Il Concorso

• Comment and discuss how you think Europe can adjust to demographic change and growth.


Paying for our choices

David Willetts

Europe's population will age dramatically over the next 50 years. With its median age rising by 11,8 years. We should celebrate the fact people are living longer. It is a great human achievement - especially as we are fitter for longer. The problem is that behind the boom there is a baby bust. That in turn means that the EU will face a 20 % decline in the size of its working age population, from around 230 million now to 190 million in 2050.

Most experts focus on the implications of these demographic changes for the financing of pensions. All the major EU countries face the problem of finding ways to meet costly pension promises. In Britain's case, companies rather than governments have made these promises. Conventional statistics have understated the problem Britain faces in meeting its pension commitment, because they only count dedicated spending on pensions and not other welfare payments to pensioners. Conventional statistics have also overstated the problem by excluding those savings which are not specifically linked to age even if they are run down in retirement.

The pensions crisis takes a different form in Italy and the UK. The private sector in Britain is the vehicle for delivering-pensions, and it is now struggling to bear the costs. Thus in the UK the pensions crisis is a, long term threat to corporate profitability. In Italy the focus of the welfare state on pensions rather than family support, together with a heavy bias in employment towards men, reinforces a very traditional family structure.

Tackling the pensions problem must be part of a fundamental process of economic reform in each country Continental Europe does not need more savings It needs more consumption, more spending and more borrowing. Keynes warned in the 1930s that ageing societies with high levels of saving, and not many investment opportunities, face a deflationary nightmare.

How might Europe adjust to demographic change? One option is to encourage the existing population to work harder. Are the extra years of higher education really worthwhile? Can we expect women to do as much paid work as men? Can we all carry on working when we are older? Economies that absorb 75% of adults into paid work are very different from those that absorb only 50%. As "unpaid" social functions enter the cash nexus, societies become more commercial. You can only increase employment in this way by also embracing labour market diversity. Standardisation and regulation are the enemies of inclusion. However, even very large increases in labour force participation would not, after 2020, offset the likely decline in the absolute size of the workforce.

Migration is another option. But Europe is already attracting migrants at historically high levels . Migration cannot offset underlying demographic change. At some point however, the shrinkage of the populations of eastern and southern Europe will create a vacuum into which will flow the rapidly growing and youthful populations of the Middle East and North Africa. In some ways. we could see a return to early Medieval Europe when Islam was at its most expansive. Europe will face new challenges in managing, relations with the growing Muslim populations.

Finally, we should begin a debate on ways of raising the birth rate . People cannot be forced to have more children than they want to. Nor should women return to the traditional roles from which they are escaping. But there is evidence that the countries where women enjoy the greatest economic freedom also enjoy higher birth rates. Here begins the outline of a 21st century agenda for families. In the years ahead it will move much higher on the policy agenda. The best way to discharge our responsibilities to the older generations is to raise the young generations.

Adapted from the CER pamphlet
'Old Europe? Demographic change and pension reform",
September 2003