RAND Researchers Say Immigration Alone Will Not Solve Europe's Pension Crisis

For Release

June 3, 2004

Europe cannot deal with the challenges of its aging population by depending on immigration alone, according to a RAND Corporation study.

Researchers from RAND Europe question the assumption that an influx of workers from non-European Union (EU) countries will sustain the labor force sufficiently to pay for the pensions and healthcare needs of a graying Europe.

Instead, a range of actions need to be considered—including controversial areas such as rationing expensive healthcare to older people and raising the retirement age, according to the RAND report.

Other ideas such as paying people to have more children, through the tax and benefits systems of individual countries, should also be looked at, the report said.

The EU-commissioned report looks at the relationship between government policy and demographic trends and says EU members and EU accession states need to consider radical alternatives to tackle the demographic challenge.

“Replacement immigration does not offer a feasible solution to the problem of population aging,” the report points out.

The report says that while immigration may be effectively used to slow—as opposed to prevent — population aging, “the sheer number of immigrants required to offset population aging...would be unacceptable in Europe’s socio-political climate.”

RAND researchers argue that even if large-scale immigration were allowed in Europe, in the long term these immigrants themselves would age.

The demographic challenge in Europe is caused by increased life expectancy and a declining birth rate that has fallen below its natural replacement levels of 2.1 children per couple. This is leading to an expanding dependent population of older people and contracting pool of economically active younger people.

The report says that if the challenge is not tackled it will have “potentially damaging consequences on European economies” through reduced economic productivity and heavily burdened pension, social and healthcare systems.

One of the report’s authors, Jonathan Grant at RAND Europe in Cambridge, said: “The report highlights the huge problem facing all European countries, that if not tackled will have a dire impact on Europe’s standard of living and economic productivity. Research done for this report demonstrates that action can be taken to tackle the problem but a comprehensive and broad policy approach is needed.”

The report says three policy options exist that European governments could consider to tackle the problem: encouraging an increase in the birth rate; allowing increased immigration and policy reforms including healthcare rationing; raising the retirement age; and encouraging more women to enter the workforce.

The report’s authors say that given the current climate surrounding immigration, they have focused more on how changes in fertility can be used as a strategy for preventing an aging population.

The authors highlight that France and Sweden in particular have had success using comprehensive packages that include family allowances (France) and attractive provisions for parental leave and childcare (Sweden).

They caution, however, that no single approach can be recommended for fertility policy. Given the cultural and political diversity of Europe, each country needs to define its own approach to controversial issues surrounding population policy such as contraception, the family and abortion.

The report points out that policies to manage population take effect slowly and therefore may be less attractive to politicians who prefer quick-fix solutions.

“There is a disconnection between the electoral cycle of four to five years and the much longer cycle of population policy,” the report says.

On healthcare the report says: “The costs of medical care have become a salient issue because of a rapidly-growing population in need and dramatically increasing health care costs for the impaired elderly. More people are expected to live longer and at a greater cost to society, as people who would have died from some accidents and strokes 20 years ago are now living much longer. Additionally, there is little incentive for patients to seek less costly medical care. A significant policy issue is whether the supply of medical personnel and facilities, as well as expenditure on them, should be increased in order to fulfill rising demand, and to what extent the state should subsidize these costs.”

On raising the retirement age, RAND researchers say: “Some countries have already implemented this measure. Germany increased the age for full benefits from age 60-63 to age 65 and in the US the 1983 amendments to the Social Security Act raised the age of eligibility for full Social Security benefits from 65 to 67 by 2027. A second option consists of an increase of the so-called ‘early retirement age’ or the prohibition of compulsory retirements. In Germany and Italy, access to these early retirement benefits have already been restricted. Similarly, France has tightened eligibility requirements; the number of years of contributions that are required for full benefits is being increased from 37.5 to 40,which became fully effective in 2003.”

Grant added: “The implications of the report have potentially profound implications for European governments. Many of the measures governments may need to take will be unpopular, such as pension reform and raising the age of retirement. There is also the question about whether governments should be interfering in the private affairs of the family. But unless action is taken to address these issues Europe will be unprepared to meet the challenge. The stated aims of the EU’s policies of employment and economic growth, as well as social cohesion, could be threatened.”

The report Low Fertility and Population Ageing: Causes Consequences and Policy Options (MG 206-EC) is available online. The study was conducted by researchers from RAND Europe and from RAND Labor and Population. Other authors are Stijn Hoorens, Suja Sivadasan, and Mirjam van het Loo from RAND Europe; and Julie DaVanzo, Lauren Hale, Shawna Gibson and William Butz from RAND Labor and Population, headquartered in Santa Monica, Calif.

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