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IPE special report May 2018

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EU sees ageing hitting public finances

EUROPE – A new report from the European Commission says there is a “fast closing window of opportunity” before population ageing hits the public finances of European Union member states.

“With a fast closing window of opportunity prior to the budgetary impact of ageing populations taking hold, the risk of unsustainable public finances will increase substantially if member states with large deficits do not achieve the budgetary consolidation plans outlined in their stability and convergence programmes,” the report says.

The 254-page “Public Finances in EMU 2003” puts pensions firmly at the centre of European public finance reform.

“Difficult choices have to be made and there are no easy quick-fix solutions,” said economic and monetary affairs commissioner Pedro Solbes. “However, I am encouraged by a renewed willingness to face up to deep-rooted structural problems, and a growing awareness of the need to prepare for the budgetary impact of ageing populations.”

The report finds that balanced budgets in Spain and Greece are under threat due to large projected increases in pension expenditure. “To ensure sustainability, the main challenge is to reform the public pension system so as to contain any increase in spending as a result of ageing populations.”

Greece was not doing enough to address the core issue of pension reform. More reform was needed to avert an “unsustainable” increase in public spending.

Budget balances in Germany, Austria, France and Portugal, the report says, are threatened by a combination of factors. Public spending on pensions and health care in these countries are expected to grow faster than the EU average in the coming decades. It said it couldn’t rule out the need for further pension reform in Germany.

It said that demographic change would hit France earlier than most other EU countries. “Therefore, reforming the pension system in view to ensure its financial sustainability is urgent,” the report warns. It said the assets of the Pension Reserve Fund “will be largely insufficient to cover increased spending on pensions”.

And the report adds that “high-debt” countries – Belgium, Greece and Italy – initially appear relatively well placed to deal with population ageing. But it says there is a degree of “fiscal illusion” created by a lowering of debt.

Italy’s strategy for ageing “gives cause for concern” – and the report called on the Italian authorities to adopt further measures to promote supplementary privately-funded pension schemes.


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