RIGA/LISBON – Long after the debt crisis is over, Europe will be grappling with an even more serious problem – how to pay for growing numbers of old people. The population of some countries is stagnant or already shrinking, notably Germany's. That will reduce savings and potential economic growth. The workers who remain are getting older and so are less productive. That will hold back living standards. And the ranks of retirees are swelling. That will threatening the financing of pensions and health care. In the 27 countries of the European Union, each pensioner is today supported on average by four people of working age. By 2050, this old-age support ratio will have fallen to just 2:1, according to United Nations and EU projections. Latvia, which has applied to join the euro in 2014, is but an extreme example of these trends. By 2060 there will be four Latvians of working age for every three aged 65. Because of emigration and low fertility, the Baltic state's population shrank by 14 percent, or 340,000 people, between 2000 and 2011, prompting warnings of an existential threat to the nation. “I don't want to make apocalyptic statements. I hope that the country can manage. But the alarm bell has rung,” said Mihail Hazans, an economics professor at the University of Latvia and the county's leading demographer. Many European countries are raising the retirement age. And some, including Britain, have favorable population profiles. But Martins Kazaks, chief economist with Swedbank in Riga, said governments had yet to grasp the magnitude of the policy shifts required. “If you define the tipping point as the point of no return, then in some respects we have passed it – and not only us, but most of Europe,” Kazaks said. “With an ageing population and the burden of pensions and welfare, the growth rate is going to be lower. If you don't do anything today, the future is going to be a lot more difficult,” he added. Policymakers need look no farther than low-growth Japan to grasp the economic impact of population decline and ageing. “Europe is the new Japan,” said Douglas Roberts, an economist with Standard Life in Edinburgh. Apart from putting pension systems on a more sustainable footing, investing in education and training so that workers are more productive should be a policy priority, economists say. So should expanding child care to allow more women to join or stay in the work force. How to share out the cost of ageing spells potential political trouble, pitting cosseted pensioners against younger generations who are overtaxed and overworked. George Magnus, a senior economic adviser to Swiss bank UBS in London, said it was understandable because of the euro zone crisis that the current focus was on the near-term affordability of welfare. “But behind that is a very structural issue, which is really about the social model and the rights and obligations of citizens vis-a-vis the state. We are going to have to have that debate,” said Magnus, author of “The Age of Aging”. Edward Hugh, an economist in Barcelona, agreed that the sovereign debt crisis gripping the developed world was at root about how to meet implicit liabilities for ever older populations: expectations of future levels of health care and pension provision may prove too optimistic. As such, Hugh is critical of policymakers in Europe and at the International Monetary Fund for neglecting the impact of demographic change. “In the absence of policies that acknowledge these issues exist and that then address them, none of the sustainability analyses - debt, financial sector, whatever - are worth the paper they have been written on,” he said. Recession-hit Portugal also illustrates the vicious economic and fiscal circle that Hugh identifies in countries on the periphery of the euro zone as a result of demographics. Portugal's fertility rate, which stood at 1.32 last year, has been below the 2.1 replacement rate – the number of children each woman needs to have to maintain current population levels – since the early 1980s. In 2012, only 90,000 children were born, the lowest number in more than a century, as economic fears gave couples pause. In short, ageing is pre-programed. By 2050, Portugal is projected to have more people aged 60 or over than any other EU member - 40 percent of the population against 24 percent today. What's more, some 100,000 to 120,000 Portuguese, or 1 percent of the population, are emigrating every year to look for better-paid work, depleting the tax base and adding to the strain of financing the welfare state. — Reuters
