No growing economy for old men. ECB warns that ageing population could leave the EU with longer recessions and calls for pension reforms

Sorin Melenciuc 18/10/2018 | 07:00

Ageing population could lead to longer recessions in the European Union member states, while the recoveries will be weaker, and political leaders should react by reforming social security systems in order to prevent increasing age-related expenditure, European Central Bank (ECB) chief economist and member of the executive board Peter Praet said on Wednesday, according to a speech released by the institution.

“Population ageing will have a deep impact on public finances in the euro area for decades to come,” Praet said at the “la Caixa” Chair for Economics and Society conference, in Madrid.

According to ECB official, policy can react to this challenge in several ways.

“First, reforming social security systems to prevent population ageing from increasing age-related expenditure. Second, fiscal consolidation outside of social security systems to finance the rise in age-related expenditure,” he explains.

The third way is “doing nothing and letting the increase in age-related expenditure feed fully into higher public debt”, a strategy he considers “very risky for countries that start with high public debt”.

Praet indicates that political pressures to delay reforms, to discontinue an existing reform agenda – or to even undo previous reforms – persist, despite the strong and well-documented case for pension reforms.

“With demographic factors expected to continue to exert downward pressure on real rates, growth-enhancing structural reforms are essential for a durable rise in equilibrium real rates,” he says.

Central bank’s policy rate is likely to hit the lower bound much more frequently than thought possible in the past, a direct consequence of the fact that current estimates of the real equilibrium interest rate are much lower than the 2 percent estimate customary before the great financial crisis.

“These effects could have implications for the way the economy and prices evolve through time; recessions may last longer, and recoveries may be slower and shallower, with a higher risk throughout of missing the objective,” Praet said.

According to ECB official, population ageing will continue to have pervasive implications for fiscal, monetary and structural policies, in particular until the baby-boomer generation moves to the dis-saving part of its life cycle at the end of the coming decade.

Fast population ageing in Romania

In Romania, demographic projections indicate an accelerated ageing of the population and implicitly the rapid deterioration of the ratio between the number of employees and the number of retirees.

The old-age dependency ratio in Romania increased from 21.5 in 2007 to 25.9 in 2016 and 26.7 last year, according to Eurostat series.

The old-age dependency ratio is traditionally seen as an indication of the level of support available to older persons – aged 65 or over – by the working age population (aged between 15 and 64 ), but it also illustrates the ageing populations.

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