The Old Continent Is Getting OlderAGING WILL NEGATIVELY AFFECT THE EUROPEAN LABOR MARKET, BARRING OFFSETS FROM ADDITIONAL MIGRATION, POSTPONEMENT OF RETIRING AND INCREASE IN WOMEN'S PARTICIPATION RATE. AND ELDERLY PEOPLE ARE SET TO HAVE MORE WEIGHT IN WELFARE POLICY
by Vincenzo Galasso, Full Professor od Economics, Director of Department of Social and Political Science
Europe – the Old Continent – is becoming the continent of the elderly. On 1 January 2022, the EU population was estimated at 446.7 million. Only 15% of the population was younger than 15 years old. 15.1% was between 65 and 79 years old and 6.1% older than 80. In 2060, the share of young individuals (younger than 15) is forecasted to shrink to 13.6%, while the elderly (65-79 years old) will rise to 17.8% of the population and the very elderly (80+) will double to 12.5%. Of course, these average numbers hide large cross-country variations. In Germany, Greece and Italy, the share of very elderly is already above 7.2% and will grow fast.
The social and economic effects of population aging have been and will continue to be extremely evident in Europe. The European labor market will largely be affected. The share of the population of working age is expected to decline and elderly people will account for an increasing share of the total population. Unless additional migration, higher women labor force and increased retirement age compensate these demographic effects, workers in the EU will be older and fewer. Welfare systems will be affected too. Pension systems, which are predominantly PAYG in the EU, rely on contributions paid by the current workers to finance benefits to the currently retired. Public healthcare in the EU mostly use general revenues to finance healthcare services that are largely targeted to the elderly. The expected increases in the dependency ratio – the ratio of the share of the elderly (65+) to the share of the working age population (18-64) – risk jeopardizing the financial sustainability of public pension and healthcare systems. In 2007, there was only one elderly person – whose pension and healthcare expenditure needed to be financed by workers – for every four individuals of working age. In 2022, there is one elderly person for every three working age individuals. But already in 2045, there will be only two individuals in working age to financially support each elderly person.
Less attention has instead been devoted to the political effects of the aging process. National and European political institutions play a crucial role in deciding economic, social and environmental policies. Citizens of different ages may have different preferences regarding these policies. The political institutions are called upon to aggregate these different instances, by putting together the pieces of the puzzle to design EU and national policies. Yet, population aging unsettles this political process. Demographic dynamics may modify individual views on policies with strong intergenerational elements, such as welfare states and the environment. Certainly, aging puts under stress the economic sustainability of welfare systems. But most of all, aging modifies the population pyramid and hence the age structure of the electorate. In 2007, the median age in the EU population – thus also including young individuals, not yet of voting age – was 42 years. In 2022, 44.5 years. This increase clarifies how the electoral incentives faced by national and EU politicians are affected by aging. With an older electorate, politicians find it convenient to pander to elderly voters. These voters are very sensitive to issues related to pensions and healthcare, which tend to be respectively their main source of income and their most used service. Hence, while aging creates economic distress to the major welfare programs, the same demographic trend increases the political power of those individuals, who represent the main supporters of these programs. The political demography of aging may thus induce more resources to be moved to elderly individuals and less to the (fewer) young.
How can the young be rescued from the political effects of aging? This is difficult to do at the national level, where electoral incentives are strictly binding. Perhaps the EU could continue the endeavor started with Next Generation EU and propose an intergenerational equity rule to protect the young from the political power of the elderly. Every euro spent on transfers or policies clearly targeted to the elderly, such as pensions or early retirement policies, should be matched by a euro spent on the younger cohorts – for example, on education or family benefits. EU constitutional rules may be needed to save the young from the side effects of the aging process.