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EC projections put peak public pension spending in 2040

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Public spending on pensions by EU member states is expected to peak in 2040, according to projections from a study mandated by the European Commission.

Both at the EU and euro area level, public pension expenditure would start to increase from the 2020s and hit a peak of 12% of GDP for the EU in 2040, and 13.5% of GDP for the euro area.

Spending would then drop to slightly below the starting point of 11% of GDP for the EU by 2070, according to the 2018 Ageing Report, which is the joint work of a unit in the Economic Policy Committee and the Commission’s department for Economic and Financial Affairs.

This expenditure trajectory would vary between countries, however, depending on factors such as the degree and timing of population ageing, economic growth prospects, and progress with structural reforms.

The report’s authors said five broad time profiles could be distilled.  

Gross public pension expenditure: 2016-2070 time profile for selected countries (% GDP) 

 screen shot 2018 05 30 at 10.13.46

1. “Stable”: For Estonia, the Netherlands, Austria, Poland, Finland, Sweden and the UK, less than two percentage points of GDP would separate the maximum and minimum projected expenditure between 2016-2070.

2. “Up”: For Belgium, Germany, Cyprus, Luxembourg and Norway, expenditure would increase for the entire period covered by the projections – notwithstanding limited, occasional but temporary declines. 

3. ”Up/Down”: For the Czech Republic, Ireland, Spain, Italy, Portugal and Slovenia, public pension spending was projected to initially rise and then decline, with an inflection point generally in the middle or second half of the 2016-2070 projection horizon.  

 screen shot 2018 05 30 at 10.12.41

Source: European Commission, Economic Policy Committee

4. ”Down/Up”: For Bulgaria, Hungary, Malta, Romania and Slovakia, a downward trend in spending would be followed by an upward trend and an eventual stabilisation above the 2016 starting point. 

5. “Down”: For Denmark, Greece, France, Croatia, Latvia and Lithuania, peak expenditure would occur at the very start of the projections, with no major increase throughout the rest of the period.

According to the Commission, pension reforms – increases in the retirement age and changes to the parameters of pension systems, such as indexation – had made it possible to stabilise public pension spending as a share of GDP over the long term.

As a result, the public pension benefit ratio – which describes the average public pension in relation to the average wage – was forecast to fall by 10.6 percentage points on average in the EU.

In member states with supplementary private pension schemes, the total value of pensions relative to average wages was projected to be 10.5 percentage points higher than in member states without.

The ageing report looks at the long-run economic and fiscal implications of Europe’s ageing population, and is published every three years. According to the Commission, it complemented the analysis in the pension adequacy report.  

The 2018 Ageing Report can be found here.

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