by Katinka Barysch
Europeans live longer, work less and have fewer babies. On current trends, the EU will not have enough workers to pay for its growing number of pensioners. Economists and policymakers have moved beyond scratching their (greying) heads in despair. They focus on what can be done to alleviate and possibly reverse the trend. That is also what they did at last week’s Munich Economic Summit that brought together some of the world’s best people on the subject (http://www.munich-economic-summit.com/mes_2007/participants.htm).
The EU’s average fertility rate is now 1.5, well below the 2.1 needed to maintain the size of a population. In Germany and Italy, the fertility rate is closer to 1, which means that each generation is 60 per cent smaller than the previous one. Even more worrying but less well-known is the fact that population decline – just like population growth – is exponential. In Germany, the birth rate started to fall in the 1960, well before Italy, Spain and other EU countries. By the 1990s, Germany was running short of 20 or 30-something potential mothers. A country that has had low birth rates for decades ends up in a ‘fertility’ trap.
Another fact that is rarely taken into account is how demographics interact with economic geography. Young people and those with skills are the most likely to leave declining areas, and women are apparently more prone to moving than men. Germany’s eastern Laender are a frightening illustration of this trend. The number of young people has dwindled, leaving the over-60s to themselves in some places. And among the 10 per cent of the population that has left the eastern Laender, there were many more women than men. In some towns, there are 160 young men for 100 young women. The fact that those men left behind tend to be unqualified and unemployed gives women little incentive to return. Similar developments can already be observed in some parts of Central and Eastern Europe, as well as in the continent’s northern and southern fringes. Europe will not age homogenously. It will be a patchwork of booming regions and those that are inhabited by octogenarians and angry young men.
No-one is yet talking about demographic micro-management. But all EU countries do need to address the inevitable raise (in many cases doubling) of the old-age dependency ratio (the number of workers to pensioners). The list of possible solutions is by now well known: work longer and harder, accept more immigrants and have more babies. But each remedy has its limits, so Vladimir Špidla, the EU’s social affairs commissioner, talks about ‘mainstreaming’ demographic concerns into all policy areas, not only pension reforms, but also education, tax, labour market and infrastructure policies.
Population decline is a European problem – globally the population is growing by 200,000 a day, adding the equivalent of Switzerland every six weeks. Some of the fastest growth happens in the EU’s vicinity, especially in North Africa and the Middle East. Children and teenagers make up over half of the populations of Iraq and Somalia. Many of them will want to move to where jobs are better and life is more stable.
But immigration can only help to alleviate Europe’s pension pressures, it cannot solve the problem. Hans-Werner Sinn, head of the Ifo Institute that runs the Economic Summit, says that even if immigrants stayed young forever, the EU-15 would need more than 190 million immigrants to keep its dependency ratio constant until 2035.
Similarly, the retirement age would have to go up to 77 if governments were to rely on this step alone to fix the pension problem. Instead, they usually adopt reform packages that include a gradual raise in retirement ages, cuts in state pension payouts and adding fully-funded ‘pillars’ to the pension systems. There are some interesting and encouraging examples of reform, for example the ‘notional contribution’ systems implemented by Sweden, Poland and Latvia. These are pay-as-you-go systems that mimic fully-funded pensions because each worker’s contributions are added up in a notional account’. Since the pension pay-out depends on how much a worker has paid in, people have an incentive to retire later.
In most other European countries reforms have been overly cautious, which may have something to do with the growing voting power of Europe’s elderly. Not only is the number of over-50s rising steadily, they also tend to be more politically active. In the last US presidential election, for example, 70 per cent of those over 65 voted, but only a third of the 18-24 year-olds. Pension reform would have to happen now, before the baby boom generation retires. But there is little sign of this.
Meanwhile, family-friendly policies are becoming increasingly popular, across the political spectrum. Munich’s assembled economists were unanimous that higher birth rates cannot solve Europe’s pension problem in the short run. Even an immediate doubling of the birth rates would only have an impact on dependency ratios in 30 years or so. But in the long run, Europe will need more babies to mitigate the economic consequences of an ageing and shrinking workforce. Can and should governments get involved?
Economists have calculated that bringing up a child costs €150,000 to €300,000 and that each child contributes a net €140,000 to a country’s pension system. The parents bear the costs but the benefits also go to those pensioners that have not raised children themselves. Therefore, some economists suggest that people with children should pay less tax and get bigger pensions. Others argue that state-funded childcare institutions are a better and more immediate way of redistributing money to those with children. The fact that France offers day care for all children over three may have helped with its impressive fertility rates. But childcare facilities alone do not make a difference: Germany’s eastern Laender have many more nurseries but fewer babies than the western part of the country.
A quick fix will not work. France has had pro-family policies since the 1870s. In Scandinavia, support for women and children runs through all aspects of life. David Willetts, the Conservative Party’s Secretary of State for Education and Skills approvingly speaks of ‘state feminism’. Nor do values or religion explain birth rates. Fertility rates are lowest in traditionalist countries with rigid family structures, such as Italy, Greece or Spain, but also Japan, South Korea and Iran. They are highest in those places that allow women to combine work with bringing up children. France’s 35-hour week gives parents plenty of free time to look after their offspring. Flexible labour markets in the UK and the US offers part-time job and makes it easier for women to go back to work after a maternity break.
Germany is almost an example of how not to do it. Education takes too long, often up to 20 years, which forces many women to delay having kids until their 30s. Women now tend to be better educated than men. But they struggle to find matching partners since many high-earning men prefer traditional stay-at-home wives. Over 40 per cent of German women expect that having a baby would be the end of their professional career. They have a point: schools close at mid-day and private child care is expensive. Part-time jobs are rare and often come without perks and social security. The expectations towards women that juggle work and kids are crushing, says Regine Stachelhaus, who admits that she only managed to bring up her son and run Hewlett Packard in Germany because her musician husband did not work regular hours.
Incidentally, Frau Stachelhaus was the only female speaker at this two-day conference. I counted fewer than ten women among the 150-odd participants. I would have though that women have a lot to contribute to debates about having babies, juggling work and families and caring for the elderly.
Katinka Barysch is chief economist at the Centre for European Reform.