At a time when deaths far exceed births in Spain and Europe, and the average age of the population continues to grow, the idea that immigration could be the lifeline of the pension system appears recurrent in public debate. For Oscar Arce. Director General of Economy of the European Central Bank, the arrival of foreigners will help, but it will not be enough, and a holistic approach is needed, at different levels, to ensure its sustainability. “Immigration may somewhat alter this (aging) trend, but it will not reverse it,” he said during the news conference XI Ibercaja Pensions Conference, organized by CinqueGiorni in collaboration with Ibercaja.
The Spaniard, who has held a strategic position at the ECB since February 2022, insisted that aging will be felt in all sectors of economic life, representing “a disruption of maximum level productive capacity”. To illustrate this, he cited some data: the cost of aging will increase by 1.3% of GDP between 2022 and 2050, of which more than half, seven tenths, will correspond to spending on pensions, thus increasing the pressure on public finances; By 2050, the working-age population in the euro area will decline by 19 million people, implying that 9.2% of the workforce will disappear in less than three decades; and while there will be 28 million people over 65, young people under 19 will decrease by six million.
The response to this demographic earthquake, with important consequences on spending on pensions, assistance and healthcare, must, in his opinion, be multifactorial and multifaceted. “There does not appear to be a single lever to ensure the functioning of the system in a lasting and fair manner,” he warned. Among them, he mentioned the need to “recalibrate spending and income”, increase the economy’s growth potential, improve the training of older workers and implement policies that make it easier for immigrants to acquire the skills required by Europe’s labor markets.
In this whole aging puzzle, of which he underlined that pensions are only one piece, one of the most important, but not the only one, there is an element that can turn the situation around. “We must not forget that new technologies, artificial intelligence, represent a promising, uncertain, but promising opportunity to put an end to the negative trend in productivity and it is a train that we cannot miss,” he said.
The issue of rising pension spending also comes at a particularly inopportune time. Because, as Arce recalled, large investments in defense which had not been planned are now added to the expenditure already started for digitalisation and the energy transition, in a context of rearmament in Europe after the Russian invasion of Ukraine. Furthermore, the fiscal margin has already been damaged by the measures adopted to combat the pandemic, which was followed by an inflationary crisis due to the rise in energy prices to which many states responded by granting aid.
With particularly high debt and the need to continue spending, the interest rate is a key factor in the financing of governments, businesses and families. And Arce pointed out that while the price of money has fallen over the past year, it has moved away from those near-zero levels it remained at after the pandemic, so free money is a thing of the past.
Inflationist or disinflationist?
In his role closely linked to monetary policy, Arce acknowledged that there are doubts about the effects of aging on prices. It was previously assumed to have a disinflationary effect because older people consume, invest less and borrow less, which reduces pressure on the demand side. But after the pandemic, this perception is not so clear. “We have seen that the shortage of labor, the difficulty of generational turnover, has created bottlenecks, because many people are retiring and it is difficult to find replacements. This has caused upward pressure on wages which has translated into higher inflation rates,” he explained. That is, as the supply of workers shrinks, there is more competition for them and companies have to pay more to attract them.
Reforms introduced during the last euro crisis to improve the employability of older people have partially alleviated these bottlenecks. “The participation rate of older people has increased in recent years, in contrast to what happened in the United States with the Great Resignations. In Europe we have not seen this. We have seen greater participation in the labor market, and this is good news,” compared Arce.
The future reality, however, remains demographically challenging. “Spain, like the rest of the EU, is aging very rapidly and will continue to do so intensely in the coming decades,” he summarized.
