Over the coming decades, EU Member States will experience a steep increase in the share of elderly persons in the population and, on the other hand, a significant decline in the share of workers. This demographic shift will in turn affect the economy and the expenditures of Member States' governments. By 2060, Europeans will live longer and have fewer children. This means that the proportion of workers supporting those in retirement will halve from an average of four to two by 2060. These projections have been confirmed by the '2015 Ageing Report: Economic and budgetary projections for the 28 EU Member States (2013-2060)', presented by the European Commission on May 12, at an EU Council for Economic and Financial Affairs (ECOFIN). The 2015 Ageing Report provides a description of the underlying macroeconomic assumptions and methodologies of the age-related expenditure projections for the EU28 and Norway. Norway, together with Iceland, Liechtenstein and the 28 EU Member States, forms part of the European Economic Area (EEA).

The projections of the report, linked to age-related expenditure and unemployment benefits, are classified into five categories: pensions, healthcare, long-term care, education and unemployment benefits.

Pensions

Public pension systems in the EU vary significantly across Member States due to different traditions on how to provide retirement income as well as different phases of the reform process of pension schemes in the Member States. Within the EU, public pension expenditure is expected to increase by 11.7% of the EU GDP over the 2013-2040 period, before levelling down to around 11% by 2060.

The Report shows that the range of projected changes between 2013 and 2060 in public pension spending is relatively large across Member States. Countries such as Croatia    (-3.9 p.p.), Denmark (-3.1 p.p.) and France (-2.8 p.p.) are expected to decrease their public pension spending. Member States like Malta (+3.2 p.p.), Luxembourg (+4.1 p.p.) and Slovenia (+3.5 p.p.) should experience the strongest increase in public pension spending ratios by 2060. The sustainability and adequacy of pensions in Malta has been high on the political agenda for the past few years. The 2006 reform introduced a number of changes to pensions in Malta leading to an increase in pensionable age, changes in the calculation of pensionable age and also the introduction of the Guaranteed National Minimum Pension amongst others.  As a result of these changes, increases in the effective retirement age are projected to be consistent with gains in life expectancy by 2030.

Healthcare

In past years, many EU countries have undertaken policy reforms in the healthcare sector. Between 2003 and 2012, the total expenditure on healthcare spent in the EU increased from 7% to 7.8% of the EU GDP, implying that the overall public expenditure in the Member States on healthcare has risen and is expected to keep rising by 2060. Statistics for 2013 show that Malta spent 5.7% of its GDP on healthcare, and this is estimated to increase to 8.1% by 2060.

Long Term Care

Public expenditure on Long-Term Care (LTC) is an important factor for the long-term sustainability of public finances. Long-term care is defined as a range of services required by dependant persons with reduced functional capacity. The public expenditure on LTC in the EU was 1.6% of the GDP in 2013. It is projected to rise to 2.8% in 2060. Over the years, many reforms in LTC were taken, both internationally and also on a national level, such as encouraging independent living through annual grants, removal of VAT and also community based nursing. Such initiatives increase public expenditure towards LTC. The projected public expenditure dedicated to LTC in Malta is estimated to increase from the current 1.1% to 2.4% by 2060.

Education

Demographic developments are also reflected in government expenditure on education, mainly due to enrolment rates. The 2015 Ageing Report states that government expenditure for education increased in 15 Member States and fell in 14 (including Norway, a non-EU Member State). In the EU, government expenditure is expected to stabilise at 4.4% of GDP by 2060. Locally, government expenditure on education is estimated to slightly increase by 0.1% between 2013 (5.9% of GDP) and 2060 (6.0% of GDP).

Unemployment Benefits

The Report's projections on unemployment benefit expenditure were carried out so as to preserve the comprehensive nature of the long-term budgetary exercise. The expenditure is largely driven by cyclical fluctuations and influenced by structural factors relating to the functioning of the labour market rather than by demographic waves. The projections illustrate that in 27 out of a total of 29 countries (including Norway), the unemployment benefit-to-GDP ratio decreases due to unemployment rate assumptions. In the EU, it is estimated that the expenditure projections of unemployment benefit will decrease by 0.4%, from 1.1% of GDP in 2013 to 0.7% in 2060. Unemployment in Malta is estimated to increase solely by 0.2%, from 6.5% in 2013 to 6.7% in 2060 and therefore the expenditure projections of unemployment benefits in 2060 is set to remain at 1.3% of GDP.  

The conclusions of the ECOFIN Council meeting saw the Finance Ministers agree that the further implementation of structural reforms is necessary in order to enhance the sustainability of public finances. The Council also reaffirmed that there is the need to continue appropriate policy action in the EU in all age-related areas, notably pension, health and long-term care reforms. The Ministers highlighted that further steps still need to be taken by Member States on the retirement age, by avoiding early exit from labour markets and also by linking the pension benefits to life expectancy.   

Kurt Sciberras

Executive,

EU Policy & Legislation,