MIGRATION

The baseline scenario assumes that the average net annual migration rate falls from 0.3% of the population in 2008 and 0.2% in 2060 for EU 27. Overall, an additional 59 million migrants are projected to join the Union between 2007 and 2060, with most joining the euro area. Countries that have recently experiences net outflows of migration (Estonia, Lithuania, Latvia, Poland, Bulgaria and Romania) are assumed to see a tapering off or reversal of the situation.

Migration is of course very difficult to predict as it depends on socioeconomic and political, legal and social developments in both the EU and the rest of the world, in particular in the neighbouring countries.

Migrants are an important addition to the work force as they tend to be of working age. Moreover, there is a longer-term effect on population since immigrant populations usually have higher fertility rate. Therefore, in the short and medium-run, an inflow of migrants leads to increase in GDP of receiving country. However, as working migrants accumulate pension rights, over the long-term they too receive pensions and other social benefits paid the host country.

Table IV.3.1 presents the effects that zero migration between each EU Member State and the rest of the world would have on the sustainability gap. This scenario should not be taken as a realistic prediction of possible outcomes for the future. It is included to provide a bound for the effect of reduced migration by showing the overall contribution that migrants are assumed to make to the growth rates of the EU economies and fiscal sustainability. Overall, assuming zero migration in the EU as a whole and in each Member States from now until 2060 would increase the sustainability gap by 2.2% of GDP in EU 27, with considerable variation between countries.

European Commission Sustainability Report - 2009

Box IV.3.1:Scenario on postponing retirement

This box presents a scenario where effective retirement ages of all Member States are increased in a uniform manner. The aim is to illustrate the impact of reforms aimed at increasing the retirement age on sustainability of public finances.

Labour market exit ages vary however significantly between countries, which are thus in differing positions to address their sustainability challenges through reforms that would defer retirement. The effective exit ages in 2008 are reported in Graph 1: Luxembourg and Slovenia have the lowest exist ages, while the highest exist ages are in Sweden and Ireland.

Graph 1: Effective exit ages in 2008

57 58 59 60 61 62 63 64 65 LU SI AT BE MT FR BG IT PL HU SK EA EL EU CZ FI NL ES DE DK UK RO LT LV EE PT CY IE SE E xit a g e

Source: Ageing Report 2009.

In the absence of policy measures aimed at postponing retirement ages – like a change in the statutory retirement ages or other encouragements for older workers to remain in the labour market – there will be a very slow increase in the exit ages (see Graph 2, baseline). This increase is related to the fact that different age cohorts have different participation rates. The average exit age for the EU-27 aggregate would increase from slightly below 62 in 2008 to just above 63 years in 2060. It should be noted that, according to the demographic projections, the remaining life expectancy at 62 is expected to increase from 20.2 years in 2008 to 26.2 in 2060.

The scenario is based on the assumption that exit ages for each Member State increase by two years – on top of the baseline – from 2010 to 2020 in a linear fashion. After 2020, the exit ages keep rising by two-thirds of the increase in remaining life expectancy. Graph 2 shows the trajectories of average exit ages in the baseline scenario and the postponed retirement scenario for the EU as a whole. The projected evolution in the remaining life expectancy at 62 is also shown.

The scenario is purely illustrative; it is not realistic to assume that the retirement ages will increase the same in all countries. One may expect the retirement ages to converge, that is, one may expect retirement ages to

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Chapter IV The potential impact of the current economic crisis and sensitivity analysis

Box (continued)

increase more in the countries that currently have the lows retirement ages, and by relatively less in the countries with the relatively high exit ages.

Graph 2: Exit ages (EU27, baseline and postponed retirement scenario)

50 52 54 56 58 60 62 64 66 68 70 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060 Year 15 17 19 21 23 25 27 29 31 33 35

Exit age: baseline Exit age: postponed

retirement scenario

Remaining life expectancy at 62 (rhs)

Source: Commission services.

These additional assumptions are also considered n this scenario:

• The extension of working lives increases total labour supply in a proportional manner. Labour

productivity for those older workers who continue to stay in the labour force due the deferral of the exit age is assumed to be 90 percent of the productivity of an average worker;

• Total pension expenditure is reduced in proportion to the decrease of average years in retirement,

which is proxied by the remaining life expectancy at the average exit age. Compared with the baseline, the average pension increases in line with GDP;

• The ratio-to-GDP of other age-related expenditure (health care, long-term care, education and

unemployment benefits) evolves according to the baseline scenario.

The main implications of the increase in exit ages are related to increase in labour supply and the cut in overall pension expenditure as compared with the baseline. Given the increase in labour supply, GDP growth rises on average 0.14 percent per year: by 2060 the GDP level is around 7½ percent larger than in the baseline. The ratio to GDP of pension expenditure in the EU as a whole falls by 1.8 percentage points of GDP; the average pension increases in line with GDP, but the number of pensions paid is lower than in the baseline.

The postponed retirement scenario yields a sustainability gap (S2) for EU-27 of 4.8 percent of GDP, which is 1.7 points lower than in the baseline scenario. Therefore, a substantial gap would remain.

The intuition behind these results is as follows: postponing exit ages, as described, practically eliminates the increase in pension expenditure as a share of GDP, though there is an increase in the average pension. Note,

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European Commission Sustainability Report - 2009

Aside from the plausibility of the scenario, the results for certain Member States need to be considered within the context of their economies. For Luxembourg and Cyprus, the baseline scenario is for net migration between 2008 and 2060 to contribute to an increase of around 40 and 50% of their 2007 populations. Both these countries' economies are heavily reliant of migrant workers at the moment, and despite the strong increase in population in the baseline assumptions, it still corresponds to a marked decrease in the rate of net migration. When interpreting the results of the sensitivity analysis, however, it should be borne in mind that the zero migration scenario is a large departure from the baseline for these (and a number of other) countries, so the magnitude of these results should be interpreted carefully.

3.5. INTEREST RATE

The alternative scenario considered in Table IV.3.1. assumes a real interest rate of 4%, rather than the 3% assumed in the baseline.

The effect of this change in the interest rate assumption is to reduce the LTC component but increase the IBP component. A higher interest rate reduces the amount that a country has to save to pay for an ageing population in the future, but increases the amount required to service existing debt. (26₎

For Member States with ageing profiles where the costs are set to increase further rather than earlier in the future, a higher interest rate allows them to finance these costs through smaller increases now compared with the baseline. Countries such as Ireland, Spain, Luxembourg and Malta, with a

(26_{) It can be seen that the effect of changing the interest rate}

assumption has a larger effect on countries with higher starting levels of debt, such as Greece and Italy.

large increase in public expenditure over the medium term, therefore benefit from a higher real interest rate.

In interpreting all these results, it should be borne in mind that the effect of a higher interest rate on the growth rate of the economy has not been modelled. The implicit assumption is that a higher interest rate is consistent with unchanged GDP growth rates.

3.6. ALTERNATIVE HEALTH CARE SCENARIOS