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Challenges for labor market due to aging societies

Published on August 27, 2009 by: in: Society

In the following years, most countries of the European Union, including Poland, will witness significant changes in the demographic structure of the population. Eurostat demographic predictions indicate that until 2050. The number of people of retirement age (over 65) in EU countries will rise by as much as 70%, while the number of people of working age (15-64) will fall by 12 percent. As a result, while today for one pensioner there are on average four people of working age, in 2050 there will be only two. Poland also will not avoid the aging of its society. What is more, demographic changes in our country will occur even faster than in the other EU countries. Until 2050 Poland will note an almost two-times quicker drop in the number of people of working age than our Western neighbors.


Is crisis imminent?

The main cause of looming demographic changes is a gradual increase in the average life expectancy and a decline in fertility rate. To illustrate, from the second half of the previous century, the average life expectancy of women in Poland at the age of 60 increased by 6 years. When leaving the labor market at a legal retirement age, women in Poland have on average 23 years of life ahead of them. The second reason for the aging of societies is diminishing number of children. At the beginning of 1990’s for one woman in her reproductive age there were more than two children – now it is only 1,3 children. It is too little to ensure the existing size and structure of the population. Unfortunately, changes in fertility rate show a great deal of immobility. Even if, through reforms which would facilitate combining work and family life, we managed to raise the fertility rate quickly, we would not be able to stop the inevitable changes in the population structure in the following decades.

Aging of societies will have a fundamental effect on the economic situation of EU countries, and, consequently, on our income level and the quality of our lives. The lower the number of working people in future Poland, the slower our economic growth. The number of people of productive age in Poland will start to drop already from 2012. This does not mean, however, that due to unfavorable demographic changes we are doomed to slower economic growth. Poland has huge growth reserves of labor, which should be immediately activated. Despite a large increase in employment after 2005, the proportion of working people between 15-64 is still just above 57 percent. It is 10 percentage points less than in EU-15 countries. If we managed, in the next ten years, to raise the proportion of working people to the level observed in the EU-15 countries, their number would rise by 1.9 million in this period. If, in the following years, the employment ratio would remain at this increased level, the number of working people in Poland would continue to rise up until 2035, not until 2011 only. The rise of employment ratio in Poland presents an enormous challenge to labor market policy. If we succeeded in increasing it, then simply because of larger number of employed people, the average pace of economic growth could be higher in the next decade by about 0,8-1,2 percentage points.

Population aging poses a serious threat for stability of the public finances. According to European Commission predictions, until 2050 public spending on retirement benefits in the EU-15 countries will rise, on average, from 10,6 to 12,9 percent of GDP, and the expenses connected with healthcare and elderly care will rise from 7,3 to 9,5 percent of GDP. In Poland, on the other hand, due to the reform of the retirement system in 1999, public spending on retirement benefits in this period should fall from 13,9 to 8,0 percent of GDP. Without such a reform, the deficit in the retirement system would be almost 5% of GDP in 2050. Its funding would require either a drastic rise of the social security contributions or taxes, or a large reduction of public spending on other purposes than retirement benefits.

In the next years, an increase in the proportion of people of post-productive age in the population and a drop in the number of people of productive age will reduce the amount of national savings in the economy. Population aging will result in an increase in the number of pensioners households, who spend their savings on consumption, with a simultaneous drop in the number of worker households, who lay aside a portion of their current income. The lower the amount of national savings, the lesser the possibilities of expanding investments and, ultimately, the slower the economic growth.

All hands on deck!

What reforms could mitigate the economic consequences of aging society in Poland? The main challenge for the economic policy in Poland in the coming years will be to boost the proportion of working people in the population. It is the best possible way to minimize the consequences of aging society. Low level of employment in Poland is caused, most notably, by the percentage of working people of ages 15-24 and 50-65, which are 15 percentage points lower than in the EU-15 countries. Low employment among the young can only partially be contributed to the recent educational boom in Poland. Despite the fact that almost two-thirds of people between the age of 20 and 24 continue their education, the biggest percentage among the OECD countries, only one in five additionally works. In other countries, the percentage of people who simultaneously work and study is much higher – in Denmark and the Netherlands, where half of young people study, more than two-thirds of them have a job.

The most important factors which enable combining work and study is the availability of part-time jobs and low taxation of income. In 2007, the percentage of people between 15 and 24 working part time in the Netherlands and Denmark was 69% and 55% accordingly. In contrast, in Poland only one in 6 people had a part-time job in this age range. Studies indicate that particularly non-salary related work costs limit the employment of young people, those with lowest qualifications and without appropriate working experience.

The main reason for low employment of elderly people in Poland are benefits, which permit leaving the job market before reaching the legal retirement age. In almost all EU countries the average age of leaving the job market was much lower than the legal retirement age, but in Poland, in 2005, it was lowest of all EU countries. Women in Poland stop their professional activity 5 years before reaching their legal retirement age, while men as much as 8 years earlier. Increasing the employment rate of elderly people requires severe reduction in availability of any kind of benefits which permit leaving the job market early.

Prolonging the professional activity period of Poles

To reduce the economical consequences of population aging, we need to raise the legal retirement age of women up to 65. In most EU-15 countries, the legal age of leaving the job market for retirement is on the same age level, i.e. 65 (e.g. In Germany, Ireland, the Netherlands, Spain, Portugal). In the last few years, many Western European countries started raising the retirement age of women to level it with the retirement age of men (e.g. in Belgium, Great Britain or Austria). In Iceland, Denmark and Norway the age of retirement for both sexes is already at 67, and in the following years the same level will be reached in Germany and Great Britain.

If we do not radically prolong the period of professional activity in Poland, keeping the relation of an average pension to an average salary at 59 percent will require raising the retirement contribution up to more than 30% in the long run (now it is 19,52%). If the contributions didn’t change, then the relation of pension to salary would plummet at best to 35%, that by more than one third. To maintain the relation of pension to salary at an unchanged level, Poles should retire at least 6 years later than they do now.

More and more countries introduce reforms which make the level of future pension dependent on an average life expectancy and the amount of funds amassed on an individual retirement account. Its main purpose is to minimize the risk of insolvency of retirement systems. At the same time, such reforms strengthen the incentives to remain professionally active. Systems which do not make the level of future retirement benefits dependent on the amount of social security contributions accumulated during the whole period of professional activity, the effectiveness of multiplying this amount and on the average life expectancy after retiring, are in fact making promises which they will not be able to fulfill in the future.

Removing obstacles

The expected growth of public spending due to population aging, together with the reform which would increase the number of working people, requires raising the effectiveness of factors of production.

First of all, a rise in work efficiency could be reached through an increase in the level of investment in the economy. Greater capital expenditure will not only directly cause quicker economical growth, but also indirectly, while the rise in investment fosters adapting innovations, which in turn increase the productiveness of capital.

Secondly, the rise in efficiency is possible through deregulation of economy. It should be based on removing the administrative obstacles in establishing and running business, and consequently, on strengthening market competition. It can be estimated that a reform which would reduce institutional barriers in Poland in this respect, to the levels observed for instance in Great Britain, Ireland or Sweden, could additionally quicken the yearly employment pace by about 0,5 percentage points.

Thirdly, quicker productivity growth in Poland would be possible with finishing the privatization process. Private businesses are managed better, they have higher ability to adjust to changing market conditions, and in consequence, more of them actually make profit. In the last few years the number of working people in Poland only grew in the private sector, while state-owned companies reduced their level of employment.

In the following years most EU countries, including Poland, will observe a significant drop in the number of people in productive age, with simultaneous large increase in the number of people in post-productive age. Aging of societies will not bring about a decline in economic growth if we quickly introduce reforms which will permanently increase the level of employment among the people of post-productive age. Keeping a steady pace of GDP growth is the only way to bridge the developmental gap which separates our country from the developed states of Western Europe.


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About Wiktor Wojciechowski

Ph.D. of economy, graduate of Warsaw School of Economics, 2004 – 2008 employee in National Bank of Poland, senior economist of FOR.

Fredrich Naumann Foundation For The Freedom
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