads to a positive net contribution to public finances. Evidence from several member states suggests this requires the share of employment-based migration in total migration to be increased, and shares of asylum and family-based migration in particular to be reduced.

Divergent but rising EU public pension costs across member states arise from different replacement rates, expected years in retirement and life expectancies at high ages. Overall, retiring baby-boomer generations in the EU look set to enjoy longer lives in retirement than either their parents or children, though diverging life expectancies across the income distribution makes it complicated to raise average retirement ages in many EU countries.

Differences in the degree of reliance on private pre-funded pension schemes in the EU impact the financial market and sustainability implications of pension schemes, while needed pension reforms must, for equity reasons, also take into account gender and coverage differentials among the covered populations. Lastly, ageing populations will put additional pressure on long-term care worker supply, with only limited scope for robotic substitution.

Source : Bruegel