The impact of ageing societies on public finances in Europe
Jan Mertl, Patrik Mottl et al.
Public finance is a field which is currently under many threats, one of them being the
problem of ageing. The general principle of budgets, e.g. balanced budget, is frequently not
being achieved and this fact is seen as harmful to the future in the terms of sustainability.
Although the public finance and macroeconomic theory knows debt as a tool for overcoming
hard times, current development and expectations greatly exceed imaginations of J.M.
Keynes, not to mention the problems in monetary policy where we see the interest rates of
central banks fall to almost zero with no significant effect for the economic recovery.
At the same time, this development has broader social context. With people living longer,
the overall picture of the society is changing. It even forces changes in grand financial
schemes, such as the pension and health care schemes, and the labour market must also
comply with societal transformations. In this regard, we can clearly perceive that some of
the aspects that we could have been relying on in the past are becoming obsolete and new
concepts emerge, that have to be taken very seriously.
The current problem of longevity is based on two important demographic facts. On the one
hand, due to the demographic behaviour during 20th century in Europe, the Europeans now
face a period of demographic decline and increased dependency ratios. They have to adapt
to the situation where the related expenditures must be borne out by current active
generation. This may be a unique situation, because in the past, the demographic was
always “reversed” and in the future, the population trends could get stabilized again.
However, it calls for policies that will be able to help overcome the phase of decline.
On the other hand, the length of life increased rapidly during the 20th century and even if the
demographic decline now culminates, we have to question if current long life could be
usefully and productively “lived” in the contemporary society and whether we provide
adequate measures for it. This fact is connected with a concept of extending the productive
and healthy phases of life in order to make use of increasing possibility to live longer. The
causes of death have significantly changed and currently degenerative and civilization
diseases dominate. A strategy to manage them is to postpone their incidence to higher age,
thus prolonging the phase of life where a person is productive, independent and in a
relatively good health. So a general concept of policies induced by this type of fact is to make
adaptive changes while fully embracing the situation, define better schemes for participation
of people in society, assess the labour market conditions and also define high-quality
institutional framework for ageing.
Based on those facts, the project scope runs as follows (possible framework for WPs).
1) The assessment of the current state of public finance, their “health” and structure.
This should provide an overview about what is currently going on in public budgets in
terms of standard analysis of their revenues and expenditures. This analysis should
also put special emphasis on the financial situation of grand social systems such as
pension and health systems, which are currently financed mainly from public budgets
and according to modern public finance theory (Rosen 2010, Ulbrich 2011) constitute
an important part of public finance field. The research here will be primarily based on
model analysis of the public finance, but should not omit the systemic, qualitative
position of social systems in public budgets, e.g. analysis of various forms of
“inclusive” social systems.
2) Based on the call, special attention should be paid to the problem of gender aspects
of ageing and their intergenerational dimension. This is also connected with the
problems in pension systems and on the labour market. The proposal should not
strive for artificial “100% gender equality”, but it can shed a light on the questions of
regulation, e.g. where the respected mechanisms should be set such a way that they
prevent market forces from discriminate one gender in an unacceptable way (e.g.
discrimination when applying for a job, health risk assessment, raising children etc.).
This could help in construction of sustainable public finance schemes, e.g. by unisex
tables in pension insurance etc. We have to be aware that some parts of this analysis
will be normative – but this is fairly natural and as such should not be a reason to
neglect these questions: every society has to deal with similar issues and seek for
consensual solutions.
3) The proposal should try to analyse and scientifically describe the size and impact of
the “ageing bubble” – e.g. what it the actual size and consequences of the current
demographic decline, which is fairly unique in the history of modern European
civilization. This knowledge could result in the increased capacity for social cohesion
and acceptability assessment, as well as demographic and financial quantification of
the problem, so that we can see its dimensions. It can also help to distinguish
between general trends in public finance and the quality and characteristics of
systems financed from public finance on one hand and the special (and probably
unprecedented) impact of current demographic development, which could
eventually disappear when the fertility rates go back to an adequate replacement
rate (as being said in the last proposal …. significant factor of socioeconomic system
sustainability is also the presence of adequate reproductive model. Without
appropriate supply of new generations, all the existing social schemes will fail,
because they are deeply rooted in the fact that they cannot replace natural
reproductive behaviour. If this reestablishment of a successful model fails, social
schemes can only partially compensate negative effects that appeared. If the
motivation problems and social pressures that are preventing the current generation
from adequate reproduction remain, the current problem could replicate to the next
generation with a lower total number of people, but the schemes will fail again. We
thus have to manage issue connected to ageing well, which is eased by the fact that
we are already equipped with adequate social tools and measures that demonstrably
lead to optimal quality of life and fulfilling of individual needs and expectations in the
last decades and under proper implementation. Simultaneously, it is necessary from
a long-term point of view to create a social environment that stimulates the healthy
demographic structure in the sense of preserving and possibly expanding dignified
human life in a defined social and natural environment. Human beings hves surely
got higher ambitions that the animal form of transfer of genetic information onto the
future generations, but in the frame of this effort we should not resign to adequate
reproductive behaviour and its acceptance and support in society.) This type of
thinking should also help in the analysis of particular public finance and social
systems problems: maybe it could in some cases differentiate between problems
which are not caused by longevity (ageing), but rather by construction and selection
of particular variant/social model, and between those which are really “longevityinduced” and are not out coming from the general “construction failures”. Even if this
hypothesis could not be entirely feasible for solution, it could help to identify the
effects of the current “population wave” and the trends of public finance in general.
4) Specific attention should be paid to labour market, where the employment question
is crucial both for the participation of people (social cohesion) and for the public
finance balance, because the tax revenues and social insurance contributions are
largely connected with economic activity and reversely with unemployment rates. It
also relates to the economic growth problem and the retirement rules. The question
of effectiveness should be assessed, e.g. on the problem how to achieve high
employment rate of “not so economically effective” people, e.g. 50+ or with health
problems/disabilities.
5) Finally, the proposal will suggest reform steps (or simply saying changes) in public
finance systems: tax system as a general and basic tool, social security systems
(mainly pension one, but can also try to assess broadly the possibilities of financing
health care systems). From the non-financial point of view, it should look at the
general problem of public services (including the theory of the „services of general
interest“ as defined by EU methodology) financed by public resources and analze the
demands for services determined by ageing societies. These include social services,
long term care, employment services, health care consequences. The method of
execution could be both a comparative analysis of various theoretical models of
financing (social models) adequate for ageing society (with help of the results of the
point 3) and an analysis of actual provision of these services, various forms of their
operation and an empirical inquiry into the empirical situation in countries „induced“
by ageing. As for a broader societal context, the questions of social welfare should
not be omitted, as this is the main part of broader social and economic context of the
problem – the analysis should be „framed“ in an adequate social policy framework as
just the economic evaluation of the ageing problem could easily lead to results
indicating that the best solution could be to avoid sickness and getting old (just an
exaggeration). These reform steps should not be ”just an analysis output”, but as the
public and social policy methodology suggests, they should be based on public
discourse analysis, lessons learned from previous attempts, maybe even discussed
with actors and stakeholders on national level etc.
The general aim of the project proposal could be to identify main problems
connected with ageing that are stressing the public finance today and suggest such
public finance and social security schemes that will sustain the pressure of longevity
(or ageing societies).
The basic methodology scheme of an analysis should go as follows:
Public and social policy approaches/recommendations
Public finance situation assessment/projections
Demography
Sociology
Law/Regulation
Economics, Public choice
This is just a preliminary and very broad draft of the project outline based on what
has been said on the workshop. It should be modified and individual team members
should think where they should add or connect their analyses. I am personally
focused on social policy field and interested in health systems, so maybe also this
determines the directions I describe here. You are therefore welcome to enrich the
outline from your point of view and specify where you see the position of your “deep
in your field” analyses which you want to perform within the project
(demographic/economic models/social systems/employment policy etc…). Also the
WP structure is subject to further discussions. The description of specific task done
and prepared by your institution will then be applied similarly as last year.