Ageing costs, public debt sustainability and EU fiscal rules

This paper examines the role of ageing costs and the underlying assumptions in the reformed EU fiscal rules. To comply with these rules, governments facing rising ageing costs over the decade that follows a multi-year adjustment period must pre-emptively implement fiscal consolidation measures to compensate for these projected increases. We evaluate the key assumptions on ageing costs embedded in the underlying debt sustainability analysis (DSA) framework and assess how sensitive public debt projections and implied fiscal adjustment requirements are to alternative ageing expenditure paths. Drawing on different projection vintages, varying time horizons, and using alternative demographic and macroeconomic assumptions, we show that even modest changes in how ageing costs are incorporated can lead to substantial differences in required fiscal tightening and projected debt ratios. The current DSA framework does not account for uncertainty in baseline ageing cost projections in country-specific assessments. Our simulations further indicate that lower projected ageing costs do not necessarily reduce long-run debt ratios, as they imply weaker upfront consolidation, which can allow debt to rise over time. More broadly, the effects of additional fiscal adjustment aimed at pre-funding projected increases in ageing-related costs depend critically on assumptions: if fiscal multipliers are larger or more persistent, the resulting weaker growth could offset public debt reduction. Overall, our findings underscore the importance of critically examining the assumptions underlying ageing cost projections, the fiscal policy responses embedded in the framework and the assumed macroeconomic effects of fiscal consolidation when assessing policies aimed at pre-emptively addressing a projected rise in ageing costs. The current treatment of ageing costs in the DSA framework constrains elected governments on the basis of uncertain and arbitrary ageing-related assumptions.