The countries of Europe are growing together – and together they’re growing gray. Whether in the East or West, there’s a shortage of children, while the baby-boomers are heading toward retirement. Michael Heise, Chief Economist of the Allianz Group, gives his views on demographic change.
Allianz Group
Frankfurt, Feb 15, 2007
Michael Heise: "We must succeed in strengthening private provision"
Mr. Heise, will the population figures stabilize one day, or are we Europeans in the process of becoming extinct?
Heise: It’s hardly possible to predict how many people will be living in Europe in one or two hundred years, but that is also true of China and India. However, we can forecast the development over the next few decades fairly well. Projections by the EU Commission have established that the number of people in the 25 EU states will only have decreased by around nine million by 2050. However, this assumes net immigration of an aggregate 40 million people.
Migration will change the structure of society, and naturally the proportion of older people will increase considerably. Such forecasts are pretty reliable, as key factors like life expectancy or the birth rate are slow to change. We have to remember that the generation of Europeans that will be having children in 20 years’ time and later has already been born, and we know how many they are.
What repercussions will the dwindling population have on the economy?
Heise: Since the number of people of working age will decline faster than the population as a whole, we can expect consequences for economic growth. Research carried out by the European Central Bank (ECB) suggests that growth momentum in the EU will slow down substantially in the long term. Thus the real annual trend growth in the European Monetary Union (EMU) forecast for the period from 2031 to 2050 would drop to 1.2 percent.
Does that mean that sooner or later we’ll have to get used to economic stagnation and a falling standard of living?
Heise: Not necessarily. If we manage to get our economic policy on course, we’ll even be able to considerably increase our per-capita standard of living. Mind you, time is running out.
And what, specifically, do you have in mind?
Heise: The most important thing is to increase labor productivity and our "human capital", since, with a declining input of labor, that’s the only way to safeguard growth and prosperity. There are two main areas where we could make a start. Firstly, we must significantly improve the efficiency of the school and vocational training system. More government funds must be earmarked for investment in education and training, which of course means painful cuts elsewhere.
Secondly, we urgently need to create a favorable environment for technological progress and corporate-sector innovation. While the business community must invest heavily in these areas, it’s up to politicians to ensure that the right conditions prevail.
What about older employees?
Heise: The attitude toward employing older persons will have to change in the near future. The number of younger working age people between 25 and 39 will decline by some 25 million in the EU of the 25 by 2050. At the same time, the number of older employees between 55 and 64 will grow by just under five million. That means that in the years to come the working population will be characterized more and more by older people.
Who’ll end up being the winners and the losers of demographic change?
Heise: In one respect we’ll all be winners – we’re all getting older. As far as the economy is concerned, the situation isn’t so clear. The young, who are frequently described as the losers, will initially benefit from the fact that their chances in the job market will improve when the supply of labor gets tight. Mind you, that isn't inevitable but assumes that they have the right qualifications.
On the other hand, those entering the work force today will have to work a lot longer and will draw a relatively small pension compared to the contributions they pay into the system. To maintain a social balance and limit the burden, we must succeed in strengthening private provision, i.e. the accumulation of capital.
What else will future generations have to be prepared for?
Heise: Whatever happens, they will be faced with rising social security contributions and higher government spending on long-term care as well as health and pension insurance. This will not be compensated by savings in unemployment insurance or less expenditures for educating a smaller younger generation.
To make the financial burden bearable for future generations, the adjustments that we have encountered in the past few years must continue. That means continuing to reduce special privileges for certain groups, concentrating on basic needs plus more personal responsibility for the individual. Social welfare will not be abolished, but it won’t be able to ensure the same standard of living for transfer recipients as today.
How is the demographic trend impacting the insurance markets?
Heise: The development is extremely different from one region to another. In the USA, China and India, for example, the population will continue to grow strongly for the time being. The ageing process is also more or less pronounced in the various world regions. We at Allianz will therefore benefit from the Group’s global positioning and its continued expansion in growth markets.
What the development of the insurance markets in Europe will be like, with shrinking and ageing populations, very much depends on whether we manage to maintain a degree of growth and thus also income momentum. If we do, the insurance markets won’t perform badly, in spite of the demographics.
Precisely the fact that the population is growing older could trigger a spate of savings in the next ten to 15 years that will have a positive impact on our life insurance and investment business. And a further factor to consider is that new markets are also beginning to emerge. There will be a sharper focus on age-specific hazards such as longevity and the associated every-day risks. Many services based on people growing old will gain in importance.
This interview was conducted for the employee magazine "Allianz Journal".
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