Policies to 'incentivise' working past 65 need to be considered, says Central Bank chief Makhlouf
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Weak productivity, teamed with an ageing population, raises questions over the long-term growth prospects of Ireland as well as the broader EU, the governor of the Central Bank of Ireland Gabriel Makhlouf has warned.
Speaking at a dinner organised by the UK Society of Professional Economists, Mr Maklhouf pointed out that Ireland’s population is “ageing at a faster rate” than almost any other European country after having dependency rates significantly below other EU member states for decades.
An ageing population impacts growth in two ways — it means more people are moving out of the workforce while more Government money is spent on healthcare and pensions.
These additional spending requirements could have a knock-on impact of potentially crowding out public investment spending.
However, Mr Makhlouf said various policies and new technologies mean that labour force participation — such as working beyond retirement age or boosting female labour force participation — can offset some of these effects.
Citing data from the European Commission, Mr Makhlouf said that the estimated annual total cost of ageing between 2022 and 2070 will be around 5% of gross domestic product in Ireland and 2% in the euro area “with most of this frontloaded in the next 20 years”.
“These are substantial cost increases, when we compare with public investment rates of between 2% and 4% over recent decades,” he said.
Mr Makhlouf said that addressing the demographic challenge is not just about looking at alternative sources of growth but also “re-assessing how we think about retirement and human capital accumulation over the life cycle”.
“If people choose to work longer, it could also up-end how we traditionally think about human capital accumulation and individual productivity growth, especially in older-age working groups,” he said.
“If a middle-aged worker instead expects to be working into their 70s, this could incentivise education and training throughout their working life, rather than the general practice of it ending in their 20s.”
Mr Makhlouf said that increased longevity as a result of healthier lifestyles presents the opportunity for people to work longer if they choose to.
“Policies to incentivise working longer, alongside promotion of lifelong learning, need to be part of our thinking,” he said.
In the face of these demographic headwinds, Mr Makhlouf said there is an “even greater emphasis” on productivity to deliver growth, but in this area, Europe is “weak” and has been “for some years”.
“Europe is at a pivotal moment in its economic development,” he said. "The tangle of ageing populations with weak productivity growth raises questions about the long-term growth outlook."
In terms of addressing sluggish EU productivity growth, Mr Makhlouf noted that there was a recent report from former president of the European Central Bank Mario Draghi on this issue, which he said “present a menu of policy options to help boost competitiveness”.
He added that policies that seek to boost productivity must be complemented by the completion of the EU single market, such as through the “long-touted capital markets union”.