It is now widely recognised that traditional demographic dependency ratios (DDRs), such as the old-age dependency ratio relating the number of people aged 65+ to the working-age population, provide a poor measure of the socio-economic changes that ageing societies will bring about. In the future, older generations will have increasingly better health and are likely to work longer. By combining population projections and National Transfer Accounts (NTA) data for seven European countries, we project the quantitative impact of ageing on public finances until 2040 and compare it to projected DDRs. We then simulate the public finance impact of changes in three key indicators related to the policy responses to population ageing – net immigration, healthy ageing and longer working lives – by linking age-specific public-health transfers and labour-market participation rates to changes in mortality. Four main findings emerge: first, the simple old-age dependency ratio overestimates the future public finance challenges faced by the countries studied – significantly so for some countries, e.g. Austria, Finland and Hungary. Second, healthy ageing has a modest effect (on public finances) except in the case of Sweden, where it is substantial. Third, the long-run effect of immigration is well captured by the simple DDR measure if immigrants are similar to the native population. Finally, increasing the length of working lives is central to addressing the public finance challenge of ageing. Extending the length of working lives by three to four years over the next 25 years – equivalent to the increase in life expectancy – severely limits the impact of ageing on public transfers.
Mikkel Barslund is a Research Fellow at CEPS and Marten von Werder is a Researcher at the Freie Universität Berlin.