EUROPEAN PAPERS ON THE NEW WELFARE

Implications of Demographic Change in Enlarged Eu on Patterns of Saving and Consumption and in Related Consumer’s Behaviour­­

4.2 Results of the projections and policy implications

Within the simulation framework just described we were asked by the Commission to address four very definite issues:
a. the effects of cohort specific consumption habits;
b. the effects of partial/flexible retirement;
c. the effects of uncertainty, through a sensitivity analysis of the results in the presence of exogenous shocks;
d. the sustainability of the system with respect to different assumptions on the importance of private pension schemes (pay-as-you-go versus funded).
In order to investigate those problems, we first developed baseline projections, and, subsequently, we altered the baseline hypotheses to shed light on each of the above mentioned issues. Table 2 summarizes the main conclusions we have been able to draw from different simulation scenarios.
Our macroeconomic projections showed that, in general, the increase of employment rates of countries showing relatively low growth rates of GDP (like the EU15 countries examined) is not enough to compensate for the shrinking size of the working population that negatively affects the growth performance. On the economic side investments and research should be stimulated in order to favour technological progress and productivity growth, while, on the demographic side, higher immigration looks unavoidable.
As far as the converging countries are concerned, our baseline simulations warned that — notwithstanding the convergence process and the consequently higher productivity growth — given their demographic evolution, which is rather defined, they face the tough risk of becoming old before becoming rich. That would it make more and more difficult to close the per capita income gap, and demands policies accelerating the convergence process, and mitigating the collapse of the working population, that in such countries is also affected by the emigration towards richer economies.
Our projections looked quite insensitive to the alterations of the hypotheses concerning consumption: whenever cohort effects are assumed in line with labour productivity, implying that no change in consumption habits occurs by cohort, macroeconomic projections appear quite reliable even without taking into account the effects of consumption changes on the economic growth.

Table 2: Summary of the main findings and assumptions
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The situation is not much different if consumption habits are assumed to change: even if the said changes imply quite noticeable variations of the ratio between aggregate consumption and GDP, the effects in terms of economic growth are modest, due to the sluggish adjustment of capital. The effects on the interest rates, however, are likely to be more relevant. Thus, as far as economic growth is concerned, ageing induced variation of the labour force should be more a policy issue than ageing induced variation of consumption, although possible effects on the financial markets should not be disregarded.
Nor is the sustainability of the welfare system, or of the pension system in particular, highly sensitive to changes of consumption habits; social security policies for the long run should be consistently addressed to the factors most directly affecting the system, as well as the economic growth, such as the increase of the participation rates. In that sense the analysis of the effects of partial retirement showed comforting results: a widespread use of partial retirement would be effective in reducing social security expenditure, both because it reduces pension payments and because it partially alleviates the problem of the shrinking labour force, which is one of the main issues raised by the ageing process.
Another strategy to increase the sustainability of the social security system is the development of a funded pillar; our analyses showed that the development of a funded second pillar in the long run may alleviate the burden of the forced saving needed to finance the pension payments. However, two conditions must be met: first people must accept the need to pay additional contributions in the first years to allow the funds to take off; second, funds assets, in order to positively contribute to the sustainability, must reach a sufficiently high level with respect to GDP.
Globally, our simulations deliver good news and bad news together. The good news is that it is possible that the ageing induced effects on consumption are not destined to become a hot policy issue, the good news is also the effectiveness of measures intended to foster labour market participation of the elderly in reducing the burden of social security expenditures.
The bad news is that the role of demography is too powerful to be completely compensated by labour market policies fostering participation and employment rates only. As a consequence we must be ready to accept a prospective reduction of the coverage, extension and level of old age provisions, and consistent reforms must be enacted and/or maintained if sustainability is to be preserved.
It must be remembered, moreover, that sustainability is not linked to social expenditure per se, but to the degrees of freedom the government has to back such expenditure, which might be reduced by a slow growth of labour incomes, or a high level of public debt, to limit ourselves to the economic factors.
Finally, sensitivity tests suggested that the projections are particularly, even if certainly not pathologically, sensitive to labour productivity assumptions; indeed this is the story of many projections exercises: assumptions on labour productivity must be clearly checked and grounded on solid analysis before running any economic projection relevant for policy issues, since all the macroeconomic forecasts and, possibly, also many of the sustainability issues concerning the welfare system heavily depend on labour productivity.


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