EN EN EN 

 COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 14.10.2009 
SEC(2009) 1354 
COMMISSION STAFF WORKING DOCUMENT 
  
Sustainability Report 2009  
accompanying the  
  
COMMUNICATION FROM THE CO MMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 
 
Sustainability of public finan ces for a recovering economy 
   
{COM(2009) 545 final} 
European Commission 
Directorate-General for Economic and Financial Affairs 
Sustainability Report - 2009 
 
EUROPEAN ECONOMY 9/2009 
  
ABBREVIATIONS AND SYMBOLS USED 
 
iii Member States 
BE Belgium 
BG Bulgaria 
CZ Czech Republic DK  Denmark 
DE Germany 
IE  Ireland EE Estonia  
EL  Greece 
ES  Spain FR  France 
IT  Italy 
CY Cyprus LV Latvia 
LT Lithuania 
LU  Luxembourg HU Hungary 
MT Malta 
NL  The Netherlands AT  Austria 
PL Poland 
PT  Portugal RO Romania 
SI Slovenia 
SK Slovak Republic FI  Finland 
SE  Sweden 
UK  United Kingdom 
 
EA European Union Member Stat es having adopted the single currency (BE, DE, EL, ES, FR, IE, 
IT, CY, LU, MT, NL, AU, PT, SI, SK, FI), i.e. coun tries participating in the economic and monetary 
union without a derogation 
EU-27 European Union,  27 Member States 
Other 
AR   Ageing Report 
CAB   Cyclically-Adjusted Balance CBO   Congress Budget Office 
DR   Debt Requirement in 2060 
EDP   Excessive Deficit Procedure 
 
 
iv EMU   Economic and Monetary Union 
EPC   Economic Policy Committee 
ERM II   European Exchange Rate Mechan ism, replacing the original ERM in 1999 
ESA95   European System of national Accounts 1995 GDP   Gross Domestic Product 
IBP   Required adjustment given the initial budgetary position 
IMF   International Monetary Fund LTC   Required adjustment given the long-term change in the budgetary position 
MTO   Medium-Term Objective 
NAIRU   Non-Accelerating Inflation Rate of Unemployment 
PAYG   Pay-As-You-Go 
RPB   Required Primary Balance 
SCP  Stability and Convergence Programmes SFA   Stock-Flow Adjustment 
SGP   Stability and Growth Pact 
 
ACKNOWLEDGEMENTS 
 
v This report was prepared in the Directorate General for Economic and Financial Affairs under the 
direction of Marco Buti, Director General, and Serv aas Deroose, Director of  the Directorate for the 
macroeconomy of the euro area and the EU. 
The main contributors were Kamil Dybczak, Christin e Frayne, Veli Laine and João Nogueira Martins. 
Tamás Gábor Szin was responsible for statistical and editorial work. 
Specific contributions were provided by Salvador Ba rrios, Per Eckefeldt, Bartosz Przywara, Etienne Sail 
and Zbigniew Truchlewski.  
The country sections in Chapter VII benefitted from comments from desk officers in the directorates 
Economies of the Member States I and II under the responsibility of directors Jürgen Kröger and Elena 
Flores Gual. 
Comments and suggestions by colleague s in the Directorate General for Economic and Financial Affairs 
as well as by other services of the Commission are gratef ully acknowledged. 
Excellent secretarial support was provided by Dominique Prins and Els Versteven.    
Comments on the report would be gratef ully received and should be sent to: 
Directorate-General for Econo mic and Financial Affairs 
Macroeconomy of the euro area and the EU 
Unit C4: Fiscal Sustainability European Commission 
B-1049 Brussels 
 
or by e-mail to joao.nogueiramartins@ec.europa.eu 

CONTENTS 
 
vii Editorial   XIII 
Executive summary 1 
Chapter I: Sustainability of public finances 7 
Summary 9 
1. Defining sustainability 10 
1.1. What is meant by the sustainability of the public finances 10 
1.2. Defining the sustainability indicators 11 
1.3. Interpreting the sustainability indicators 11 1.4. Other concepts of sustainability 12 
2. Deriving the sustainability indicators 13 
2.1. Required adjustment given The initial budgetary position 13 2.2. The debt requirement by 2060 14 2.3. The required adjustment given the increase in age-related costs 14 
2.4. Policy implications 15 
3. Estimating the cost of ageing 16 
3.1. projecting age-related expenditure 16 
3.2. A partial equilibrium analysis 17 
3.3. Unchanged policy assumption 17 
Chapter II: The economic and budg etary implications of ageing 19 
Summary 21 
1. The effect of demographic changes 22 
1.1. Population ageing 22 
1.2. Labour force projections 26 1.3. Labour productivity and potential growth 26 
1.4. Budgetary projections 28 
Chapter III: Quantitative sustainability results 31 
Summary 33 
1. The sustainability results 34 
1.1. The quantitative indicators 34 
1.2. A graphic representation of the sustainability gap (S2) 35 
1.3. The long term budgetary cost of ageing 36 1.4. The initial budgetary position 37 
1.5. Required primary balance 39 
1.6. Government debt projections 39 
2. Comparison with the 2006 sustainability report 41 
3. The cost of no policy reaction 43 
 
 
viii Chapter IV: The potential impact of  the current economic crisis and 
sensitivity analysis 45 
Summary 47 
1. The effect of the financial crisis 48 
1.1. The perspectives for economic growth 48 
1.2. Three medium-term post-crisis SCENARIOS 49 
1.3. The budgetary impact of  the post-crisis scenarios 51 
1.4. Implications on sustainability indicators of the Alternative POST-CRISIs cenarios 52 
2. The effect of fiscal consolidation: an MTO scenario 54 
3. Sensitivity analysis not linked to the financial crisis 57 
3.1. Life expectancy 57 
3.2. Labour productivity 58 
3.3. Employment rate 58 3.4. Migration 59 
3.5. Interest rate 62 
3.6. Alternative health care scenarios 62 3.7. Changes in the long-term care assumptions 64 
Chapter V: Other factors 67 
Summary 69 
1. Debt and assets 70 
1.1. The level and evolution of Gross debt 70 
1.2. Primary balance 71 
1.3. Government Assets 72 
2. Pension projections 73 
2.1. Pension expenditure projections and social and political risks. 73 
2.2. Private funded pension schemes and financial risks 75 
3. Contingent liabilities 77 
4. Tax ratio 79 
Chapter VI: Overall classification  of the long-term risks to the 
sustainability of public finances 81 
Summary 83 
1. Overall assessment 84 
1.1. The sustainability indicators 84 
1.2. Additional factors 84 
1.3. Overall assessment 85 
2. Assessment of sustainability  risks for the Member States 89 
2.1. Low long-term risk countries 89 
2.2. Medium-risk countries 89 
2.3. High long-term risk countries 90 
Chapter VII: Sustainability assessment per Member State 91 
1. Belgium 92 
1.1. Overview of the results 92 
1.2. Overall assessment 92 
 
 
ix 2. Bulgaria 94 
2.1. Overview of the results 94 
2.2. Overall Assessment 94 
3. The Czech Republic 96 
3.1. Overview of the results 96 
3.2. Overall assessment 96 
4. Denmark 98 
4.1. Overview of the results 98 4.2. Overall assessment 98 
5. Germany 100 
5.1. Overview of the results 100 
5.2. Overall assessment 100 
6. Estonia 102 
6.1. Overview of the results 102 
6.2. Overall assessment 102 
7. Ireland 104 
7.1. Overview of the results 104 7.2. Overall assessment 104 
8. Greece 106 
8.1. Overview of the results 106 
8.2. Overall assessment 106 
9. Spain 108 
9.1. Overview of the results 108 
9.2. Overall assessment 108 
10. France 110 
10.1. Overview of Results 110 10.2. Overall Assessment 110 
11. Italy 112 
11.1. Overview of the results 112 
11.2. Overall assessment 112 
12. Cyprus 114 
12.1. Overview of the results 114 
12.2. Overall assessment 114 
13. Latvia 116 
13.1. Overview of the results 116 13.2. Overall assessment 116 
14. Lithuania 118 
14.1. Overview of the results 118 
14.2. Overall assessment 118 
15. Luxembourg 120 
15.1. Overview of the results 120 
15.2. Overall assessment 120 
16. Hungary 122 
16.1. Overview of the results 122 16.2. Overall assessment 122 
17. Malta 124 
17.1. Overview of the results 124 
17.2. Overall assessment 124 
 
 
x 18. The Netherlands 126 
18.1. Overview of the results 126 
18.2. Overall assessment 126 
19. Austria 128 
19.1. Overview of the results 128 
19.2. Overall assessment 128 
20. Poland 130 
20.1. Overview of the results 130 20.2. Overall assessment 130 
21. Portugal 132 
21.1. Overview of the results 132 
21.2. Overall assessment 132 
22. Romania 134 
22.1. Overview of the results 134 
22.2. Overall assessment 134 
23. Slovenia 136 
23.1. Overview of the results 136 23.2. Overall assessment 136 
24. Slovakia 138 
24.1. Overview of the results 138 
24.2. Overall assessment 138 
25. Finland 140 
25.1. Overview of the results 140 
25.2. Overall assessment 140 
26. Sweden 142 
26.1. Overview of the results 142 26.2. Overall assessment 142 
27. United Kingdom 144 
27.1. Overview of results 144 
27.2. Overall assessment 144 
Chapter A.I: Deriving the sustainability indicators 147 
1. Deriving the sustainability indicators 148 
Chapter A.II: Revenue projections 157 
1. Revenue projections 158 
 
LIST OF TABLES 
I.2.1. Summarising the indicators 14 
II.1.1. Demographic projections for the EU countries 23 II.1.2. Increase in age-related expenditure, 2010-2060, % of GDP 29 III.1.1. Results of the sustainability gap calculations in the baseline scenario (% of GDP) 35 III.1.2. Government structural balances (% of GDP) 38 III.1.3. Required primary balance (% GDP) 39 III.1.4. Projected debt developments 40 III.2.1. LTC component of the S2 indicator until 2050 and 2060 42 III.3.1. Cost of delaying the response by 5 years 43 
 
 
xi IV.1.1. The effects on the level of real GDP per capita of the three post-crisis scenarios 50 
IV.1.2. Sustainability calculations under alternative crisis scenarios 53 IV.2.1. Effect of the MTO balance on the S2 indicator and required primary balance 
(RPB) 54 
IV.3.1. Sensitivity scenarios, difference in  S2 indicator compared to the baseline 
scenario 58 
IV.3.2. Sensitivity scenarios, difference in  S2 indicator compared to the baseline 
scenario 63 
IV.3.3. Sensitivity scenarios, difference in  S2 indicator compared to the baseline 
scenario 65 
V.1.1. General government gross debt ratio 71 V.1.2. General government financial assets as a share of GDP 72 V.1.3. Structural primary balances as a share of GDP 72 V.2.1. Benefit ratio – 74 
V.3.1. Public interventions in the banking sector as a share of GDP 78 VI.1.1. Main factors considered in reaching an overall assessment of the public finance 
sustainability risks 87 
VII.1.1. Summary table (Belgium) 93 VII.2.1. Summary table (Bulgaria) 95 VII.3.1. Summary table (The Czech Republic) 97 VII.4.1. Summary table (Denmark) 99 VII.5.1. Summary table (Germany) 101 VII.6.1. Summary table (Estonia) 103 VII.7.1. Summary table (Ireland) 105 VII.8.1. Summary table (Greece) 107 VII.9.1. Summary table (Spain) 109 VII.10.1. Summary table (France) 111 VII.11.1. Summary table (Italy) 113 VII.12.1. Summary table (Cyprus) 115 VII.13.1. Summary table (Latvia) 117 VII.14.1. Summary table (Lithuania) 119 VII.15.1. Summary table (Luxembourg) 121 VII.16.1. Summary table (Hungary) 123 VII.17.1. Summary table (Malta) 125 VII.18.1. Summary table (The Netherlands) 127 VII.19.1. Summary table (Austria) 129 VII.20.1. Summary table (Poland) 131 VII.21.1. Summary table (Portugal) 133 VII.22.1. Summary table (Romania) 135 VII.23.1. Summary table (Slovenia) 137 VII.24.1. Summary table (Slovakia) 139 VII.25.1. Summary table (Finland) 141 VII.26.1. Summary table (Sweden) 143 VII.27.1. Summary table (United Kingdom) 145 A.II.1.1. Property income (% of GDP) 160 
 
LIST OF GRAPHS 
II.1.1. Life expectancy at birth, 1960 to 2008, selected countries (males and females) 22 II.1.2. Fertility rates, 1960-2008, selected Member States 22 II.1.3. Population pyramids (in thousands) for EU27 in 2008 and 2060 23 II.1.4. Projected change of main population groups (in % change over the period 
2008-2060) 25 
 
 
xii II.1.5. Population of working-age and total employment, EU27 27 
II.1.6. Decomposition of GDP growth, EU27, ( annual average growth rate) 27 III.1.1. Decomposition of the S2 indicator 36 III.1.2. Gross debt (% of GDP) 40 III.2.1. S2 indicator in the baseline scenario compared to the results of the 2006 
Sustainability Report 42 
IV.1.1. Potential GDP growth compared: di fferent crisis scenarios (annual % change) 49 
IV.1.2. Potential impact of the budgetary crisis on pensions 51 IV.1.3. The potential budgetary impact of the crisis on total age-related expenditure 51 IV.1.4. The dynamics of public pension ex penditure (baseline versus lost decade 
scenario, % of GDP) 52 
V.2.1. Expenditure of non-public occupational, private mandatory and non-
mandatory pension (% of GDP) 76 
V.4.1. Receipts and spending as a share of GDP 79 VI.1.1. Overall risk classification and the sustainability gaps (S2 and S1 in the baseline 
scenario) 88 
VII.1.1. Determinants of fiscal sustainability (Belgium) 93 VII.2.1. Determinants of fiscal sustainability (Bulgaria) 94 VII.3.1. Determinants of fiscal sustainability (The Czech Republic) 96 VII.4.1. Determinants of fiscal sustainability (Denmark) 98 VII.5.1. Determinants of fiscal sustainability (Germany) 101 VII.6.1. Determinants of fiscal sustainability (Estonia) 102 VII.7.1. Determinants of fiscal sustainability (Ireland) 104 VII.8.1. Determinants of fiscal sustainability (Greece) 106 VII.9.1. Determinants of fiscal sustainability (Spain) 108 VII.10.1. Determinants of fiscal sustainability (France) 110 VII.11.1. Determinants of fiscal sustainability (Italy) 112 VII.12.1. Determinants of fiscal sustainability (Cyprus) 114 VII.13.1. Determinants of fiscal sustainability (Latvia) 116 VII.14.1. Determinants of fiscal sustainability (Lithuania) 118 VII.15.1. Determinants of fiscal sustainability (Luxembourg) 120 VII.16.1. Determinants of fiscal sustainability (Hungary) 122 VII.17.1. Determinants of fiscal sustainability (Malta) 124 VII.18.1. Determinants of fiscal sustainability (The Netherlands) 126 VII.19.1. Determinants of fiscal sustainability (Austria) 128 VII.20.1. Determinants of fiscal sustainability (Poland) 130 VII.21.1. Determinants of fiscal sustainability (Portugal) 132 VII.22.1. Determinants of fiscal sustainability (Romania) 134 VII.23.1. Determinants of fiscal sustainability (Slovenia) 136 VII.24.1. Determinants of fiscal sustainability (Slovakia) 138 VII.25.1. Determinants of fiscal sustainability (Finland) 140 VII.26.1. Determinants of fiscal sustainability (Sweden) 142 VII.27.1. Determinants of fiscal sustainability (United Kingdom) 144 
 
LIST OF BOXES 
IV.1.1. Estimating the impact on pension spending of changes in macroeconomic 
variables. 50 
IV.2.1. Medium-term debt projections under alternative consolidation scenarios 55 IV.3.1. Scenario on postponing retirement 60 
 
EDITORIAL 
 
 
xiii The European economy is showing signs of entering a phase of recovery after a deep crisis. Thanks to 
effective and substantive policy action since autumn 2008, coordinated in the context of the European Economic Recovery Plan (EERP), a financial meltdown and a generalised loss of confidence has been avoided. However, uncertainty remains high, and ther e are still risks of negative feedback loops between 
the financial sector and the real economy. Given the output losses in previous quarters, economic activity is set to shrink by 4 percent this year, followed by a gradual recovery in 2010.  
Fiscal policymaking has been successf ully targeted to the need and ur gency of pulling the economy out of 
the recession. Discretionary fiscal stimulus and unfe ttered automatic stabilisers have provided a cushion 
to economic activity and contributed to the recent sign s of improvement, but have led to a substantial 
deterioration in government accounts. From a deficit of  0.8 percent of GDP in 2007 – the best result for 
thirty years – the government deficits in the EU ar e forecast to average 6 percent of GDP in 2009 and 
around 7 percent in 2010. In the th ree years to 2010, the gross debt ratio for the EU as a whole is 
increasing by more than 20 points. Moreover, very large contingent liabilities may translate into actual costs over the coming years, although some costs in support of the banking sector may be recouped. 
The sustainability of public finances in a longer-term perspective must not be ignored. Though the debt 
and deficit increases are by themselves quite impr essive, the projected impact on public finances of 
ageing populations is anticipated to dwarf the effect of the crisis many times over. The fiscal costs of the crisis and of projected demographic development compound each other and make fiscal sustainability an acute challenge. The available proj ections show that, in the absence of ambitious efforts to implement 
structural reforms and consolidate government accounts, ther e would be large increases in expenditure on 
debt interest and public pensions, as well as on h ealthcare and long-term care during the coming decades. 
Rising government expenditure and prospects of an ever-increasing debt would be an obstacle to a sustained and recovery and balanced economic growth in the longer run. 
Successful fiscal expansion to counter recession  and longer-term fiscal sustainability are not 
incompatible. Fiscal measures to increase confidence and support demand are only successful if they are 
perceived by the markets and public opinion as temporary and consistent with long-term sustainability. Otherwise, if economic agents expect a durable wideni ng of debt, fiscal support will lose its effectiveness 
and can become counterproductive, in  particular when the crisis climax  has been overcome and one enters 
a phase of recovery. 
Fiscal exit strategies aiming at achieving ambitious and realistic medium-term objectives need to be 
designed now, and implemented in a coordinated manner as soon as recovery takes hold, taking into account the specific situations of individual countries .  To support the required reforms and enhance the 
credibility of fiscal adjustment – which inevitably st retches over a number of years – Member States may 
also need to develop further their own budgetary frameworks. In the Stability and Growth Pact context, debt sustainability should get a very prominent and explicit role in surveillance procedures. 
 
 
 Marco Buti 
 Director General  Economic and Financial Affairs 

EXECUTIVE SUMMARY 
 
 
1 Alongside households and firms, governments too have to meet their 
financial obligations over time. The concept of the sustainability of the public finances concerns the ability of a government to finance its current debt and expected expenditure. There is no one clear-cut definition of a sustainable fiscal position; instead there are a lternative theoretical and practical 
approaches to assessing the sustainability of public finances. In general, it can be stated that, at first instance, a sustainable position involves a debt level 
that does not entail interest payments so large that they cannot be paid. Thus, the sustainability of the public finances considers the ability of a government to service the costs of its debt through future revenues. Sustainability of public finances is therefore a long-term concept and differs from solvency which is concerned with the immediate (short run) ability of a country to 
finance its expenditure.  
This report takes into account the crisis context and its impact on public 
finances at the moment when the first signs of stabilisation become apparent. As long as the recovery is not sustained and the discretionary measures deployed by governments are not withdrawn, the effect of the crisis on public finances cannot be fully determined. However, given the large impact of the crisis on public debt, it provides a timely input at a stage where fiscal policies must progressively be reoriented towa rds sustainability and exit strategies 
need to be designed now and implemented in a coordinated manner as soon as the recovery takes hold, taking into account the specific situation of 
individual countries. 
The fiscal costs of the crisis and of projected demographic developments 
compound each other and make fiscal sustainability an acute challenge. The available projections show that, in the absence of ambitious efforts to 
implement structural reforms and c onsolidate government accounts, there 
would be very large increases in expenditure on debt interest and public pensions, as well as on healthcare and long-term care during the coming 
decades.  
The assessment of the long-term sustainability of fiscal policy is now a well 
established part of budgetary surveillance in the EU. However, in a context of crisis and recovery, the sustainability assessment is undertaken under larger than usual uncertainty. On the one hand, it is difficult to correctly judge the initial structural fiscal position. This is related to the uncertainty on the potential output and the output gap, but also on the way that tax revenue has been affected by the crisis , as well as on the durable or temporary nature of 
the support measures adopted by governments. On the other hand, the crisis may constitute a structural break in our economies and have a protracted 
impact on the way these economies will grow over the next decades.  
Population ageing is a phenomenon that  the Member States are already 
familiar with, but whose consequences are yet to be felt in full force. Already, the European Union has expe rienced an ageing of its population 
through an increase in life expectancy and a fall in fertility rates. Over the 
next 50 years the EU population is expected to age further – this will have consequences for the public finances and their sustainability. The economic and budgetary consequences of the expected change in population structure stem mainly from a reduction in the working age population and an increase 
European Commission 
Sustainability Report - 2009 
 
2 in the number of elderly people requiring support. A lower number of 
economically active people leads to lower economic growth and lower taxes, while a higher number of retired people entails additional public provision of 
age-related transfers and services.  
On the basis of current policies, age-rela ted public expenditure is projected to 
increase on average by 4.3 percentage po ints of GDP by 2060 in the EU. The 
increase is mainly due to pension, h ealthcare and long-term care spending. As 
there are significant differences in both  the structure of ageing and the social 
security systems that pr ovide support for the el derly across the Member 
States, the projected increase in public expenditure also varies by country.  
In order to asses the sustainability of fiscal policy in each Member State, a 
number of indicators have been developed. In general, these indicators assume a continuation of current revenue and expenditure policies over a finite or infinite timescale, usually taking the expected development of population size and structure into acco unt. More specifically, these indicators 
reflect the projected development of ma in tax revenues (usually direct and 
indirect taxes and social contributions) and expenditure (i.e. pensions, health care, long-term care etc.) under current policy over a very long horizon. The 
sustainability indicators quantify the gap that must be closed to ensure the 
public obligations can be financed in the future.  
In this report – in line with previous assessments – two main sustainability 
gap indicators are derived: the S1 and S2 indicators. Both S1 and S2 show the size of the permanent budget adjustment required to ensure that the public budget constraints are met. The S1 indicator shows the adjustment to the current primary balance re quired to reach a target government gross debt of 
60% of GDP in 2060, including paying for any additional expenditure arising from an ageing population. The S2 indicator shows the adjustment to the current primary balance required to fulfil the infinite horizon intertemporal budget constraint, including paying for any additional expenditure arising from an ageing population. Thus, the difference between S1 and S2 is the 
length of the time horizon taken into account when assessing the 
sustainability of the public finances. In both cases, non-age related and non-interest spending is assumed to remain constant as a share of GDP in the relevant time period. In addition to those two indicators, the required primary balance (RPB) is also used to illustrate the sustainability situation. The RPB indicates the starting budgetary position which, if attained, ensures the sustainability of the public finances under no policy change assumptions. The RPB can then be used to compare the actual or planned budgetary strategy 
with the structural primary balance re quired for fulfilling the inter-temporal 
budget constraint. The major inputs in to S1, S2 and RPB indicators are the 
current levels of gross government debt , the structural primary balance (i.e. 
public budget balance excluding interest payments on public debt, cyclical factors and one-off transactions) and the expected additional costs arising 
from population ageing. 
A positive value of the gap indicators like S1 and S2 signifies the permanent 
adjustment to the fiscal policy that is necessary to  ensure sustainability. The 
analysis is undertaken on the basis of current policy continuing in the future; this does not imply that it is realistic to assume that these policies will continue, but serves to quantify the necessary magn itude of the change in 
Executive summary 
 
 
3 policy in order to inform the debate. Indeed, the greater the value of the 
indicator the greater adjustment that is required to restore the sustainability of public budgets. On the contrary, a nega tive value indicates that fiscal policy 
is sustainable. The value of S1 and S2 can be further decomposed into parts characterising the required adjustment given the initial budgetary position (IBP), required adjustment given the long-term change in expenditure (LTC) and, in case of S1, the effect of the starting level of debt relative to the 60% target for 2060 (DR) to allow consideration and comparison of the contribution these components make to sustainability. Still, the indicators do 
not in themselves provide any guide as to how the adjustment should take place as the necessary adjustments could occur as result of an increase in 
government receipts or a reduction in its spending, or structural reforms. 
The value of the S2 indicator shows a sustainability gap of 6.5% of GDP for 
the whole EU and of 5.8% of GDP fo r the euro area, albeit with wide 
variation between countries. The S1 indicator shows a sustainability gap for the EU countries and for the euro area, of 5.4% and 4.8% of GDP respectively. The decomposition results show that for the EU-27 countries, the IBP is responsible for 3.3 points of the S2 gap and 3.1 points for the S1 gap. This means that even without taking the cost of ageing into account,  that is assuming that age-related expenditure in government accounts 
remained constant as a share of GDP, European countries should tighten their 
fiscal stance (in terms of the structural  primary balance) by an average of 
3.3% of GDP, or adopt structural reforms, for their public finances to return to a sustainable path. The long term cost of ageing (LTC) contributes 3.2 
points to the S2 gap and 2 points to the S1 gap, with the figures being 3.5 and 2.4 points respectively for the euro area. This shows that the LTC has a significant fiscal impact on average. For the S1 gap,  the requirement to reach 
a debt level of 60% of GDP by 2060 (DR) adds an adjustment of 0.2 points 
for the EU-27 and 0.3 points for the euro area. 
Overall, the baseline results in this report differ significantly from those 
presented three years ago in the 2006 Sustainability Report. While the EU-25 average sustainability gap was estimated at 3.4% of GDP on S2, the current estimates are for 6.5% of GDP. On average, the sustainability gap has increased by 3.1% of GDP for the 25 countries that were members of the EU in 2006. While four Member States (Hungary, Portugal, Italy and Germany) show a lower sustainability gap than in the 2006 exercise, the remaining Member States show deterioration. Of  these, in all cases expect Greece, 
Luxembourg and Malta, the deterioration is essentially due to the crisis-related weakening of the initial budgetary position rather than to an increase 
in the age-related costs and the delay in the required adjustment that leads to a higher LTC. For Spain, Greece, Irelan d, Latvia and the UK the weakened 
initial budgetary position is responsibl e for an increase of the estimated 
sustainability gap of over 5% of GDP.  
The financial and economic crisis has added to countries' sustainability 
difficulties, through the significantly worse than expected macro-economic and fiscal developments in 2008 and 2009 it has led to. In addition, there is marked uncertainty regarding economic growth in the medium and long-term perspective. As a consequence, a nu mber of alternative macroeconomic 
scenarios were produced to lo ok at the impact of the crisis. In a lost decade 
scenario, pension expenditure is 0.9% of GDP higher in 2060 relative to the 
European Commission 
Sustainability Report - 2009 
 
4 baseline, while total age related expenditure is 1.4% of GDP higher, with the 
most of the increases occurring between 2007 and 2020.  
Although the crisis has added to the su stainability problems, the recovery is 
not likely to solve all the difficulties on its own. For some Member States the 
current deficits may return to surplu s when the recovery comes, but where 
this is not the case budgetary consolid ation will be necessary and should be 
undertaken as soon as the time is right in order to reduce long-term risks to public finance sustainability. Projections based on a scenario of growth returning to the long-term path of be fore the crisis show that without 
consolidation, the gross debt-to-GDP ra tio for the EU as a whole could reach 
100 percent as early as 2014, and keep on increasing. A consolidation effort of 0.5 percent of GDP per year until the Member States’ MTOs are reached will only stabilise the debt ratio at arou nd 100 percent of GDP if growth takes 
time to return to the pre-crisis trend. Thus, although fiscal support must be maintained until recovery is secured, fiscal policies must progressively be reoriented towards sustainability. Exit strategies need to be designed now and implemented in a coordinated manner as soon as recovery takes hold, taking 
into account the specific situations of individual countries.   
Of course, the estimates presented in the report are partly determined by the 
underlying assumptions made. To assess the robustness of the sustainability indicators and to better understand the long-term sustainability risks in each country, the Sustainability Report quantifies the impact of changes in main assumptions on the sustainability indicators. In particular, alternative assumptions are presented for life expectancy, labour productivity, 
participation of older workers in the labour market, total employment, migration and the interest rate. For all these elements there is considerable uncertainty when predicting into the future, so considering the response of sustainability results to the underlying assumptions is important. Again, the final change of S2 as a response to a change in some of the mentioned parameters may differ country-by country as eligibility and indexation rules 
for age related expenditure  are country specific. 
On the basis of the sustainability indicators, as well as a number of other 
factors (including debt and assets, average pensions and tax burden), the EU Member States are classified in thr ee categories depending on the degrees of 
long-term risk they face. Overall, only  five countries are classified as low-
risk countries, nine countries are classified as facing medium long-term risk, 
while thirteen countries are  exposed to higher long-term risks. 
Bulgaria, Denmark, Estonia, Finland and Sweden have relatively stronger 
budgetary positions and have undertaken comprehensive pension reforms in recent years. Though the crisis is leading to a deterioration in government 
balances and a substantial increase in government debt ratios of each of these 
countries, their structural fiscal positions remain sounder than in most other EU countries, and present therefore a low long-term risk. In Bulgaria, 
Denmark, Estonia and Sweden, the incr ease in age-related expenditure over 
the next decades is projected to be  well below the EU average. Note, 
however, that the projections for Bulg aria and Estonia do  not include any 
strengthening of social  protection in the coming decades that may be 
necessary for their systems to converge w ith other EU countries. In Finland, 
the projected increase in expenditure is substantial and the fiscal cost of the 
Executive summary 
 
 
5 crisis has been large. However, the large stock of financial assets in the social 
security portfolio provides a cushion to  absorb a deterioration in government 
accounts.  
Belgium, Germany, France, Italy, Hungary, Luxembourg, Austria, Poland 
and Portugal are countries with very different characteristics in relation to 
their initial budgetary position and age-related expenditure. Belgium, Germany and Austria are projected to be ar costs of ageing close to, or above, 
the EU average, but their initial bud getary positions are relatively sound, 
provided that the crisis-related deteri oration in governmen t accounts does not 
become structural. Though medium-term consolidation will improve the sustainability indicators, reforms to address rising age-related costs will be indispensable. For Belgium, the debt ratio – which is returning to above 100 percent of GDP – constitutes a burden and a specific risk. The projected increase in the age-related expenditure in Luxembourg is the highest of the whole EU; however, this risk is cushioned by the currently low debt and large government-owned financial assets. In ge neral, for this group of countries, 
the long-term sustainability risk is medium. For France, Italy, Hungary, Poland and Portugal, the long-term costs of ageing are not projected to be particularly high. However, their initial budgetary positions imply that fiscal 
policy is unsustainable even without co nsidering any increase in age-related 
expenditure. In all these countries, the cr isis and the support to recovery are 
leading to a very fast increase in debt ratios, quickly offsetting the consolidation gains achieved in recent years. For Poland, projections indicate 
a fall in age-related expenditure over the long term because of the shift of pension provision to funded schemes; however, the projected reduction in expenditure is also related to a large cut in benefit ratios. This may raise issues of social sustainability by increasing old-age poverty. For France, ambitious fiscal consolidation, once the recovery is firmer, is indispensable and will constitute a major step to improve sustainability. In Portugal, a recent pension reform have done much  to improve sustainability; however, 
the structural budgetary position remains largely unbalanced. In the case of 
Italy, fast fiscal consolidation once the recovery takes hold is indispensable to ensure a steady reduction in the very high debt ratio.  The low sustainability gap of Hungary results from pension reform and recent fiscal consolidation; however, the correction in structural im balances in recent years needs to be 
pursued further in order to reduce debt. 
The Czech Republic, Cyprus, Ireland, Greece, Spain, Latvia, Lithuania, 
Malta, the Netherlands, Romania, Slovenia, Slovakia and the United Kingdom have sustainability gaps above 6 percent of GDP; over double that level in Ireland, Greece, Spain, Sloven ia and the United Kingdom. In nearly 
all of these countries, the sustainability gaps are the result of a very large projected increase in age-related expe nditure, compounded in most cases by 
large initial imbalances, and hence they are exposed to higher long-term risks. This indicates that closing their gaps will require both ambitious consolidation programmes that reduce debts and deficits in the coming years, and profound reforms of social protecti on. This is particularly the case for 
Greece, which faces the second highest in crease in age-related expenditure of 
the entire EU, while its very high debt ratio adds to the concerns on sustainability. The possible continuing effects of the crisis on the budgetary position and on medium-term growth are a serious concern for most of the countries exposed to high long-term sustainability risks – in particular, 
European Commission 
Sustainability Report - 2009 
 
6 Ireland, Greece, Latvia, Spain and United Kingdom – for whom avoiding 
exponentially increasing debts is a po licy challenge already in a medium-
term perspective. 
The report is structured as follows. Chapter I introduces the concept of 
sustainability and discusses how it will be measured. It introduces the additional difficulties that demographic changes and the fiscal costs of the crisis poses to sustainability. Chapte r II presents data on projected 
demographics in the EU for the years until 2060, and the projected increases in a number of age-related expenditure  categories. Chapter III presents the 
results of the sustainability analysis in the form of the S1 and S2 indicators and breaks the results down in their constituent parts. It compares the results with those presented in the 2006 Sustainability Report and considers the cost of delaying action. Chapter IV consider s the effect that the economic crisis 
might have on sustainability and by presenting the effect that alternative post-crisis macroeconomic scenarios might have. It considers the impact that 
consolidation in line with the existing medium term budgetary objectives would have, if undertaken once the ec onomies are firmly in the recovery 
phase. Finally it presents a sensitivity analysis which considers how different underlying assumptions would affect the value of the S2 indicator. Chapter V discusses other factors that affect sustainability but which do not directly enter the calculation of the indicators. These are the additional risk of debt 
and the value of government assets, the level of pensions and the social and political risks that these may entail, the role of contingent liabilities and the implications that different levels of existing tax ratios have for governments' policy choices. Chapter VI presents an  overall classification of countries 
according to the long-term sustainability risks that they face, while detailed 
data, and discussion of the results, for each Member State is set out in 
Chapter VII. 
 
  
Chapter I 
Sustainability of public finances 
  

SUMMARY 
 
9 The crisis-related fiscal expansions and the ageing 
of European Union's population raise questions about the sustainability of the Member States' public finances. As the share of working age people in the population falls and the share of the old increases, economies are faced with lower economic growth and higher  costs associated with 
providing services for the ageing population. This results in pressure on the public finances; bold measures will be necessary  to ensure that they 
return to a sustainable foo ting before the full effect 
of ageing is felt. 
Sustainability relates to the ability of a government 
to assume the financial burden of its debt currently and in the future. While there is no one clear-cut definition of a sustainable fiscal position, this chapter defines two sustainability gap indicators which are most widely used in the EU to measure the sustainability challenges that Member States face. These are: 
The S1 indicator shows the durable adjustment to 
the current primary balance required to reach a target debt of 60% of GDP in 2060, including paying for any additional expenditure arising from an ageing population. 
The S2 indicator shows the durable adjustment of 
the current primary balance required to fulfil the infinite horizon intertemporal budget constraints, including paying for any additional expenditure arising from an ag eing population. 
The sustainability indicators quantify the required 
permanent budgetary adjustment (e.g. a durable reduction of non age-related public expenditure as a share of GDP or a cons tant increase in public 
revenue as a share of GDP) to ensure the sustainability of the public finances. The sustainability indicators provide a firm basis to identify the size and the ma in source of risks to 
public finance sustainability in the EU Member States in a long-term perspective. They can be decomposed into a part that relates to the starting fiscal position and a part that relates to the additional costs of an ageing population. Decomposing them in this way gives additional information about the nature of the policy response that is appropriate. In pa rticular, where the costs of 
ageing are a significant  risk factor to the 
sustainability of the public finances, the case for reforming the social pr otection systems becomes strong. The sustainability indicators also provide 
information on the cost that would result from a delay in addressing the long-term sustainability issues.  
The analysis in this re port uses the projected 
changes in age-related expenditure from the Commission and EPC’s 2009 Ageing Report. It considers the additional expenditure on pensions, healthcare and long-ter m care that population 
forecasts entail, as well as the potentially offsetting effect of changes to ed ucation expenditure and 
unemployment benefits. The different social protection structures and demographic trends of the Member States mean th at such expenditure is 
expected to evolve in very different ways across countries. 
The analysis undertaken in this report takes the 
2009 fiscal position as a basis and projects the trajectory of the public finances on a partial equilibrium basis. All projections are done on a ‘no policy change’ assumption, whereby it is assumed that already approved legislation continues to apply, but th at most tax receipts and 
spending stay constant as a share of GDP over the long term. This assumption of unchanged polices over the whole projection period is not adopted for reasons of realism, but becau se it is the assumption 
that allows a robust assessment of the required remedial action to avoid that the EU public finances enter in an exponentially increasing debt spiral. 
1. DEFINING SUSTAINABILITY 
 
10 1.1. WHAT IS MEANT BY THE SUSTAINABILITY 
OF THE PUBLIC FINANCES 
The concept of the sustainability of the public 
finances relates to the ability of a government to assume the financial burden of its debt currently and going forward. There is no clear-cut definition of a sustainable fiscal position, though the concept is rather intuitive. At a first instance it involves a debt level that does not entail – either now or in the foreseeable future – interest payments so large that they cannot be paid.  
A first way of writing down the widest definition 
of sustainability is to look at the solvency condition for the general government through the government’s inter-temporal budget constraint. (
1) 
This considers the ability of the government to meet the costs of its debt through future revenues. The intertemporal budget constraint is satisfied if the projected outflows of the government (current public debt and the discounted value of all future expenditure, including th e projected increase in 
age-related expenditure) are covered by the discounted value of all future government revenue. This is equivalent to saying that the government must run sufficiently large primary surpluses (receipts minus spending excluding interest payments) going forward to cover the cost of servicing its debt.  
The intertemporal budget constraint is most often 
considered over an infinite horizon with no implications about when the primary surpluses should be larger or smaller, nor what balance of expenditure and receipts they  should be driven by. 
Nor does it imply that that the debt should stand at a particular finite value at any given point in time. As such it could, theoretically, be satisfied by very high levels of debt and, therefore, very high interest payments, in the short term or at any time horizon, as long as there is reason to believe that 
                                                          
 
(1) ∑∞
+=−=
+−
100 00
)1( ttttt
trPBD 
where D t0 is gross debt as a share of GDP in the year before 
the long-term projections, PB t is the structural primary 
balance (receipts minus spending excluding debt interest 
payments) at time t and r  is the differential between the 
nominal interest rate and the nominal GDP growth rate.  sufficiently large primary surpluses will be 
achieved afterwards. 
While the infinite horizon gives a comprehensive 
picture of the sustainability of the public finances, it can prove weak from a policy point of view due to its lack of immediacy and raises issues of time consistency. Alternatively, a finite version of the budget constraint can be defined, by setting a target date and a target debt level and considering whether and how this can be achieved. The choice of target date reflects th e aim of the exercise in 
terms of how it is expected to guide policy. By picking a short timescale, the requirements placed on the government are stronger as there is little possibility of adjusting the fiscal position in the future to ensure that this budget constraint is met, though some challenges (such as the demographic developments and potential growth after the target date) are disregarded. Conve rsely, the further away 
the target date, the more  abstract the exercise 
becomes as a guide to policymakers, and the more relevant time consistency issues become. By choosing too high a target debt level, there is the possibility that sustainability is compromised in the period beyond the target date, while choosing too low a debt level can implicitly impose an undue burden on current taxpayers versus those in the more distant future. In this report, the target date is 2060 – ten years more than 2050, the target date in the Commission’s previous Sustainability Report. (
2) The target level of debt is 60 % of 
GDP, which is the threshold for the general government gross debt in the EC Treaty. 
The analysis presented in this report aims to 
provide an estimate of  whether the current 
budgetary position in the Member States presents a sustainability gap going forward, once the effects of an ageing population are taken into account. The analysis aims to aid the understanding of the 
choices the governments of the Member States face over the long term a nd to inform the debate 
about the magnitude of changes that need to be considered.  
                                                          
 
(2) ‘Long-Term Sustainability of P ublic Finances in the EU,’ 
European Economy , 4/2006 and respective Commission 
communication , COM (2006) 574 final, 12 October 2006.  
Chapter I 
Sustainability of public finances 
 
11 1.2. DEFINING THE SUSTAINABILITY 
INDICATORS 
In this report sustainability is assessed using 
current levels of gross government debt, the primary balance in structural terms ( i. e. the 
cyclically-adjusted primary balance and removing one-off transactions) and expected additional costs arising from ageing to s ee whether an infinite and 
a finite version of the intertemporal budget constraint are met. The gr eater the expected costs 
of ageing, the harder it is for the intertemporal constraints to be met, other things being equal, as the current primary balance will need to be sufficiently large to acco unt for these additional 
future costs. Correspondin g to each version of the 
budget constraint – over an finite or infinite 
horizon – two sustainability gap indicators are derived, showing the size of the permanent budget adjustment required to ensure that the constraints are met.  
The S1 indicator shows the durable adjustment to 
the structural primary bala nce required to reach a 
target debt of 60% of GDP in 2060, including paying for any additional expenditure from now to the target date, arising from an ageing population. 
The choice of the debt target for the S1 indicator is 
in line with the debt threshold in the Treaty. The timescale has been chosen to be long enough to 
allow the impact of agei ng to be analysed in a 
meaningful way, while still remaining within the sights of current taxpayers and policy makers. 
The S2 indicator shows the adjustment to the 
structural primary balance required to fulfil the infinite horizon intertemporal budget constraint, including paying for any additional expenditure arising from an ag eing population. 
1.3. INTERPRETING THE SUSTAINABILITY 
INDICATORS 
The sustainability indicators quantify the gap that 
must be closed to ensure the sustainability of the public finances. The larger the value of the gap indicators, the greater is the necessary adjustment 
to the structural primary balance to ensure sustainability. A negative value indicates that the intertemporal budget c onstraint is met; even deterioration in the primary balance could allow 
the constraint to be met. 
The indicators do not provide any guide as to how 
the adjustment should ta ke place. Although  the 
sustainability indicators are sometimes referred to as tax gaps, the necessary adjustments could occur 
as result of an increase in government receipts (usually through higher direct or indirect taxes), a reduction in non age related spending, or through policy responses aimed at reducing the cost of ageing. The choice of measure, or combination of measures, may itself have an impact on the economy or on fiscal sustainability. For example, a large increase in the tax burden to fill the sustainability gap may itself lead to deterioration in the economy’s growth prospects, with consequences for sustainability. 
The sustainability gap indicators are one way of 
presenting the results of the sustainability analysis. An alternative would be to look at the future level of debt assuming no policy action in response to the sustainability imbalances. This exercise is also presented later in the report, showing a more cumulative or ‘stock assessment’ of the challenge faced by each Member State. 
The required primary balance (RPB) is another 
indicator used to present the sustainability situation. The RPB indicates the starting budgetary position which, if attained, ensures the sustainability of the public finances under no policy change assumptions. Unlike the S2 indicator, it is a level for the budgetary position, rather than a gap. It is important to note that the RPB is not a static indicator. For a country that has reached its RPB (so with a S2 gap which is zero and which is projected to  remain zero), the actual 
and required primary balance will progressively deteriorate given the increase in ageing-related expenditure, though sustainability is ensured. 
Where the actual (or planned for the medium term) 
budgetary balance is equal or more positive than the RPB, the public finances are sustainable. The opposite is true where the actual or planned budgetary balance is smalle r or more negative than 
the RPB. In practice, th e RPB is often calculated 
as the projected average st ructural primary balance 
over several years. In this report it is given for the first five years after the Commission Spring 2009 forecast horizon (2011–15). Like the sustainability 
European Commission 
Sustainability Report - 2009 
 
12 gaps (S1 and S2), the RPB does not provide firm 
guidance on which policy measures (such as tax increases, spending cuts or reforms in social protection) are required to return to sustainable public finances. However, when the RPB is so large that it is not realistic, medium-term fiscal consolidation via tax or spending measures will not be enough and reform of the demographic-driven spending categories (notably public pensions and healthcare) appear indispensable. 
1.4. OTHER CONCEPTS OF SUSTAINABILITY 
Depending on the public policy interest, other concepts of sustainability exist. For example, concepts of political or social sustainability or of inter-generational equity would be assessed using a different approach to that pursued in this report. Debt involves the deferral of payments to future taxpayers and restricts choice about how to spend the products of their labour and investment. Questions about inter-generational equity, therefore, also need to be considered by policy makers. It might, for example, be informative to look at the marginal benefit to future taxpayers of the expenditure financed through debt whose repayment may fall on them. For small economies outside the monetary union, the currency denomination of debt and whether debt is held internally or externally may also be important. 
Moreover, while a given level of debt may not be 
unbearable, the budgetary pressures caused by the debt burden can create political incentives for governments to default on their debt, either explicitly or through inflation. The EU, and in particular, the euro area countries, is well equipped to resist pressures to inflate away government 
debts. 
2. DERIVING THE SUSTAINABILITY INDICATORS 
 
13 The sustainability indicators, S1 and S2, show the 
gap between the curr ent budgetary position 
expressed in terms of the structural balance and that required to ensure sustainability.  
Table II.2.1 breaks the indicators down into the 
three factors that the gap depends on, and the three corresponding components of the indicators. It shows that the initial budgetary position and the long term costs of ageing  affect both indicators 
directly, while the S1 indicator is also directly affected by the starting level of debt relative to the 60% target for 2060. In the results shown in later sections of this report, the contribution of these three components is considered in detail. 
2.1. REQUIRED ADJUSTMENT GIVEN THE 
INITIAL BUDGETARY POSITION 
Irrespective of the increase in government 
expenditure due to projected demographic developments, the public finances of a given country may be unsustainable if the initial structural primary balance,  the projected interest 
payments and economic growth imply an ever increasing debt ratio. Thus, the first component of the S1 and S2 indicators corresponds to the gap between the initial structural primary balance and the debt-stabilising primary surplus. This component is referred to as the required 
adjustment given the initial budgetary position , or 
simply IBP. (
3) 
In order to correctly account for the contribution of 
the budget balance at the starting year, it is 
important to consider the underlying fiscal position, rather than the actual value of the government surplus or deficit published by the statisticians. This means adjusting the starting balance for the effect of the business cycle and temporary measures, such as one-off expenditure 
                                                          
 
(3) As the size of this component depends on expected growth 
and interest rates, it is not necessarily the case that it will 
have the same magnitude in the S1 and S2 indicators, as 
expected growth and interest rates might vary over time. However, in practice IBP (S1) an IBP (S2) are quite close 
to each other. Moreover, also because of the expected 
movements in growth and interest rates, including those of a cyclical nature, the concept of ‘debt stabilisation’ should 
be understood in a long-term perspective and not year by 
year. and revenues, to derive the structural balance. This 
report usually uses the forecasts for 2009, as published in the European Commission 2009 spring Forecasts, for the starting position of the 
both the structural balance and debt level. 
Correctly estimating the stru ctural balance requires 
an estimation of the position of the economic activity relative to its potential, the so-called output gap, and an estimation of the effect of the economic cycles on government revenues and spending. (
4) Cyclical adjustment always entails a 
certain level of imprecision. However, under the current circumstances, with the European economy in the early phases of recovery after a deep financial and economic crisis, the inherent difficulties are unusually large. First, it is difficult to correctly judge the position of the output gap. In the light of possible st ructural changes, the 
potential output of today, as well as its trajectory in the future contains a substantial element of uncertainty. These factors act  to compound the fact 
that tax elasticities tend to vary over the economic cycle and that they are implicitly affected by asset price changes which are difficult to model or predict. The nature of the crisis has been such that the element of uncertainty linked to judging the initial budgetary position and its contribution to sustainability over time is of particular significance.   
The forecast trajectory of economic growth over 
the medium- and long-term is a crucial factor in determining the impact of the initial budgetary position and debt on sustainability, and the required adjustment given the initial budgetary position. As this trajectory is particularly uncertain 
given the economic and financial crisis, Chapter IV derives alternative estimates for the sustainability indicators under alternative scenario.  
                                                          
 
(4) Cycles in assets prices may also be relevant in estimating 
the structural balance, though they are usually not 
considered explicitly in most structural adjustment 
methods. 
European Commission 
Sustainability Report - 2009 
 
14 2.2. THE DEBT REQUIREMENT BY 2060 
The starting level of debt enters the definition of 
both indicators through the initial budgetary position, as it determines the size of interest payments on government debt that must be covered. In the case of the S1 indicator only, the size of adjustment required also directly depends on the debt requirement set at end of the time period (60% of GDP in 2060). For countries with starting government gross debt above 60% of GDP the required adjustment to reach the target debt by 
2060  (DR) term will increase the size of the 
indicator as the effort of debt reduction by 2060 needs to be considered. For countries with current debt of below 60%, the DR component will be negative and reduce the S1 indicator.  
The current financial and economic crisis, adds an 
element of uncertainty to the DR estimate too. The 
estimates presented later in the report use debt from 2009 as the base. Yet with the historically large deficit ratios being recorded in several European countries, in so me cases up to 10% of 
GDP, the increase in debt likely to be seen over the next couple of years could lead to very different estimates of the contribution of the debt component to the S1 indicator. Moreover, the accumulation of financial assets – such as shares, other equity or loans, as part of the bail out of banks and other entities heavily hit by the crisis – by governments also implies that the government gross debts of several countries are increasing 
much faster than implicit by the deficit (
5). 
2.3. THE REQUIRED ADJUSTMENT GIVEN THE 
INCREASE IN AGE-RELATED COSTS 
Finally, both S1 and S2 include a component 
which corresponds to the required adjustment due 
to the long-term changes in government expenditure (or simply, LTC). The third 
component of both indicat ors is the additional 
adjustment required as a result of these expenses either to 2060 or over an infinite horizon. The magnitude of the LTC component depends on both the demographic outlook for countries and their social protection arrangements. The LTC component represents either the change required to pay for the additional expenses or the size of a structural reform (
6) to social protection schemes 
to avoid the increase that would otherwise ensue. 
The size of this component is likely to vary 
between the S1 and S2 indicators. The larger the part of the expected agei ng of the population that 
is to occur in the short- rather than medium-term 
                                                          
 
(5) See European Commission (2009), ‘Public Finances in 
EMU-2009’, chapter II-1, European Economy , 5, for more 
details on how government transactions to bail out banks 
and other entities hit by the crisis are recorded in 
government accounts – in particular with respect to the government deficit and debt. See also Eurostat News 
Release  103/2009 of 15 July 2009: ‘The statistical 
recording of public interven tions to support financial 
institutions and financial markets during the financial 
crisis.’  
(
6) The size of a structural reform to social protection schemes 
(such as public pensions and healthcare) means here the 
discounted sum of the spending savings implied by that 
reform.  
Table I.2.1:  Summarising the indicators 
 Required adjustment given the 
initial budgetary position (IBP)Required adjustment to reach 
debt to GDP ratio of 60% in 
2060 (DR)Required adjustment due to 
long-term changes in the 
primar y balance (LTC )
S1= Gap to the debt-stabilising 
primary balance+ Additional adjustment required 
to reach a debt target of 60% 
of GDP in 2060+ Additional adjustment required 
to finance the increase in 
public expenditure due to 
ageing up to 2060
S2= Gap to the debt-stabilising 
primary balance+ 0 + Additional adjustment required 
to finance the increase in 
public expenditure due to 
ageing over an infinite horizon
Source:  Commission services 
 
Chapter I 
Sustainability of public finances 
 
15 future, the larger the imp act on the S1 indicator 
relative to the S2 indicator. Conversely, if the costs of an ageing population are mainly borne closer to 2060 than now, the larger the relative impact of ageing on the S2 indicator.  
The economic crisis has an impact on LTC in so 
far as the crisis leads to a durable fall in potential growth, and indirectly on several government outlay that somehow depend on growth. Moreover, the shock to asset prices and asset returns also impact on the net costs of providing pension for the pension schemes that control large assets. 
2.4. POLICY IMPLICATIONS 
The decomposition of the indicators allows an analysis of the driving forces behind the results summarised by the indicators. The same overall sustainability gap may be the result of either the current fiscal position (see IBP), the level of debt (see DR) or the expected in crease in ageing-related 
expenditure (see LTC). In relation to the latter, comparing LTC components in S1 and S2 ( i.e. the 
finite- and infinite-horizon versions of the sustainability indicators) also allows identification of the urgency in addressing the demographic-related sustainability issues. 
An optimal policy response requires an 
understanding of these issues. For example, a sustainability gap arising primarily from an imbalanced initial budgetary position being insufficient or one that is insufficient to stabilise debt might be easier to rectify politically through tax increases or spendi ng cuts, than one due 
primarily to the costs of ageing. In the latter case, costs on government budgets might only become directly visible in the future and anticipatory remedial action may be more difficult to implement. The overall e fficiency of fiscal 
consolidation approach (increasing taxes or cutting expenditure) or of approaches based on structural reforms of social protection also depends on the source (IBP, DR or LTC) of the sustainability imbalances. 
 
3. ESTIMATING THE COST OF AGEING 
 
16 3.1. PROJECTING AGE-RELATED EXPENDITURE 
An ageing population puts pressure on a country’s 
finances primarily through its effects on the labour market and hence economic growth and age-related expenditure. With fewer people being of working age, the potential growth rate of the economy is reduced. These changes affect each of the components of the S1 and S2 indicators, through changes in the estimated rate of economic growth.  
The direct costs of ageing  involve increases in age-
related expenditure. This report uses the estimates of the fiscal impact of these changes as presented 
in the 2009 Ageing Report. (
7) As the aim is to 
provide an estimate of the long-term effect on sustainability of ageing, the analysis takes the figures for age-related costs starting in 2010. The projections are made on a basis of no-policy change assumption where it is assumed that current tax and spending arrangements continue in the future. 
  
The Ageing Report considers the public cost of ageing using five expenditure categories. This report uses the projected changes to these categories to quantify the impact of ageing on the 
sustainability of the public finances. 
Public pensions' expenditure  increases with an 
older population. This category consists of old age pensions and survivors' pensions, early retirement funding, various disability benefits and other items of public expenditure that provide support for those unable to work. The extent to which such expenditure increases depends on both the degree of ageing – the number of  retirees and the average 
length in retirement, which is directly linked with longevity – but also very significantly on the retirement age and the stru cture of the pension and 
support systems in place. Such systems typically constitute a significant portion of the public budget, but their structures vary widely, in terms of 
                                                          
 
(7) ‘2009 Ageing Report’  joint report of the European 
Commission and the EPC, European Economy , 2, and 
Commission Communication ‘Dealing with the Impact of 
an Ageing Population in the EU,’ COM (2009) 180 final, 
21 April 2009. their current generosity and of their dynamic 
properties.  
Healthcare expenditure  is also affected by the 
age structure of the population and the way total health-related costs are split between the government, patients or private insurance bodies. However, the link between age and the cost of healthcare is much less linear than for pensions. Although there is evidence that the consumption of healthcare services by the elderly is substantially larger than that by prime- age adults, an increase in 
life expectancy is typically also accompanied by an increase in the averag e number of healthy years 
and so healthcare costs need not increase in a linear fashion. The reference scenario from the Ageing Report which is used in the baseline results in this report assumes that half the increase in life expectancy is spent in good health. 
Long-term care expenditure  relates to the costs 
associated with helping people carry out daily living activities. This
 is also expected to increase 
with an ageing population.  The increase depends, 
as with the healthcare expenditure, on the ‘quality’ of the ageing, but also crucially on the government support available for individuals less able to look after themselves. There is large variation between Member States in terms of their reliance on informal care (usually provided by family members) which might be difficult to maintain going forward. 
Education expenditure  as a share of GDP tends 
to fall as the population ages, as young people make up a smaller share of the population.  In order to estimate the size of this change, the Ageing Report considers the impact of the change in the number of children and young people on total staff compensation, other costs (such as educational infrastructure) and the cost of direct 
and indirect transfers to students and their households. 
Unemployment benefits  and other benefits for 
those outside the labour market are also expected to put relatively less pressure on government balances, as the higher dependency ratio is likely to result in lower levels of unemployment amongst labour market participants  and greater incentives to 
participate in the labour market for working age individuals. 
Chapter I 
Sustainability of public finances 
 
17 The social protection sy stems in place determine 
how a change in the population translates into costs for government accounts. The projections used for the analysis are presented in Chapter II. Sensitivity scenarios in Chapter IV show the uncertainty involved in projections for these variables and the implications on the different measures of sustainability gaps. 
Neither the Ageing Report nor this report make 
any normative judgement about the efficiency or desirability of Member States' social protection systems – it merely assesses their expected costs. Nor are the second-order effects of these policies on the economy taken into account. For example, inadequate healthcare may reduce the labour market participation of individuals who might otherwise be able and willing to work to an older age. Higher education standards may require higher expenditure but incr ease the efficiency of 
labour force and potential output in the medium to long term. Inadequate provision of formal long-term care may adversely effect the labour market participation of women, which in turn would have a knock-on effect on economic growth.  
3.2. A PARTIAL EQUILIBRIUM ANALYSIS 
The sustainability indicators presented in this report are derived on the basis of a partial equilibrium analysis. A number of assumptions are therefore necessary for estimation to be possible. 
On the real side of the economy, the growth path 
uses the demographic profile to estimate future labour input by making assumptions about the total population, employment rate, the share of the working age population and the average hours 
worked. This is combined with assumptions about total factor productivity (TFP) and capital deepening to reach a for ecast of potential GDP, 
using a production function approach. This depends on demographic developments ( i.e. on 
working age population) but is exogenous relative to public finance and therefore fiscal policy developments. The growth projection does not, therefore, consider the im pact that unsustainable 
fiscal policies or the increas e in tax burden to close 
sustainability gaps may have on economic activity. In the same manner, the real interest rates are set in an exogenous manner at 3% for all Member States, irrespective of the government debt developments 
in the EU, the euro area and globally. 
3.3. UNCHANGED POLICY ASSUMPTION 
The projections assume that social protection 
arrangements remain unchanged going forward,  and that nearly all government revenues and non-age related expenditure stays constant as a share of GDP. This no-policy change assumption is a purely technical assumption. It does not mean that such a scenario is realistic. However it is a necessary assumption, given that the purpose of the exercise is to identify unsustainable fiscal policies and to measure the size of the required remedial action. 
Two components of government revenue form an 
exception to the constant share assumption.  Projections for revenues from pension taxation and property income are modelled separately. In the former case it is because revenues from pension taxation as themselves a consequence of ageing. It is modelled using elasticities of personal income tax revenues with respect to the tax base. This is a technical improvement as compared to the 2006 Sustainability Report where such modelling was not undertaken.  
Moreover, in the 2006 Sustainability Report 
property income was assumed to remain constant as a share of GDP. In addition no accumulation of financial assets (or other components of the stock-flows adjustment (SFA)) were incorporated in the long-run so that the evolution of nominal debt was only driven by the actual government deficit/surplus. These two assumptions are, however, not mutually consistent. A constant ratio-to-GDP of property income would have required a regular accumulation of financial assets, with implications for gross debt developments.  Therefore the assumption of constancy of property income as ratio to GDP in the Sustainability Report of 2006 was, therefore, abandoned.  
The assumption of no accumulation of financial 
assets and, therefore, no SFA assumption is kept in this report. It implies that the nominal value of government-owned financial assets remains constant and so there is a decrease of the share of those assets in GDP.  Under the assumption that nominal returns on assets are constant over time, 
European Commission 
Sustainability Report - 2009 
 
18 property income from those assets also decreases 
as a share of GDP. This is clearly the case for interest-bearing assets (bonds) but also applies to shares and other equity. (
8) 
The increases in age-related expenditure due to 
demographic change are added to a constant level of other public spending as a share of GDP. For 
the years beyond 2060 – the horizon of the available demographic projections – further assumptions are also neces sary in relation to the 
infinite-horizon budgetary constraint and the S2 indicator. Beyond that y ear it is assumed that 
government revenue and primary expenditure, including age-related expenditure, remain constant as a share of GDP, while interest payments evolve in line with debt developments. In so far as the EU population keeps ageing beyond 2060, this assumption implies underestimating the sustainability gap (S2), though the size of such a projection error is minimised by the discounting of all future flows. 
 
                                                          
 
(8) Returns on assets that are currently owned by government 
are recorded as property income , and therefore included in 
government revenue reducing the general government deficit. This is why the cha nge in the primary balances 
implied by the property income projections is included in 
the required adjustment given the initial budgetary position (IBP) term of the sustainability  indicators. More details on 
property income projections and revenue projections from 
pension taxation are included in an appendix. 
Chapter II 
The economic and budgetary implications of 
ageing 
  

SUMMARY 
 
21 An increase in life expectancy, alongside a fall in 
fertility rates is leading to an accelerated ageing of the population in the EU and other parts of the world. Over the years to 2060, the time period covered by this report, the EU population is set to age further. Aside from the social consequences, 
population ageing has significant economic consequences due to a reduction in the working age population and an increase in government expenditure related to ageing. 
Population ageing is not a new phenomenon in the 
European Union. Alre ady, increased life 
expectancy and falling fertility rates have led to a change in the demographic structure. Over the next 50 years, the phenomenon of an ageing population 
is projected to intensify with life expectancy increasing by 7 years for women and 8 ½ years for men, on average. Alongside this, fertility rates are projected to pick up some what from their current 
level of 1.5 children per woman, to 1.6. They will therefore remain well below the stable population level of 2.1, thus contributing to a falling population. A continuation of net migration into the European Union should alleviate some of the effects of increased longev ity and low birth rates, 
but this too is projected to slow, albeit with great uncertainty underpinning the projections. 
These changes in the population structure have 
significant economic consequences, stemming mainly from a reduction in the working age population and an increase in the number of elderly people requiring s upport. Overall, the old 
age dependency ratio defined as the population aged 65 or over as a per centage of the population 
aged 15 to 64, is projected  to increase from 25% in 
2007 to 54% in 2060. In parallel, the number of individuals aged 15 to 64 is set to fall from 332 million in 2007 to 283 million by 2060. 
A decrease in the number of people of working age 
reduces the potential economic growth rate of a country. For the EU – before considering any durable impact on medium- to long-term growth of crisis which is discussed in chapter IV – potential growth is forecast to fall from 2.4% per annum over 2007–20 to 1.3% over 2041–60. 
Aside from the effect on economic growth, an 
ageing population also entails additional government expenditure in terms of public provision of age-related transfers and services. The fiscal impact of ageing is therefore projected to be 
substantial in almost all Member States; these costs will accelerate signific antly over the course 
of the next decade.  
An elderly population requires support in the form 
of pensions, healthcare and long-term care. Of these, old-age pension provision is currently the most significant budget item, although its share of GDP varies widely, ranging from 5% in Latvia to 14% in Italy. By 2060, the Member States' public finances would face spending increases of 2.3 percentage points of GDP, on average, on the basis of current pension structures. The size of the increase differs significan tly across Member States 
and pension reforms enact ed in a number of 
countries are bringing positive results in terms of expenditure containment and sustainability of public finances. Almost all Member States have tightened the eligibility requirements for receiving a public pension, mainly by raising the retirement age and restricting access to early retirement schemes.  
Once projected spending on healthcare and long-
term care has been added, and the decreases in unemployment benefit and education expenditure have been netted out, age-related expenditure over the EU is forecast to rise by 4½  percentage points of GDP by 2060, from a base of 23¼% of GDP (projected for 2010). However, while Poland is expecting a reduction in age-related expenditure, 
Greece and Luxembourg are forecast to have increases of over 15 percentage points of GDP, with all other countries lying between these two extremes. 
    
1. THE EFFECT OF DEMOGRAPHIC CHANGES 
 
22 An increase in life expectancy, alongside a fall in 
fertility rates is leading to an accelerated ageing of the population in the EU and other parts of the world. Over the years to 2060, the time period covered by this report, the EU population is set to age further. Aside from several social consequences, population ageing has significant economic consequences due to a reduction in the working age population and an increase in government expenditure. 
This chapter looks at population projections that 
underpin this report and considers the way in which they are likely to a ffect the economies of the 
Member States of the European Union.  
1.1. POPULATION AGEING 
Population ageing is a phenomenon that the Member States are already familiar with, but whose consequences are yet to be felt in full force. 
Already, the European Union has experienced an ageing of its population through an increase in life expectancy and a fall in fertility rates. This can be seen in graphs II.1.1 and II.1.2. 
Graph II.1.1:  Life expectancy at birth, 1960 to 2008, selected 
countries (males and females) 
606570758085
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005BE BG CZ GR
HU PT SK FR
Source:  Eurostat. 
Graph II.1.1 shows life ex pectancy at birth for 
eight selected EU Member States from 1961 to 2008. Although there is variation between countries the overall trend is clear. The overall effect is set to intensify over the years to 2060, the years covered by this report. The figures underpinning the analysis in this report are the 
Eurostat population projections EUROPOP 2008. (
9) 
Life expectancy is project ed to continue changing 
over the next 50 years (see Table II.1.1), continuing the trend of in creases in life expectancy 
in all Member States for several decades. Life expectancy at birth for women is projected to increase from 82.1 years in  2008 to 89.0 years by 
2060, while for men it is set to increase from 76.0 years to 84.5. Overall, it is in countries that currently have lower lif e expectancy that the 
increase is projected to  be greatest as the 
projections assume a catching up in life expectancy. 
Graph II.1.2:  Fertility rates, 1960-2008, selected Member States 
 
11.522.533.54
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
BE BG CZ GR
HU PT SK FR
Source:  Eurostat. 
Fertility in the EU has declined sharply in past 
decades. The total fertility rate, defined as the average number of births per woman, has fallen from a ‘baby boom’ level of 2.5 in the late 1960s to 1.5 in 2008, on average for the EU as a whole. Graph II.1.2 shows the evol ution of fertility rate in 
eight selected EU Member  States over the years 
1961 to 2008; the decline over the years is evident to see.  
                                                          
 
(9) See Giannakouris, K. (2008), ‘Ageing characterises the 
demographic perspectives of the European societies’, 
Eurostat Statistics in Focus , 78/2008.. 
Chapter II 
The economic and budgetary implications of ageing 
 
23  
Table II.1.1:  Demographic projections for the EU countries 
2008 2060 2008 2060 2008 2060 2008 2060
BE 1.8 1.8 82.3 88.9 76.7 84.4 0.5 0.2
BG 1.4 1.6 76.7 86.5 69.7 81.6 0.0 0.0
CZ 1.3 1.5 80.2 87.8 73.9 83.2 0.2 0.2
DK 1.9 1.9 81.0 88.4 76.4 84.3 0.2 0.1
DE 1.3 1.5 82.6 89.1 77.3 84.9 0.2 0.2
EE 1.6 1.7 78.7 87.5 68.0 80.8 0.0 0.0
IE 1.9 1.9 81.9 89.2 77.5 85.2 1.4 0.1
EL 1.4 1.6 82.6 88.7 77.4 84.8 0.4 0.2
ES 1.4 1.6 83.9 89.6 77.4 84.9 1.4 0.3
FR 2.0 1.9 84.3 90.1 77.5 85.1 0.2 0.1
IT 1.4 1.6 84.2 90.0 78.5 85.5 0.4 0.3
CY 1.5 1.6 81.7 88.7 78.2 85.2 1.2 0.4
LV 1.4 1.5 76.7 86.8 66.0 80.5 0.0 0.0
LT 1.4 1.5 77.4 86.9 65.9 80.5 -0.1 0.0
LU 1.7 1.7 81.2 88.5 76.3 84.5 0.9 0.4
HU 1.4 1.5 78.1 87.3 69.7 81.9 0.2 0.2
MT 1.4 1.6 81.1 88.6 76.0 84.3 0.2 0.2
NL 1.7 1.8 82.2 88.9 77.9 84.9 0.0 0.1
AT 1.4 1.6 82.9 89.2 77.4 84.9 0.4 0.2
PL 1.3 1.5 79.9 88.0 71.4 82.5 0.0 0.0
PT 1.4 1.5 82.4 88.8 75.8 84.1 0.5 0.3
RO 1.3 1.5 76.6 86.6 69.8 81.9 0.0 0.0
SI 1.3 1.5 81.9 88.8 74.7 83.7 0.3 0.1
SK 1.3 1.5 78.7 87.4 70.9 82.0 0.1 0.1
FI 1.8 1.8 83.1 89.3 76.1 84.3 0.2 0.1
SE 1.9 1.9 83.1 89.3 79.0 85.4 0.5 0.1
UK 1.9 1.8 81.5 88.9 77.4 85.0 0.3 0.1
EU-27 1.5 1.6 82.1 89.0 76.0 84.5 0.3 0.2
EA 1.5 1.7 82.3 89.0 76.6 84.6MalesLife expectancy at birth Fertility rate
Females (briths per woman)Net annual migration flow (as 
% of population)
Source:  Eurostat, EUROPOP 2008. 
 
Graph II.1.3:  Population pyramids (in thousa nds) for EU27 in 2008 and 2060 
Source:    Eurostat, EUROPOP 2008 
European Commission 
Sustainability Report - 2009 
 
24 The fertility rates for all the countries in the 
European Union are shown in Table II.1.1, including the Eurostat projections for 2060. It shows that in all countries  in the EU, the fertility 
rate is currently below the population replacement rate of 2.1 (the fertility rate that keeps the population constant), but is set to increase in most countries, to reach a sl ightly higher average 
fertility rate of 1.6 by 2060. Despite the projected increase, fertility is projected to remain below the replacement rate for all countries.  
The third factor in population projections is 
migration. Over time, Europe has become a destination for migrants, although there have been marked differences in the trends between countries. While the large Western European countries were the traditional destinations for migrants, in recent y ears some traditional 
emigration countries in Southern Europe have become receiving countries , while many countries 
in Central and Eastern Europe are currently source and destination countries. 
Although migration flows are the hardest to 
predict, as they depend not only on the socio-economic situation in the EU, but also in third countries, projections for net migration are also presented in Table II.1.1 By 2060, migration into the EU is set to fall from a net annual inflow of 0.3% of the EU population to 0.2%. Overall, cumulative net migration is projected to add up to 59 million people from 2008 to 2060, of which 46 million are expected to arrive in the 16 countries that currently constitute the euro area. 
While the demographic developments differ from 
country to country the overall size of the EU population is projected to remain the same in 2060 as today, due to the slight rebound in fertility and relatively dynamic immigration flows. The age distribution of the populati on is forecast to differ 
markedly however. 
The population distribution is shown in the age 
pyramids in Graph II.1.3, while the projected change of main population groups are shown in more detail by Member State in Graph II.1.4. 
Chapter II 
The economic and budgetary implications of ageing 
 
25 Graph II.1.4:  Projected change of main population gro ups (in % change over the period 2008-2060) 
Children
-45 -25 -5 1 5 35SKROPLLTBGLVHUMTDECZEESINLITPTGREU27EAFIDKATESFRBESEUKIELUCYWorking age population
-45 -25 -5 1 5 35BGLVLTPLROSKSIEEHUCZDEMTGRITEU27FINLEAPTESATDKBEFRSEUKIELUCY
Elderly
0 50 1 00 1 50 200 250DEBGLVEEITLTGRHUFIEADKEU27BESEFRSIATRONLPTUKCZPLESMTLUSKIECYVery old
0 50 100 150 200 250 300 350 400SEDELVUKFREEBEFIBGDKATITEALTEU25NLHUPTGRSIPLESCZMTROLUSKCYIE
 
Source:    Eurostat, EUROPOP 2008. 
European Commission 
Sustainability Report - 2009 
 
26 1.2. LABOUR FORCE PROJECTIONS 
The economic consequences of the expected 
change in population structure stem mainly from a reduction in the working age population and an increase in the number of elderly people requiring support. Overall, the old-age dependency ratio, defined as the population aged 65 or over as a percentage of the population aged 15 to 64, is projected to increase from  25% in 2007 to 54% in 
2060. In parallel, the number of individuals aged 15 to 64 is set to fall from 331.9 million in 2007 to 283.3 million by 2060. 
Graph II.1.5 shows the pr ojected trajectory of the 
working age population and total employment for 2007 to 2060. The figures come from the 2009 Ageing Report, which calculates the economic consequences of an ageing  population for the years 
until 2060. The data provided in that report forms the basis for analysis the impact of ageing on the 
public finances in this report. 
The graph shows that the working age population 
is forecast to increase until 2013 and then start to 
fall. The labour market participation rate is projected to increase from 70½% in 2007 to 74% in 2060 for the EU as a whole, most of which will materialise before 2020. The gap between male and female participation rates is expected to narrow gradually, especially  in countries where it 
is currently large. Overall, employment rates are expected to increase from 65½% in 2007 to about 
70% in 2060. Within this total, the employment rate of older workers is expected to grow substantially as a result of reforms aimed at prolonging working life in many Member States, and the projected improvement in health conditions of those above 65. These reforms have been enacted to counter so me of the increase in 
costs that will materialise as the population ages. Overall, however, employment in the EU is projected to shrink by about 19 million people by the year 2060. Increasing la bour force participation 
rates in most countries and higher net immigration levels in some will only moderate the fall in employment due to the shrinking working age population over the period from 2020 to 2060. 1.3. LABOUR PRODUCTIVITY AND POTENTIAL 
GROWTH 
Economic growth is determined by the increase in 
the number of people in production and the increase in their productivity. A slow down or decrease in employment will  therefore act to lower 
economic growth unless pr oductivity accelerates.  
Graph II.1.6 shows the forecast for potential 
economic growth in the EU from 2007 to 2060, broken down into three time periods.  (
10). In the 
baseline scenario, the for ecast is for potential GDP 
growth to average 2.4% for the years 2007–20, of which 0.6% is due to the forecast increase in 
employment. Thereafter, the decrease in the working age population and employment acts to reduce GDP growth and the only source of 
economic growth will be productivity improvements. Of course, in the light of the financial crisis, the outlook for at least the short term is now likely to be considerably lower than the baseline.  
As a result of declining labour input, productivity 
will eventually be the only source of future economic growth. The assumption used in the potential GDP forecasts is that Member States' labour productivity growth would converge to a long-term historical averag e in the EU of 1¾% per 
annum, close to that recorded in the US and the EU over the very long term. As a result, the annual potential GDP growth rate would decline significantly on account of the shrinking working-age population, which will act as a drag on growth and on per capita income. By the 2041–60 period, GDP growth is forecast to average 1.3% per annum. 
 
                                                          
 
(10) The figures do not take account any durable impact of the 
financial crisis on medium- to long-term potential growth, 
which is discussed in detail in Chapter IV. 
Chapter II 
The economic and budgetary implications of ageing 
 
27   Graph II.1.5:  Population of working-age and total employment, EU27 
180200220240260280300320340
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
20552058636465666768697071w orking-age population total employment employment rate
until 201 2:
rising  
employ
ment
and slow growth in 
wo rking-
age 
population201 3-201 9:
rising  
employment,  
declining 
working-age 
populationfrom 2020 onward:
both  employment  and working-age population decline
Source:   Commission services, EPC. 
Graph II.1.6:  Decomposition of GDP growth, EU27, ( annual average growth rate) 
EU27
-1.00.01.02.03.04.05.0
2007-20 2021-40 2041-60Labour productivity growth and
Labour growth
-1.00.01.02.03.04.05.0
GDP growth
Labour productivity growth Labour growth
GDP growth GDP per capita growth
Si 1 4 Si 1 5
Source:   Commission services, EPC. 
European Commission 
Sustainability Report - 2009 
 
28 Graph II.1.6 also shows GDP growth per capita.  It 
shows that over the three time periods displayed, this goes from being lower than overall growth until 2020, to being higher after 2040. This is because the overall population falls and results in living standards growing by more than the headline GDP growth figures indicate.   
1.4. BUDGETARY PROJECTIONS 
Aside from the effect on economic growth, an 
ageing population also entails additional government expenditure in terms of public provision of age-related transfers and services. The fiscal impact of ageing is therefore projected to be 
substantial in almost all Member States; these costs will accelerate signific antly over the course 
of the next decade.  
In the absence of changes to policy, public pension 
expenditure is projected to increase significantly in most Member States due to the demographic trends with more people retiring and spending more years in retirement thanks to the increase in longevity. However, pension reforms enacted in a number of Member States are bringing positive results in terms of expenditure containment and sustainability of public finances. Almost all Member States have tightened the eligibility requirements for receiving a public pension, mainly by raising the retirement age and restricting access to early retirement schemes. Reforms are also leading to a gradually smaller share of public pension benefits in overall pension provision. Alongside reforming public pensions systems, many countries have introduced, and/or are planning to expand, supplementary funded pension schemes. Overall, public pension spending is set to increase by 2.3 percentage points GDP by 2060, from a base of 10.2% of GDP. This is shown in Table II.1.2 along with the change to other age-
related expenditure items and their projected levels from 2010 on. 
As Table II.1.2 shows, public expenditure on 
health care is projected to grow by 1.4 percentage points of GDP in the EU by 2060 from a base of just under 7% of GDP. The increase in living standard conditions is an important driver of healthcare costs, aff ecting the demand for 
healthcare mainly through higher expectations on quantity and quality of care to be provided or 
financed by government.  
Analysis of past trends in healthcare expenditure 
suggests that technological developments – new and better treatments (
11) – are responsible for a 
significant part of overall costs growth, which may result in a significant increase in spending which is not fully captured in the projection. (
12) However, 
technological advancement may also have positive effects on reducing costs of medical treatments through efficiency gains (faster and better treatments). There is large uncertainty as to which 
factor will dominate in the future.  
Based on current policies, public spending on 
long-term care is project ed to increase by 1.1   
percentage points of GDP by 2060 due to the fact that the very old (aged 80+) will be the fastest growing age class of the population in the future. But there are upside risks to these costs due to changes in family struct ures, higher labour force 
participation of women and increased geographical mobility.  
Public expenditure on education is also in part 
determined by demographics. The baseline scenario suggests a smal l decrease in the public 
education expenditure ratio over the projection period results solely from changes in the demographic composition (fewer children in the future). However, aside from demographic factors, other factors also affect  education spending and it 
may be that ambitions to increase attainment dominate the savings that demographics can offer. 
                                                          
 
(11) Of course, these new and better treatments are also one of 
the reasons explaining the incr eases in longevity over the 
last decades and projected for the future.  
(12) Sensitivity tests in the 2009  Ageing Report suggest that 
increases in health care expe nditure as a share of GDP 
could be as much as four ti mes higher than in the baseline 
scenario which is presented above over 2010–60. 
Chapter II 
The economic and budgetary implications of ageing 
 
29 The projections on unemployment benefit 
expenditure are based solely on the evolution of the unemployment rates, which stem from the macroeconomic and labour market assumptions. In 
the EU, expenditure on unemployment benefits is projected to fall from 0.8% of GDP in 2007 to 0.6% of GDP in 2060, though large fluctuations may be expected over such a long period. This reduction is mainly driven by the assumption that unemployment rates in all countries with unemployment rates above the EU15 average would converge to the EU15 average by 2020. Indeed, after 2020, only small changes are projected.    
Overall, on the basis of current policies, age-
related public expenditure is projected to increase on average by 4.3 percentage points of GDP by 2060 in the EU – especially through pension, healthcare and long-term care spending. There are 
however marked differences in the impact of ageing across Member States: 
• The increase in government spending in 
ageing-related categories is likely to be very 
significant (7 percentage points of GDP or more) in nine EU Member States 
(Luxembourg, Greece, Slovenia, Cyprus, Malta, the Netherlands, Romania, Spain, and Ireland), although for some countries the large increase will be from a fairly low level. 
• For a second group of countries – Belgium, 
Finland, Czech Republic, Lithuania, Slovakia, 
the United Kingdom, Germany and Hungary – the cost of ageing is more limited, but still very high (between 4 and 7 percentage points of GDP). 
• Finally, the increase is more moderate, 4 
percentage points of GD P or less, in Bulgaria, 
Sweden, Portugal, Austri a, France, Denmark, 
Italy, Latvia, Estonia and Poland. Most of these countries have implemented substantial pension reforms, in several cases also involving a partial switch to private funded pension schemes (Bulgaria, Estonia, Latvia, Poland, and Sweden). 
 The projected increase for the EU as a whole is 
slightly higher than in the long-term projections, considered in the 2006  
Table II.1.2:  Increase in age-related expe nditure, 2010-2060, % of GDP 
2010Change 
2010 to 
2060 2010Change 
2010 to 
2060 2010Change 
2010 to 
2060 2010Change 
2010 to 
2060 2010Change 
2010 to 
2060
BE 10.3 4.5 7.7 1.1 1.5 1.3 7.3 -0.3 26.8 6.6
BG 9.1 2.2 4.8 0.6 0.2 0.2 3.0 0.2 17.1 3.2
CZ 7.1 4.0 6.4 2.0 0.2 0.4 3.3 0.0 17.0 6.3
DK 9.4 -0.2 6.0 0.9 1.8 1.5 8.0 0.1 25.2 2.2
DE 10.2 2.5 7.6 1.6 1.0 1.4 4.6 -0.4 23.3 5.1
EE 6.4 -1.6 5.1 1.1 0.1 0.1 3.2 0.3 14.8 -0.1
IE 5.5 5.9 5.9 1.7 0.9 1.3 5.3 -0.2 17.5 8.7
EL 11.6 12.5 5.1 1.3 1.5 2.1 3.8 0.1 21.9 16.0
ES 8.9 6.2 5.6 1.6 0.7 0.7 4.8 -0.2 20.0 8.3
FR 13.5 0.6 8.2 1.1 1.5 0.7 5.8 -0.2 29.0 2.2
IT 14.0 -0.4 5.9 1.0 1.7 1.2 4.3 -0.2 26.0 1.6
CY 6.9 10.8 2.8 0.6 0.0 0.0 5.8 -0.6 15.5 10.7
LV 5.1 0.0 3.5 0.5 0.4 0.5 3.3 0.3 12.3 1.3
LT 6.5 4.9 4.6 1.0 0.5 0.6 3.5 -0.4 15.1 6.0
LU 8.6 15.3 5.9 1.1 1.4 2.0 4.0 -0.3 19.9 18.2
HU 11.3 2.6 5.8 1.3 0.3 0.4 4.5 -0.3 21.8 4.0
MT 8.3 5.1 4.9 3.1 1.0 1.6 5.0 -0.7 19.2 9.2
NL 6.5 4.0 4.9 0.9 3.5 4.6 5.6 -0.2 20.5 9.4
AT 12.7 1.0 6.6 1.4 1.3 1.2 5.2 -0.2 25.7 3.3
PL 10.8 -2.1 4.1 0.8 0.4 0.7 3.8 -0.6 19.1 -1.1
PT 11.9 1.5 7.3 1.8 0.1 0.1 5.6 -0.4 24.9 2.9
RO 8.4 7.4 3.6 1.3 0.0 0.0 2.7 -0.2 14.7 8.5
SI 10.1 8.5 6.8 1.7 1.2 1.7 5.1 0.7 23.1 12.7
SK 6.6 3.6 5.2 2.1 0.2 0.4 2.9 -0.6 14.9 5.5
FI 10.7 2.6 5.6 0.8 1.9 2.5 6.4 0.0 24.7 5.9
SE 9.6 -0.2 7.3 0.7 3.5 2.2 6.6 0.0 27.1 2.7
UK 6.7 2.5 7.6 1.8 0.8 0.5 4.0 0.0 19.2 4.8
EU-27 10.2 2.3 6.8 1.4 1.3 1.1 4.9 -0.2 23.2 4.6
EA 11.2 2.7 6.8 1.3 1.4 1.3 5.0 -0.2 24.5 5.1Total Pension spending Healthcare Long-term careUnemployment benefits 
and education
Source:   Commission services, EPC. 
 
European Commission 
Sustainability Report - 2009 
 
30 Sustainability Report, in part due to the 
extension of the projection horizon from 2050 to 2060. 
 At Member State level, large downward 
revisions in the budgetary impact of ageing have occurred since the 2006 Sustainability Report in Portugal, Hungary, Denmark and the Czech Republic (reflecting the impact of pension reforms). By contrast, large upward revisions are reported in Greece, Luxembourg, Malta, Estonia, Austria, Poland and Lithuania (reflecting primarily revised projected changes in pension expenditure stemming from reform reversals and improved modelling techniques) (
13). 
 
                                                           
(13) In the case of Greece, the large upward revisions are due to 
the data not being available in time for the previous report. 
Note also that the cases of Bulgaria and Romania were not 
considered in the 2006 report. 
Chapter III 
Quantitative sustainability results 
  

SUMMARY 
 
33 This chapter presents the baseline results of the 
sustainability analysis. The S2 indicator shows a sustainability gap of 6.5% of GDP for the European Union overall, while the S1 shows a gap 
of 5.8%. However there is considerable variation between Member States. While nearly all EU countries display sustainability gaps on both indicators, Denmark and Hungary display no sustainability gaps, and Bulgaria only displays a sustainability gap on the S2, but not on the S1 measure. 
According to the S2 indi cator, of the 25 Member 
States that display a gap, around a fifth require an 
adjustment of below 4% of GDP, a further half below 8% and a third between this and 15% of GDP. 
Most countries have sustainability gaps as a result 
of both an unfavourable starting position for the public finances and due to  the projected increase in 
the cost of ageing. However, a fifth of countries have an underlying fiscal position which would be sustainable over the long term, were it not for the projected increase in age-related expenditure. On average, ½ of the gap is due to the initial fiscal position and another ½ due to the projected increase in age-related expenditure.  
The sustainability gap indicators show the size of 
the permanent adjustment that is required to keep the public finances sustainable. Not making this adjustment would have the short to medium-term effect of increasing debt, before serious sustainability concerns start affecting countries' abilities to raise debt as the perceived long-term risks increase. In the absence of an adjustment, by 2060 the EU government debt-to-GDP ratio could be more than seven times larger than it is now. 
In 2006 the first Commission’s Sustainability 
Report was published. The S2 sustainability gap was 3.4% of GDP for the 25 Member States considered in that report, some 3.1 points lower than in the current report. Aside from some methodological changes, and fresher long-term projections, the recent deterioration in the government deficits and debt levels explains most of the worsened sustainability gaps. 
It is clear that Member States will need to address 
the challenges posed by the sustainability gaps. Depending on the size and the cause of their gaps, Member States will need to find some combination 
of structural reforms of  their social protection 
system that result in a reduction in the cost of ageing, an increase in tax or a reduction in 
spending. Aside from choosing the optimal way of addressing the anticipated  hole in their public 
finances, the timing of policy action is also important, all the more as fiscal policy is playing an important role in pulling the economy out of the crisis. On average, delaying the response by 5 years increases the gap by 0.5 points of GDP, but this cost of delay is much more severe for a number of Member States. This represents additional measures that must be introduced and permanently maintained.  
1. THE SUSTAINABILITY RESULTS 
 
34 This Section presents the results of the 
sustainability analysis in terms of the S1 and S2 indicators and their respective components, as described in Chapter I.  
1.1. THE QUANTITATIVE INDICATORS 
Table III.1.1 shows estimates of the sustainability gap indicators S1 and S2 and decomposes them into their constituent parts. These are: (i) the required adjustment given the initial budgetary position  (IBP), which gives the gap between the 
structural primary balance in 2009 and the long-term debt-stabilising budget balance; (ii) the required adjustment given the long-term change  in 
the budgetary position due to the costs of ageing (LTC), and (iii), the adjustment necessary to reach 
the debt  target of 60% of GDP in 2060. The 
overall change to the share of GDP to be spent on age-related expenditure in 2060 relative to 2010 is also shown, as is the stru ctural primary balance for 
2008 and 2009. 
The S2 indicator shows a sustainability gap of 
6.5% of GDP for EU-27 and of 5.8% of GDP for the Euro Area. This is the permanent adjustment in the primary balance necessary to meet the intertemporal budget constraint over an infinite horizon. The S1 indicator shows a sustainability gap for the EU-27 countries and for the Euro Area, of 5.4% and 4.8% of GDP respectively.  
The decomposition results show that for the EU-27 
countries, the IBP is responsible for 3.3 percentage points (p.p.) of the S2 gap and 3.1 p.p. for the S1 gap. This means that even without taking into account the cost of ageing – that is, assuming that age-related expenditure in government accounts remained constant as a share of GDP – European countries would have to tig hten their fiscal stances, 
in terms of the structural  primary balance, by an 
average of 3.3% of GDP for their public finances to return to a sustainable path. 
LTC contributes 3.2 p.p. to the S2 gap and 2.0 p.p. 
to the S1 gap, with the figures being 3.5 p.p. and 2.4 p.p. respectively for th e Euro Area. This shows 
that the projected increase in ageing-related costs 
has a significant impact on the sustainability position of each. For the S1 gap, the DR ad ds a required adjustment 
of 0.2 p.p. for the EU-27 and 0.3 p.p. for the Euro Area.  
The table also shows the absolute increase in age-
related expenditure until 2060. Overall, for the EU-27, age related expenditure is expected to be 4.4 percentage points of GDP higher in 2060 relative to 2010 and 4.8 percentage points higher for the Euro Area. This is higher than the impact of the LTC due to the discounting of future flows and time-profile of the age-related expenditure, in particular the fact that  moderate increases in 
expenditure are expected in  the early years of the 
projection. The differen ce between the projected 
increase in age-related expenditure and the LTC component of the sustainability gaps is also related to the relationship between the long-term real growth rates and the assumption on real interest rates.  
Within the aggregates  there are significant 
differences across Member States both in terms of the indicators and their constituent components. While nearly all EU countries display sustainability gaps on both indicators, Denmark and Hungary display no sustainability gaps, and Bulgaria only displays a sustainability gap on the S2, but not the S1 measure. In Bulgaria's case this is because its low debt allows some leeway in dealing with the costs of ageing through an 
increase in this debt and because the cost of ageing 
is higher in the more distant future, thus having a larger impact on S2 than on S1. 
Chapter III 
Quantitative sustainability results 
 
35 According to the S2 indi cator, of the 25 Member 
States that display a sustainability gap, around a fifth require an adjustment of below 4% of GDP, a further half below 8% and a third between this and 15% of GDP. In terms of the S1 indicator, of the 24 Member States with a sustainability gap, around a quarter require an adjustment of  below 3½% of GDP, a further half between 3½ and 6½% and a quarter between this and 12½% of GDP. Broadly, the countries displaying significant sustainability gaps on one measure, also display it on the other and, in all cases except Italy, (
14) the sustainability 
gap is greater according to  the S2 than the S1 
indicator. 
                                                           
(14) Due to a series of reforms since 1992 to its pension system, 
Italy is facing a relatively low in crease in the cost of ageing 
with little difference between the LTC contribution to S1 
and S2, but faces a high S1 due to its high debt ratio. The long-term projections for Italy assume, however, that all 
legislated changes in the pe nsion system will be duly 
implemented as planned.  1.2. A GRAPHIC REPRESENTATION OF THE 
SUSTAINABILITY GAP (S2) 
Table III.1.1 shows the decomposition of the S1 
and S2 indicators into their constituent components (IBP, DR and LTC). Using the data for the S2 indicator, Graph III.1.1 depicts the contribution of the IBP and the LTC components. 
The further along the horizontal axis countries are, 
the larger the required adjustment to stabilise the debt ratios given the initial budgetary position (IBP), before considering the long-term costs of ageing. The higher up the vertical axis, the greater the required adjustment due to the long-term change in age-relate d costs (LTC). The 
sustainability gap (S2) is the sum of the vertical and horizontal distances fr om each dot to the solid 
diagonal line. Countries that are northeast of the solid diagonal line have a sustainability gap; the further away from that lin e, the greater their gap. 
Countries that lie southwest of the solid line (in the chart Denmark and Hungary only) have sustainable public financ es, the ageing population 
notwithstanding. The dotted diagonals are ‘isogap’ lines: two countries located on the same line have the same sustainability gap (S2) over an infinite  
Table III.1.1:  Results of the sustainability gap calculations  in the baseline scenario (% of  GDP) 
Structural Structural Change
primary balance primary balance in age-related 
2008 2009 expenditure Total IBP* DR* LTC* Total IBP* LTC*
BE 1.5 0.7 5.9 4.5 0.5 0.6 3.5 5.3 0.6 4.8
BG 1.0 1.1 3.2 -0.6 -0.7 -0.5 0.6 0.9 -0.6 1.5
CZ -2.3 -2.9 6.3 5.3 3.6 -0.3 1.9 7.4 3.7 3.7
DK 5.6 2.8 1.0 -0.6 -1.9 -0.5 1.8 -0.2 -1.6 1.4
DE 1.6 0.6 5.1 3.1 0.8 0.2 2.1 4.2 0.9 3.3
EE -3.9 -0.6 -0.1 0.3 1.0 -0.6 -0.2 1.0 1.1 -0.1
IE -6.4 -7.6 8.7 12.1 8.2 0.2 3.7 15.0 8.3 6.7
EL -2.1 -0.9 16.0 10.8 2.4 0.7 7.7 14.1 2.6 11.5
ES -2.4 -5.2 8.0 9.5 5.9 -0.1 3.6 11.8 6.1 5.7
FR -1.5 -2.7 2.1 5.5 3.8 0.4 1.4 5.6 3.8 1.8
IT 1.7 2.0 1.6 1.9 -0.2 0.7 1.4 1.4 -0.1 1.5
CY 2.9 0.2 10.7 4.6 0.2 -0.3 4.7 8.8 0.5 8.3
LV -4.9 -8.1 1.3 9.4 8.8 -0.2 0.9 9.9 8.9 1.0
LT -4.5 -3.1 6.0 5.4 3.7 -0.3 2.0 7.1 3.9 3.2
LU 2.3 1.2 16.2 6.2 -0.6 -0.8 7.5 12.5 -0.4 12.9
HU -0.3 3.1 3.3 -1.1 -1.9 0.4 0.4 -0.1 -1.6 1.5
MT -1.6 -0.2 9.2 4.7 1.1 0.2 3.4 7.0 1.4 5.7
NL 1.7 0.0 6.7 5.2 1.6 0.0 3.7 6.9 1.9 5.0
AT 0.8 -0.2 4.0 3.8 1.5 0.2 2.2 4.7 1.6 3.1
PL -3.1 -3.1 -1.2 2.9 4.2 0.0 -1.2 3.2 4.4 -1.2
PT -0.9 -2.4 2.8 4.7 3.4 0.3 1.0 5.5 3.7 1.9
RO -7.2 -3.7 8.5 6.9 4.1 -0.4 3.2 9.1 4.3 4.9
SI -1.3 -3.3 12.5 9.2 3.8 -0.3 5.7 12.2 3.9 8.3
SK -3.5 -3.7 5.5 5.7 4.3 -0.3 1.6 7.4 4.5 2.9
FI 4.3 2.1 5.4 2.6 -0.8 -0.3 3.7 4.0 -0.5 4.5
SE 3.4 0.9 2.4 0.5 -0.1 -0.3 0.8 1.8 0.2 1.6
UK -3.3 -7.8 4.8 10.8 8.6 0.2 2.0 12.4 8.8 3.6
EU27 -0.4 -2.0 4.4 5.4 3.1 0.2 2.0 6.5 3.3 3.2
EA 0.2 -0.9 4.8 4.8 2.1 0.3 2.4 5.8 2.3 3.5S1 S2
* IBP = required adjustment given the  initial budgetary position, DR =  adjustment to reach the debt requirement (60% of GDP) in 2060, LTC = 
required adjustment given the lo ng-term change in the primary balance due demographic ageing. 
Source:  Commission services 
 
European Commission 
Sustainability Report - 2009 
 
36 horizon, though they may have different initial 
budgetary positions and di fferent ageing-related 
costs. 
Most Member States are in the top right quadrant, 
showing that their sustainability gap is due to the compounding effects of an unfavourable initial fiscal position and an increase in the budgetary cost of ageing. Countries in the top left quadrant have a favourable initial budgetary position in 2009 thanks to the consolidation efforts of previous years. However for most of them this initial position is not enough given the expected long-term increase in expenditure. 
Only Denmark and Hungary have an initial fiscal 
position that is favourable enough to absorb the expected increase in co sts related to ageing. 
However, the recent consolidation efforts in Hungary must be pursued in coming years in order to reduce its government debt ratio. Finally, Estonia and Poland are in the bottom right quadrant; that means that they have a sustainability gap which is caused by an unfavourable initial fiscal position, but which is reduced by a projected decrease in age-related spending. 1.3. THE LONG TERM BUDGETARY COST OF 
AGEING 
The LTC component shows significant differences 
between Member States in terms of the budgetary impact of ageing until 2060 and indefinitely. As worked out for the infinite horizon, its impact ranges from a margin of 1.2% of GDP in Poland because of the long-term reduction in expenditure, 
to a required adjustment of 12.9% in Luxembourg because of the increase in ageing-related spending.  
Overall, the LTC components of the sustainability 
gap lies under 2% of GDP for ten Member States (Poland, Estonia, Latvia, Denmark, Italy, Bulgaria, Hungary, Sweden, France and Portugal). Nine Member States face a budg etary impact of between 
2% and 5% of GDP (Slovakia, Austria, Lithuania, Germany, the United Kingdom, the Czech Republic, Finland, Belgium and Romania). The remaining eight countries (the Netherlands Malta, Spain, Ireland, Cyprus, Slovenia, Greece and Luxembourg) have a LTC of 5% of GDP or above, with the costs incu mbent on Greece and 
Luxembourg representing 11.5 and 12.9% of GDP, respectively.  
Chapter II decomposed the contribution of pension 
spending, healthcare, l ong-term care, education Graph III.1.1:  Decomposition of the S2 indicator 
EA EUBE
BGCZ
DKDE
EEIEEL
ES
FRITCY
LVLTLU
HUMT
NL
AT
PLPTROSI
SKFI
SEUK
-4.0-2.00.02.04.06.08.010.012.014.0
-14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0Favourable long-term projections
Favorable initial fiscal position Unfavorable initial fiscal positionNo sustainability gap
(S2<0)Sustainability gap
(S2>0)LTC (% of GDP)
IBP ( %  of  GDP)Unfavourable long-term projectionsS2=0 S2=16 S2=14 S2=10 S2=8 S2=6 S2=4 S2=2
Source:  Commission services. 
Chapter III 
Quantitative sustainability results 
 
37 and unemployment benefits on the projected 
increase in spending. Overall, however, the Member States facing high expected costs do so primarily on the basis of the high costs of their pension systems – with the exception of the Netherlands, where the projected change in 
pension spending contribute 4 p.p. points of GDP to the increase in spending, while long term care is expected to increase by 5.8 p.p. of GDP. The countries with the largest projected increases in pension-related expenditure are those have so far introduced at best modest reforms to their pension systems.  
In all Member States (except Denmark), the LTC 
has a larger impact on the S2 than the S1 indicator. 
As this is due to the time profile of the costs of ageing, it indicates that the budgetary impact of 
ageing is back loaded and may likely continue increasing for some time after 2060. In Denmark's 
case, the time profile leads to age-related government expenditure reaching its maximum in 2025 and starting to decline after 2045. For other countries, the st ructure of ageing  and the social 
protection arrangements in Member States drive the higher contribution to S2 than S1 of the LTC component
. Other things being equal, countries 
that are due to undergo most of their ageing in the near future do not show  as large a disparity 
between the contribution of ageing on the two indicators. Equally, the institutional setup in place plays a crucial role as to how the ageing translates into costs, with a flatter profile for countries whose pension arrangements limit costs to the government sector. 
1.4. THE INITIAL BUDGETARY POSITION 
Aside from the long-term costs of ageing (LTC) the current budgetary and debt position also contribute to the sustainability gap for a majority of countries. According to the initial budgetary position (IBP) component of both S2 and S1 indicators and the debt requirement (DR) (
15) for 
S1, only one fifth of Member States have an initial fiscal position which would be sustainable if long-
                                                          
 
(15) The initial level of debt enters the IBP term, as it 
determines the required prim ary surplus to service it. 
However, it also directly enters the S1 indicators through 
the additional effort required to bring debt to 60% of GDP 
by 2060. term costs were left aside. Another third require an 
adjustment of up to around 3% of GDP to the structural public balan ce to place their public 
finances on a sustainable path, even before considering the long-term budgetary impact of an ageing population. The re maining Member States 
have an initial fiscal position that would require an even greater adjustment. 
According to the IBP comp onent of S2 indicator, 
for the Czech Republic, France, Lithuania, Poland, Portugal, Slovenia Slovakia and Romania, the required correction is in the region of 3 to 5% of GDP. For Spain it is slightly above 6% of GDP, while Latvia, UK and Ireland – given their very large structural imbalances in 2009 – require adjustments of over 8% of GDP.  
The IBPs are calculated using the budgetary 
position of 2009 – drawn from the European Commission spring forecasts (
16) from May 2009. 
– as starting point. As discussed in Chapter I, the structural primary bala nce is used in the 
calculation of the sustainability gap indicators. This removes the estimated effect of the economic cycle from the primary balance and also removes the effect of one-off measures. Some of the 
automatic effect of the ec onomic crisis on budgets 
is therefore stripped out of from the data. However, structural adjustment can only be undertaken imperfectly and this is particularly the case in the middle of  such unprecedented 
economic times. In so far as the crisis leads to a durable reduction in economic activity and growth, the structural deficit and sustainability gaps could be underestimated. However, on the other hand, some of temporary stimulus measures adopted by government may have not been properly filtered out when estimating the structural deficits and may currently appears as dete riorating the structural 
deficits.  
                                                          
 
(16) European Economy , 3 (4 May 2009). 
European Commission 
Sustainability Report - 2009 
 
38 While the long-term consequences of the crisis on 
the economies and public finances of the EU Member States are still unclear, the debt and deficit figures that contribute to deriving the IBP and DR indicators, as well as the growth and other assumptions going forward are therefore liable to 
change. Alternative scenarios for the 
macroeconomic environment and its consequences are presented in Chapter IV.  
In order to look at the role of the initial structural 
balance in more detail, Table III.1.2 shows how this has changed in recent years. The first column shows the average for the 2004-09 period, the second the absolute difference and finally the 2008 outturn, and forecasts for 2009 and 2010. Overall just under one quarter of Member States have improved their structural balance, and on average the structural balance fo r the EU-27 and for the 
Euro Area countries deteriorated by 1.5 and 0.9 percentage points of GDP respectively between 2004 and 2008. 
Amongst Member States with a deterioration in the 
structural balance, Bulgaria, Denmark, Portugal and Sweden have had a loosening of under 1 p.p. 
of GDP between 2004 and 2008; Belgium, France, Lithuania, Netherlands and Finland between 1 and 2 p.p. of GDP; the Czech Republic, Estonia, Austria, Romania, Slovenia and Slovakia 2 and 5 p.p. and Ireland, Spain, Latvia and UK over 5 p.p. of GDP. According to the IBP component, most of these countries have large sustainability gaps, indicating that this loosening has been an important contributor to th e fiscal adjustment that 
needs to occur for sustainability to be ensured in the future. This can also be seen by observing the size of the structural balan ce in Table III.1.2 as the 
link between the initial structural primary balance and the sustainability indicators is direct – a change in the structural balance feeds into an equivalent increase or decrease into the sustainability gap indicator. Conversely, a number of countries, and in particular Hungary and Cyprus, have strengthened their structural balances 
significantly. 
It is now evident that the fiscal deficits are 
deteriorating substantially in 2009 relative to 2008 and a further weakening of the public balance  
Table III.1.2:  Government structural balances (% of GDP) 
2004-2009 averageDifference between 
2009 and 2004 2008 out-turn 2009 forecast 2010 forecast
BE -1.8 -1.9 -2.2 -3.2 -4.0
BG 1.0 -0.4 0.2 0.3 1.6
CZ -3.1 -2.2 -3.4 -4.0 -3.7
DK 3.1 -0.9 4.2 1.2 -0.4
DE -2.2 1.1 -1.2 -2.4 -3.9
EE -0.8 -3.0 -4.1 -1.0 -1.9
IE -2.6 -10.2 -7.5 -9.8 -12.2
EL -5.8 2.8 -6.5 -5.7 -4.7
ES -0.9 -7.5 -3.9 -6.8 -8.2
FR -4.2 -1.4 -4.3 -5.5 -5.5
IT -3.8 2.4 -3.4 -2.6 -2.8
CY -1.5 2.9 0.1 -2.1 -2.1
LV -4.4 -8.1 -5.8 -9.5 -11.5
LT -3.1 -1.8 -5.2 -4.3 -5.5
LU 0.3 1.4 2.0 0.6 0.1
HU -6.4 5.4 -4.5 -1.7 -2.0
MT -4.1 2.2 -4.9 -3.6 -2.8
NL -0.8 -1.5 -0.5 -2.6 -4.3
AT -1.8 -2.8 -1.8 -3.2 -3.8
PL -4.9 0.0 -5.3 -6.0 -5.6
PT -4.5 -0.5 -3.8 -5.5 -5.1
RO -4.1 -3.3 -7.9 -5.2 -4.7
SI -2.3 -3.2 -2.5 -4.9 -5.2
SK -3.5 -3.1 -4.7 -5.0 -4.7
FI 2.5 -1.8 2.8 0.8 -0.7
SE 0.8 -0.3 1.7 -0.5 -1.9
UK -5.1 -6.1 -5.6 -10.0 -12.2
EA-16 -2.7 -0.9 -2.8 -3.9 -4.7
EU-27 -3.0 -1.5 -3.1 -4.6 -5.5Structural balance
Source:  Commission services 
 
Chapter III 
Quantitative sustainability results 
 
39 beyond the effects of the business cycle is 
projected for 2010. The e xpected deterioration in 
the structural balances can be seen in Table III.1.2. 
While the average struct ural balance for 2008 
stood at –3.1% for EU-27, in 2009 it is expected to be –4.6% before falling further to –5.5% in 2010. Thus, if 2010 was used as the base year for the analysis in this report, the results would indicate greater sustainability gaps caused by the weaker starting balances.  
1.5. REQUIRED PRIMARY BALANCE 
It is informative to s ee the size of the primary 
balance required to close the sustainability gaps; that is, to account for the costs of ageing and the interest on current stock of debt.  In other words, to see what a sustainable budgetary position looks like. 
This is given by the required primary balance 
(RPB). The RPB represents the structural primary balance that would be necessary at the beginning of the long-term projections to ensure long-term sustainability in the light of these liabilities, once all other spending has been covered. The RPB is usually calculated as an average over five years: the RPB for the years 2011-2015 is shown in Table III.1.2, along with the st ructural primary balance 
and the increase in age-related expenditure between 2010 and 2060.  
Table III.1.3:  Required primary balance (% GDP) 
Structural primary 
balanceRequired primary 
balanceIncrease in age-related 
expenditure
2009 average 2011-2015 between 2010 and 2060
BE 0.7 5.9 5.9
BG 1.1 2.3 3.2
CZ -2.9 4.6 6.3
DK 2.8 1.9 1.0
DE 0.6 5.0 5.1
EE -0.6 0.3 -0.1
IE -7.6 7.2 8.7
EL -0.9 12.7 16.0
ES -5.2 6.4 8.0
FR -2.7 2.8 2.1
IT 2.0 3.4 1.6
CY 0.2 8.9 10.7
LV -8.1 2.2 1.3
LT -3.1 4.2 6.0
LU 1.2 13.6 16.2
HU 3.1 3.5 3.3
MT -0.2 6.3 9.2
NL 0.0 6.5 6.7
AT -0.2 4.5 4.0
PL -3.1 1.1 -1.2
PT -2.4 3.0 2.8
RO -3.7 5.4 8.5
SI -3.3 8.4 12.5
SK -3.7 4.0 5.5
FI 2.1 5.5 5.4
SE 0.9 3.1 2.4
UK -7.8 4.5 4.8
EU27 -2.0 4.5 4.4
EA -0.9 4.9 4.8
Source:  Commissions services 
 
The table shows that there is significant variation 
in terms of the RPB across Member States. While for EU-27 it will represent an average of 4.5% of GDP, and 4.9% for the Euro Area, the figures range from under 2% of GDP for Estonia, Denmark and Poland, to over 10% of GDP for Greece and Luxembourg. Twelve Member States will require a primary balance of 5% of GDP or over. 
For several countries, the RBP is so large that it is 
socially and politically unrealistic to reach and sustain; they are well ab ove the largest primary 
surpluses ever recorded in  any EU Member State. 
For these countries, an effort of consolidation in the medium-term, even if very ambitious would not suffice to put the public finances on a sustainable path without profound reforms of their social protection systems. 
1.6. GOVERNMENT DEBT PROJECTIONS 
The analysis of sustainability presented so far looks at the adjustment of  the structural primary 
balance required to ensure sustainability in terms of the S2, S1 or RPB indicators. An alternative way of looking at sustainability is to consider the trajectory of debt, if such an adjustment were not undertaken. The results of this exercise are presented in Graph III.1.2 and, in more detail, in 
European Commission 
Sustainability Report - 2009 
 
40 Table III.1.4. The table shows the government 
gross debt ratio in 2008 and 2009, and the projections for 2010, 2030 and 2060, once the costs of servicing debt and paying for age-related expenditure are taken into account. In a sense, it represents the stock measure of the flow indicators S2 and S1. 
Graph III.1.2:  Gross debt (% of GDP) 
50100150200250300350400450500
2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057Gross debt (% of GDP)EU27 EA
Source:  Commission services 
In 2008, the government gross debt-to-GDP ratio 
stood above 60% mark for the Euro Area on average and for eight of th e 27 EU Member States. 
These countries are Belgium, Greece, France, Italy, Hungary, Malta, Austria and Portugal. However, Ireland, Spain, Poland and UK are also forecast to reach or exceed this debt ratio by the end of 2010. 
On unchanged policy relative to 2009, by 2060 
Bulgaria, Denmark, Hung ary, Italy and Sweden 
would have reduced their debt ratios. Conversely, the spectacularly high de bt projections for the 
majority of other countries indicate unsustainable policies and illustrate the magnitude of the issue. 
As already mentioned el sewhere in the report, 
these long-term debt projections have been prepared under a no-policy-change assumption and in partial equilibrium. Given that assumption, these projections are not robust forecasts and are not meant to be realistic scenarios of what may happen in the future. In practice, it is extremely unlikely that financial markets would keep financing government debt which amounted to several times the annual GDP of a country, or that government would not change their policies in the presence of ever increasing debts. The aim of the debt projections is to illustrate the long-term trends and the size of the required remedial action to avoid government debts to enter into an exponentially 
increasing spiral.  
 
Table III.1.4:  Projected debt developments 
2008 2009 2010 2030 2060
BE 89,6 94,9 98,6 137,8 372,4
BG 14,1 16,0 18,6 -9,9 9,8
CZ 29,8 33,0 37,0 114,9 486,7
DK 33,3 29,8 26,4 11,3 18,3
DE 65,9 72,4 75,1 102,5 318,9
EE 4,8 10,1 13,9 28,5 81,4
IE 43,2 60,0 75,8 260,8 848,5
EL 97,6 104,6 111,6 205,9 884,0
ES 39,5 48,1 55,6 188,2 766,6
FR 68,0 78,5 83,8 177,4 431,3
IT 105,8 113,3 116,7 112,2 205,9
CY 49,1 44,8 42,4 67,8 335,5
LV 19,5 30,9 42,4 230,6 898,1
LT 15,6 24,0 34,1 113,9 545,9
LU 14,7 14,9 13,7 35,6 437,5
HU 73,0 84,1 89,0 21,8 -26,3
MT 64,1 68,4 72,6 114,0 432,5
NL 58,2 55,3 58,0 121,0 450,3
AT 62,5 69,3 72,7 116,7 337,8
PL 47,2 53,9 60,4 108,9 318,4
PT 66,4 73,8 78,9 156,1 389,9
RO 13,6 21,8 30,4 125,1 633,8
SI 22,8 27,2 30,7 158,8 831,6
SK 27,6 32,0 36,3 115,5 561,2
FI 33,4 37,5 40,0 61,3 248,7
SE 38,0 41,6 40,8 32,2 93,1
UK 52,0 64,0 71,2 271,3 759,2
EU27 63,0 70,6 75,2 155,9 477,3
EA 68,6 75,8 80,0 140,2 422,3Gross debt
The government debt ratio is usually compiled in gross terms, without 
netting out assets from government liabilities. Gross debt can therefore 
never be negative. Moreover, the projections is this table assumes that the accumulation of financial assets is nil for countries with debt. In this 
table, the negative values should be interpreted as net accumulation of 
assets for the countries that would fully reimburse their debts. Although the assumption of no accu mulation of assets until  the full repayment of 
debt is not plausible, it has no implications on the sustainability assessment provided the interest rate paid on government debt and the rate of return on government assets are similar.  
Source:  Commission services 
 
2. COMPARISON WITH THE 2006 SUSTAINABILITY REPORT 
 
41 The results in this report differ significantly from 
those presented three years ago in the 2006 Sustainability Report. While the EU-25 (
17) 
average sustainability gap was estimated 3.4% of GDP on S2, the current estim ates are for 6.5% of 
GDP. 
Graph III.2.1 compares th e S2 indicator calculated 
in this report with the one of 2006. The difference between S2 in the 2006 and 2009 reports is split in three components: (i) the difference that is due to changes in the initial budgetary position, (ii) the difference that owes to the revision in the long-term projection of age-re lated expenditure because 
of new demographic projections and a number of improvements in the projection methods, and (iii) the fact that the long-term projections have been extended from 2050 to 2060. 
On average, the sustainability gap has increased by 
3.1 percentage points (p.p.) of GDP for the 25 countries that were members of the EU in 2006. While 4 Member States (Hungary, Portugal, Italy and Germany) show a lower sustainability gap than in the 2006 exer cise, the remaining 21 
Member States show a deterioration. Of these, in all cases expect Luxembourg, Greece and Malta, the deterioration is essentially due to a weakening of the initial budgetary position rather than to an increase in the age-relate d costs and the delay in 
the required adjustment th at leads to a higher LTC. 
For Ireland, Spain, Latv ia and UK the weakened 
initial budgetary position is responsible for an increase of the estimated sustainability gap of over 5 points.  
Overall, for the EU-25 countries, the deterioration 
in S2 is due to the worsening in the starting budgetary position. The required adjustment given the starting position has increase by 3.2 p.p. of GDP between the 2006 and 2009 reports, as the base year for the analysis changed from 2005 to 2009. The fiscal impact of the economic and financial crisis is therefore included in the 2009 estimates and explains the worse initial budgetary position.  
                                                          
 
(17) The comparison in sustainability indicators estimated in 
2006 and 2009 concerns 25 countries, since Bulgaria and 
Romania joined the EU in 2007 after the publication of the 
2006 sustainability report. Conversely, there has been a slight improvement 
by 0.1 p.p. of GDP in the LTC component of S2. Almost half of Member States show an improvement on this component. Notable outliers are Luxembourg, Malta and Greece where changes in the estimate of the LTC are equal to 3.6, 4.6 and 9.9 points, respectively. In Greece's case, this is 
largely explained by the fact that the 2006 estimates did not include pension expenditure as projections were not available at that time. For Luxembourg, the required adjustment given the long-term costs (LTC) now takes into account the pension expenditure that should be paid out to non-residents, while in 2006 this was omitted.  
Table III.2.1 shows the LTC component of the S2 
indicator calculated until 2050 and 2060, as well as the difference between the two and the S2 sustainability gap. It aims to complement the analysis presented in Graph III.2.1 by showing the evolution of the LTC due to the increase in expenditure in the years after 2050. The figures show that on average there is little difference between the LTC until 2050 and until 2060. For EU-27 the difference equals 0.3 points on average, while for the Euro Area, the difference is 0.1 p.p. of GDP. Little of the difference between the results presented in this report and those presented in the 2006 Sustainability Report can therefore be attributed to the additional costs of ageing beyond 2050. However, it suggests that, on the basis of current projections, the ratio-to-GDP of age-related expenditure will keep increasing beyond 2060 for most. However, it should be noted that the relationship between the cost of ageing and the LTC depends on the discount rates and the time profile of the spending increases. For individual Member States, however, there is more variation with some such as Ireland, Cyprus and Malta having a significant increase in their sustainability gap due to the effect of the additional costs of ageing beyond 2050. 
European Commission 
Sustainability Report - 2009 
 
42  
Table III.2.1:  LTC component of the S2  indicator until 2050 and 
2060 
S2 
until 2050 until 2060 until 2060
BE 4.6 4.8 0.1 5.3
BG 1.1 1.5 0.4 0.9
CZ 2.9 3.7 0.8 7.4
DK 1.8 1.4 -0.4 -0.2
DE 3.0 3.3 0.3 4.2
EE -0.2 -0.1 0.0 1.0
IE 5.3 6.7 1.4 15.0
EL 10.8 11.5 0.7 14.1
ES 5.4 5.7 0.4 11.8
FR 1.9 1.8 -0.1 5.6
IT 1.9 1.5 -0.5 1.4
CY 6.6 8.3 1.6 8.8
LV 1.0 1.0 0.0 9.9
LT 2.6 3.2 0.6 7.1
LU 11.9 12.9 1.0 12.5
HU 1.0 1.5 0.5 -0.1
MT 4.5 5.7 1.2 7.0
NL 5.0 5.0 0.0 6.9
AT 3.1 3.1 0.0 4.7
PL -1.3 -1.2 0.0 3.2
PT 1.6 1.9 0.3 5.5
RO 4.4 4.9 0.5 9.1
SI 7.7 8.3 0.7 12.2
SK 2.3 2.9 0.6 7.4
FI 4.3 4.5 0.2 4.0
SE 1.2 1.6 0.4 1.8
UK 2.6 3.6 0.9 12.4
EU27 2.9 3.2 0.3 6.5
EA 3.4 3.5 0.1 5.8LTC Difference in LTC 
2050 - 2060
Source:  Commission services 
 
 
  Graph III.2.1:  S2 indicator in the baseline scenario compared to the results of the 2006 Sustainability Report 
-10-9-8-7-6-5-4-3-2-1012345678910111213
HU PT IT DE CY FR DK CZ EA SE EU25 LU PL BE EE SK AT FI SI LT NL MT UK ES LV EL IEDifference due to IBP Difference due to LTC
Residual (extension of projection 2050-60) Total difference between 2006 and 2009 reports
Source:  Commission services 
3. THE COST OF NO POLICY REACTION 
 
43 The results of the sustainability gap exercise 
present a policy challenge for the nearly all the Member States. On average, policies are required that will close a sustainability gap equal to 6.5% of GDP, with a half of this effect being due to the long-term costs of ageing . This can be achieved 
through some combination of a reduction in the additional costs of ageing, an increase in tax, a reduction in non-age related spending or structural reforms that slows down age-related expenditure. 
The sustainability gap indicators show the 
correction that is required for the years covered by the analysis. Implicitly, the gap given by the indicators is the size of the correction that must 
occur now and be maintained for the years until 
2060 and beyond.  
If the correction were to be undertaken later, then 
countries with a sustainability gap would need to make a greater adjustment . Table III.3.1 presents 
this additional cost of delay – that is the increase in the S1 and the S2 indicators. It shows how much greater the adjustment would have to be, if it were undertaken in 5 years’ time rather than now. For ease of comparison it also shows the S2 gap presented in Table III.1.1 and the size this would be with a 5-years delay. For the EU on average, a 5 year delay would result in an additional required adjustment of 0.5 percentage points of GDP being necessary to ensure sust ainability according to the 
S2 indicator. 
For twelve Member States , the additional cost of 
delayed response is greater than 0.5 p.p. of GDP. These countries are the Czech Republic, Ireland, Greece, Spain, Latvia, Lithuania, Malta, Netherlands, Romania, Slovenia, Slovakia and the UK. For Greece and Slovenia, the cost of delay exceeds 1 percentage point of GDP, thus significantly increasing an already sizeable sustainability gap. 
The absolute additional costs in terms of required 
adjustment of the delay is related to the size of the sustainability gap and the government gross debt but its relative size also depends on the projected economic growth in the future.  
Table III.3.1:  Cost of delaying th e response by 5 years 
S1 S2 original S2 S2 delayed
BE 0 . 70 . 35 . 35 . 7
BG -0.1 0.1 0.9 1.0
CZ 0 . 80 . 67 . 48 . 1
DK -0.1 0.0 -0.2 -0.3
DE 0 . 50 . 44 . 24 . 6
EE 0 . 00 . 11 . 01 . 0
IE 1.5 0.7 15.0 15.7
EL 1.6 1.1 14.1 15.1
ES 1.3 0.8 11.8 12.6
FR 0 . 80 . 35 . 65 . 9
IT 0 . 30 . 11 . 41 . 5
CY 0 . 50 . 48 . 89 . 2
LV 1.4 0.9 9.9 10.8
LT 0 . 80 . 77 . 17 . 8
LU 0.8 0.5 12.5 13.1
HU -0.2 0.0 -0.1 -0.1
MT 0 . 70 . 67 . 07 . 6
NL 0 . 80 . 66 . 97 . 5
AT 0 . 60 . 34 . 75 . 1
PL 0 . 40 . 33 . 23 . 5
PT 0 . 70 . 45 . 55 . 9
RO 0 . 90 . 89 . 19 . 9
SI 1.4 1.1 12.2 13.3
SK 0 . 80 . 77 . 48 . 1
FI 0 . 40 . 34 . 04 . 3
SE 0 . 10 . 11 . 81 . 9
UK 1.5 0.7 12.4 13.1
EU27 0 . 80 . 56 . 56 . 9
EA 0 . 70 . 45 . 86 . 2Cost of delay ( % of GDP) Sustainability gap
Source:  Commission services 
 
The results presented in Table III.3.1 make it clear 
that inaction carries a cost. Moreover, there is a question of intergenerational fairness to be considered. The additional costs of ageing will fall at least in part on future taxpayers for countries with a sustainability gap. By closing the gap later, more of the burden is incumbent on future taxpayers rather than current ones and the burden is greater in absolute terms too. 
The cost of delay indicat es show the increase in 
the sustainability gap if no remedial action is taken. In so far as the crisis and the fiscal support that is necessary in support of the recovery do not allow an ambitious fiscal consolidation effort in the short- to medium term, the relentless increase in the sustainability gaps suggests the urgency in considering in earnest prof ound reforms in social 
protection system, even if the impact of those reforms may take time to appear in government accounts. 
   

Chapter IV 
The potential impact of the current economic 
crisis and sensitivity analysis 
  

SUMMARY 
 
47 The baseline analysis in this report uses 
projections for potential growth that do not take into account any durable effect of the ongoing 
financial and economic crisis. Instead, the pre-crisis potential growth es timate is forecast forward 
taking changing demographics into account. This chapter presents three alte rnative growth scenarios 
for the medium and long terms in the light of the economic crisis and then shows the corresponding 
estimates of the sustainability gaps. 
The financial and economic crisis has already led 
to significantly worse than expected macro-
economic and fiscal developments in 2008 and 2009. While the prospects for 2010 appear disappointing, there is al so marked uncertainty 
regarding economic growth in the medium and long-term perspective. The unusually sharp and rapid deterioration in economic activity has transformed into a world recession. This poses the question of the extent to which the worsened short-term outlook would have implications for the growth potential of the EU economies also over the medium- and longer-term. 
Of the three alternative scenarios presented, the 
first one assumes that it will take a decade for potential output to reach its pre-crisis growth rate 
leading to a ‘lost decade’ of growth. If this situation were to materialise, the sustainability gap would be some 1.2 percentage points (p.p.) of GDP higher on average, purely due to the effect that lower GDP growth over ten years and a lower level of GDP thereafter has. While lower growth means that employees will accrue lower pension entitlements, the effect on pensions will be more modest than on overall output, leading to higher pension spending as a share of GDP.  
Of course the ‘lost decade’  scenario may prove to 
be too pessimistic. However, as long as the crisis has a long-term impact on the level of output of the economy, the baseline sustainability indicators will prove to have been underestimates of the true gaps. 
The economic crisis means that any measures to 
address the long-term sustainability difficulties will need to be carefully thought through to ensure that they do not lead to short-term choking of the recovery. If action had been taken in previous years, and Member States had attained the medium-term objectives (MTOs) that were in place for the previous cycle of stability and convergence programmes, then, most sustainability 
gaps would have been closed. 
This chapter also presents the results of a 
sensitivity analysis, which considers the effect on the estimates of the sustainability gaps of alternative scenarios for demographics and for the costs of providing health and long-term care for the elderly. By looking at different scenarios for longevity, health status and health costs, productivity, labour market scenarios, interest rates, long-term care needs and costs, it provides a sense of how the assumptions made in the baseline affect the final outcome and the robustness of the estimates.  
1. THE EFFECT OF THE FINANCIAL CRISIS 
 
48 The assessment of the sustainability conditions in 
each of the EU member states requires very long-term projections for demographic developments, interest rates and labour market, macroeconomic and fiscal situation. Given the relatively large margins of error surr ounding each of those 
projections, this chapter considers a series of sensitivity analyses. It starts by presenting alternative growth scenarios for the post-crisis years and then discusses the uncertainty linked to them. It then turns to other issues like the demographic projections, productivity growth, unemployment and interest rates. This allows an assessment of the robustness of the sustainability indicators and a better understanding of the long-term sustainability risks in each country. 
1.1. THE PERSPECTIVES FOR ECONOMIC 
GROWTH 
The baseline GDP growth forecasts used in the 
main analysis do not ta ke account any durable 
implications of the economic and financial crisis on economic activity. This section presents the alternative economic assumptions in the light of the crisis that will be used to look at the impact it might have on the long-term sustainability of the Member States of the European Union. 
The financial and economic crisis has already led 
to significantly worse than expected macro-
economic and fiscal developments in 2008 and 2009. While a number of forecasters are now starting to revise upwards growth forecasts for 2010, economic growth fo r the EU as a whole and 
for each Member States will remain quite low or even negative. Moreover, there is also marked uncertainty regarding economic growth in the medium and long-term perspective. The unusually sharp and rapid deterioration in economic activity has transformed into a wo rld recession. This poses 
the question of the extent to which the worsened short-term outlook would have implications for the growth potential of the EU economies also over the medium- and longer-term.  (
18) 
                                                           
(18) It should be borne in mind that estimating potential output 
growth is subject to uncertain ty and that different methods 
for doing so exists. While in principle only structural 
factors matter for the estimation of the growth potential, it Under a conventional business cycle interpretation, 
a period of low growth would be followed by a period of above trend growth. Given the severity and scope of the current crisis, however, there is however the serious risk of a structural break in growth conditions and that the recovery will be characterised by a protr acted period of slow 
growth, and reduction in potential GDP growth. This might be due to a number of factors, including: 
Increases in the cost of capital due to the real 
economy effects of balance-sheet adjustments in the financial sector, even in the presence of large recapitalisation packages; 
Wide-spread credit constraints and higher 
borrowing costs in the non-financial sector in the light of the restructuring of banks. (
19) Moreover, 
there may be a possible shift in attitude to risk leading to a structurally  and permanently higher 
cost of capital; 
Slower growth in total factor productivity due to a 
reduction in investment, which can have a lasting effect; 
A permanent loss of human capital due to long 
term unemployment in the event of a protracted slow-down (the hysteresis effect). This may be more likely in the relatively inflexible EU labour markets; 
A collapse in world trade and higher protectionism 
could have a particularly adverse effect on EU growth (and especially ex port-oriented countries); 
A wide-ranging lack of confidence leading to the 
postponement of household consumption and investment by firms; 
A lasting increase in the weight of government in 
the economies, with a heav ier tax burden that is 
                                                                                  
 
is very difficult to distinguish cyclical and structural factors 
in real time. This is all the more the case in times of rapid 
changes in economic activity or  structural breaks, like for 
instance at the current juncture . For this reason, real-time 
estimates of potential growth, and of output gaps, need to be interpreted with caution.  
(
19) Although EU consumers have  lower deleveraging needs 
than US consumers, firms are more heavily indebted. 
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
49 necessary to finance the increase in government 
expenditure and debt. 
1.2. THREE MEDIUM-TERM POST-CRISIS 
SCENARIOS 
In order to look at the possible effects of the 
economic crisis, three s cenarios for medium and 
long terms economic growth have been modelled in addition to the base line scenario. These are 
presented in Graph IV.1.1 for EU 27. It should be noted, that the trajectory of growth differs between Member States and that the EU27 average may hide substantially different developments and prospects among member states. (
20)  
The baseline scenario shows a gradual reduction in 
potential growth due to population ageing, as explained in previous chapters. This scenario assumes that the loss in output in 2008–10 is of a cyclical nature without a durable impact on current 
and projected potential. This scenario is basically the same that one could have prior to the emergence of the crisis. Though it is labelled 
                                                          
 
(20) The calculations for the altern ative scenarios are based on 
the Commission's spring 2009 forecasts of May 2009 and 
therefore an update on those presented in the 2009 Ageing 
Report, which were based on the January 2009 forecast. ‘baseline’ and most indicators in this report are 
based on that scenario, it appears at this stage an overoptimistic scenario. 
The first alternative scenario , ‘the rebound,’ is also 
of an optimistic nature. Though it acknowledges a loss in potential growth as measured by the usual techniques, during the crisis years, it assumes a rebound in potential growth the years until 2020 or so, with the longer-term outcomes being unchanged. 
The ‘lost decade’ scenario shows potential growth 
taking ten years to return to its pre-crisis level; both labour productivity and labour input are assumed to reach the baseline growth rate in 2020. Thereafter it follows the same path as in the absence of the crisis, but the output lost during the crisis years is definitely lost. 
The most pessimistic scenario is the ‘permanent 
shock’ scenario, where not only is there no 
rebound, but there is a permanent hit to potential growth going forward. In this case, labour productivity growth and labour input are assumed to be permanently lower due to the crisis. This appears to be an over pessimistic scenario. Graph IV.1.1:  Potential GDP growth compared: differe nt crisis scenarios (annual % change) 
00.511.522.533.54
2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059Rebound
Lost decade
Permanent shock
Bas eline
Source:  Commission services 
European Commission 
Sustainability Report - 2009 
 
50 The effects on the level of real GDP per capita of 
the three scenarios, relative to the baseline are shown in Table IV.1.1. As over the first few years, 
trend growth follows the 2009 spring forecasts in all cases, the initial loss in GDP by 2010 equals 2% in all cases. Thereafter, in the rebound scenario, GDP per capita continues to fall but has caught up by 2020 when the recover is complete. 
This is not the case in the either scenarios where annual GDP growth over 2007-2020 is on average 0.8-0.9% lower than in the baseline. In the lost decade scenario, despite po tential growth having 
reached its pre-crisis leve l by 2020, the years of 
the crisis leave a level effect equal to 11% of the  
Table IV.1.1:  The effects on the level of real GDP per capita of the three post-crisis scenarios 
2010 2015 2020 2040 2060
Rebound -2 -6 0 00
Lost decade -2 -9 -11 -11 -11
Permanent shock -2 -9 -12 -16 -20EU27 Level of GDP per capita, difference from baseline in %
Source:   Commission services 
 
 
 Box IV.1.1: Estimating the impact on pension spending of changes in macroeconomic 
variables.
For the analysis in this report, the potential budgetary impact of varying the underlyin g
assumptions (productivity, employment) on pension spending, is estimated by the Commissio n
using the sensitivity scenarios on the labour productivity growth rate and the structura l
unemployment rate, rather than by the Member States using the national pension models.  
The elasticity of public pension expenditure with respect to changes in GDP is calculated a s
follows:  
⎟⎟
⎠⎞
⎜⎜
⎝⎛ −⎟⎟
⎠⎞
⎜⎜
⎝⎛ −
=
baseline
tbaseline
tscenarioalt
tbaseline
tbaseline
tscenarioalt
t
scenarioalt
t
GDPGDP GDPPP P
..
.ε   (1) 
where:   P: pension expenditure (level) 
  GDP : GDP (level) 
alt.scenario : the higher labour productivity scenario and the higher employmen t
rate scenario, respectively 
This elasticity is time-varying so as to capture potential changes over time that pension reform s
might have induced in the relationship between GDP growth and pension expenditure.  Using the estimated elasticity, the alternative 'crisis' scenario is imposed as the 'alt.scenario' , an
d
the change in pension expenditure vis-à-vis the baseline is solved for. The alternative scenarios fo r
pension expenditure carried out in the projection exercise relate to specific shocks (the 0.25 p.p
higher labour productivity growth rate and 1 p.p. lower structural unemployment rate). For shock s
of a different size, the calculated elasticity above can be used as a proxy for the effect of such a
shock on pension expenditure. However, it should be noted that the elasticity with respect to a
shock of a different size might be different. This would occur if there are non-linearities in th e
relationship. This simple model does not reflect such cases. 
 
 
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
51 baseline GDP per capita. This will never be caught 
up. The permanent effect on growth in the permanent shock scenario is more dramatic however; in this case the lower rate of growth leads to an ever increas e difference in level in 
GDP per capita going forward. While in 2020 GDP per capita is 12% lower than in the baseline, but 2060 it is 20% lower. 
1.3. THE BUDGETARY IMPACT OF THE POST-
CRISIS SCENARIOS 
The budgetary impact of the shocks on age-related 
expenditure is modelled according to the three scenarios and compared with the baseline.  
For public pension expenditure, the sensitivity 
tests of the projections to a change in the structural 
unemployment rate and to the productivity growth rate is used to calculate an elasticity of public pension with respect to changes in output.(
21) 
Details are provided in box IV.1.1. For the other age-related government expenditure items, the projections were obtained re-running the different models (health care, long -term care, education and 
unemployment benefits) with the respective alternative macro-economic scenarios.  
The magnitude of the budgetary impact is 
determined by the nature of the shock. As the lost decade and permanent shock scenarios are negative – in the sense of implying a lower GDP level – they lead to higher age-related expenditure as a share of GDP, while the rebound scenario is 
neutral. Graphs IV.1.2 an d IV.1.3 show the effect 
of the three potential growth scenarios on public pension expenditure and the overall age related expenditure, cumulatively over the 2007–60 period. They show, that relative to the baseline, the permanent shock has a bigger impact than the lost decade scenario, while th e rebound scenario is 
neutral overall, both for pension spending and the overall age related expenditure. 
                                                          
 
(21) The sensitivity tests carried out in the 2009 Ageing Report 
were used to calculate the elasticities.  Graph IV.1.2:  Potential impact of the budgetary crisis on pensions 
EU 27 pension expenditure, change in % of GDP between 2007-2060
00.511.522.533.54
Baseline Rebound Lost decade Permanent shock+0.0+0.9+1.4
Source:  Commission services 
Graph IV.1.3:  The potential budgetary impact of the crisis on total 
age-related expenditure 
EU 27 age related expenditure, change in % of GDP between 2007-2060
012345678
Baseline Rebound Lost decade Permanent shock+0.0+1.4+2.0
Source:  Commission services 
In the case of the rebound  scenario, the additional 
costs in the years when GDP growth in at below 
the baseline rate are offset by lower costs when GDP growth is at above trend growth. In the lost decade scenario, pension expenditure is 0.9% of GDP higher in 2060 relative to the baseline, while the age related expenditure is 1.4% of GDP higher, with the increases occu rring between 2007 and 
2020, before gradually falling. In the permanent shock scenario, however, the increase in both 
pension expenditure and the overall age related expenditure are not only higher (at 1.4% and 2.0% of GDP respectively), but also continue increasing beyond 2020 into the future. 
1.3.1. The dynamics of the impact of the crisis 
on public pension expenditure 
The economic crisis leads to lower nominal GDP 
in the short term and, in the case of the lost decade 
and permanent shock scenarios lower potential GDP levels relative to the baseline scenario going forward. In parallel, public pension expenditure 
European Commission 
Sustainability Report - 2009 
 
52 will be lower than in the baseline scenario. Due to 
the design of contribution and entitlement systems and as pensions tend not to be indexed with wages, the short-term elasticity of pension expenditure to GDP is less than 1. Pension expenditure will therefore fall less than GDP,  leading to an increase 
in pension spending as a share of GDP. Over the medium to long term, the estimated elasticity rises reflecting the fact that lower contributions due to the effects of the crisis eventually lead to lower 
entitlements. The difference in pension expenditure in the crisis scenarios vis-à-vis the baseline starts therefore to fall over the longer-
term. 
Graph IV.1.4 shows the dynamics of public 
pension expenditure as a share of GDP for the baseline and lost decade scenarios. It shows that, while overall pension spending as a share of GDP is higher in the lost decad e scenario than in the 
baseline scenario by 0.9 p.p. of GDP, most of the increase happens in the early years. Indeed, for the years 2020–60 the lost decade scenario has a marginally lower increase in public pension spending relative to GDP – by 0.1 p.p. – as lower entitlements start to have an effect. 
Overall, the no-policy change assumption involves 
the (partial) indexation of pensions alongside earnings-related entitlements. These features lead to the crisis scenarios resulting in rising and then 
falling level of pension spending as a share of GDP.  
1.4. IMPLICATIONS ON SUSTAINABILITY 
INDICATORS OF THE ALTERNATIVE POST-CRISIS CENARIOS 
Table IV.1.2 shows the sustainability gap, as 
measured by S2 indicator , estimated for the three 
alternative scenarios. The results show the effect of the different outcomes for GDP growth on sustainability, but do not account for the additional costs associated with the fi scal cost of the recovery 
measures which will add to the stock of debt and increase the primary surplu s required to service the 
debt. If these additional costs were added on, an increase in the gap through the IBP component of the order of magnitude presented in the last column of the table would emerge. While this is not insignificant, it is not as large as the overall effect of ageing and is also highly uncertain as the final fiscal cost of the crisis will depend on the ability of governments to recoup some or all of the funds they used for the recapitalisation of banks and on which share of contingent liabilities borne by the government in the co ntext of the crisis (for 
example State guarantees to deposits and to liabilities issued by the banks) will materialise. Graph IV.1.4:  The dynamics of public pensio n expenditure (baseline versus lo st decade scenario, % of GDP) 
1011121314
2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059Lost decade
Baseline
Source:  Commission services 
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
53 For the rebound scenario, the differences with the 
baseline are all in the short-term, and cancel each other out over the long-term. Conversely, for both the other scenarios, the lasting impact of the economic crisis puts more pressure on the sustainability of the public finances. While the lost decade scenario assumes a return to previously 
expected trend growth, the lower productivity growth for ten years and the lower output that results is forecast to increase the sustainability gap as measured by the S2 indi cator   of 1.1% of GDP 
to 6.0% of GDP for EU 27. This increase is essentially driven by an increase in the long-term cost of ageing, as an unchanged assumption about 
inflation and therefore the up-rating of pensions leads to higher spending as a share of the (lower) GDP.  
In the case of the permanent shock the effect of the 
crisis on long-term sustainability is more marked, as both the productivity and GDP growth are assumed to be on a lower trajectory going forward. This leads to an ever growing difference in output levels and an increase in the sustainability gap of 1.5% of GDP. This is primarily due to higher long term costs of ageing, but the initial budgetary 
position also contributes more to the gap due to the lower GDP growth. Although the analysis undertaken in this report is primarily a partial equilibrium exercise, in the case of the permanent shock scenario, a departure from the permanent real interest rate of 3% has been made. Instead, it is assumed that the interest rate and GDP growth rate differential remains constant, so that interest rates in this case are lower than in the baseline. This is because with a permanent change in the 
trend rate of output it woul d be expected that there 
is additionally an effect on  the return to capital and 
therefore the interest rate.  
For a few countries, the crisis scenarios lead to a 
decrease in the sustainability gaps. This somehow counterintuitive result is due to eligibility and up rating rules for pensions, where the lower accrual of pension rights dominates the lower GDP effects during the years cove red by the analysis.  
Table IV.1.2:  Sustainability calculations und er alternative crisis scenarios 
Effect of different crisis scenarios on the S2 indicator and required primary balance (RPB)
S 2I B P * L T CS 2 I B P L T CS 2 I B P L T CS 2 I B P L T C
BE 5.3 0.6 4.8 0.0 0.0 0.0 1.7 0.1 1.6 2.8 0.3 2.5
BG 0.9 -0.6 1.5 0.0 0.0 0.0 -0.6 0.0 -0.7 -0.6 0.0 -0.6
CZ 7.4 3.7 3.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 -0.1
DK -0.2 -1.6 1.4 0.0 0.0 0.0 -0.2 0.0 -0.2 0.1 0.0 0.1
DE 4.2 0.9 3.3 0.0 0.0 0.0 1.6 0.1 1.5 1.6 0.2 1.3
EE 1.0 1.1 -0.1 0.0 0.0 0.0 -0.3 0.0 -0.4 -0.2 0.1 -0.3
IE 15.0 8.3 6.7 0.0 0.0 0.0 5.6 0.2 5.4 5.4 0.4 5.0
EL 14.1 2.6 11.5 0.0 0.0 0.0 -0.8 0.0 -0.8 0.5 0.3 0.3
ES 11.8 6.1 5.7 0.0 0.0 0.0 3.0 0.1 2.9 3.7 0.2 3.6
FR 5.6 3.8 1.8 0.0 0.0 0.0 1.0 0.1 0.9 2.0 0.3 1.7
IT 1.4 -0.1 1.5 0.0 0.0 0.0 0.5 0.1 0.4 1.3 0.4 0.9
CY 8.8 0.5 8.3 0.0 0.0 0.0 -0.1 0.0 -0.1 0.2 0.1 0.1
LV 9.9 8.9 1.0 -0.1 -0.1 0.0 0.7 0.1 0.5 1.0 0.2 0.7
LT 7.1 3.9 3.2 0.0 0.0 0.0 0.7 0.1 0.6 0.5 0.1 0.3
LU 12.5 -0.4 12.9 0.0 0.0 0.0 0.6 0.0 0.6 0.1 0.0 0.1
HU -0.1 -1.6 1.5 -0.1 -0.1 0.0 0.9 0.2 0.7 1.3 0.4 0.9
MT 7.0 1.4 5.7 0.0 0.0 0.0 4.1 0.1 4.0 4.5 0.2 4.3
NL 6.9 1.9 5.0 0.0 0.0 0.0 0.6 0.0 0.5 0.8 0.1 0.7
AT 4.7 1.6 3.1 0.0 0.0 0.0 1.4 0.0 1.4 2.5 0.2 2.3
PL 3.2 4.4 -1.2 0.0 0.0 0.0 -0.1 0.0 -0.2 0.3 0.1 0.1
PT 5.5 3.7 1.9 0.0 0.0 0.0 1.3 0.1 1.2 2.1 0.3 1.8
RO 9.1 4.3 4.9 0.0 0.0 0.0 0.8 0.0 0.7 0.6 0.1 0.5
SI 12.2 3.9 8.3 0.0 0.0 0.0 2.9 0.0 2.8 2.3 0.1 2.2
SK 7.4 4.5 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 -0.1
FI 4.0 -0.5 4.5 0.1 0.1 0.0 0.4 0.0 0.4 0.9 0.0 0.8
SE 1.8 0.2 1.6 0.0 0.0 0.0 1.5 0.0 1.5 1.7 0.1 1.7
UK 12.4 8.8 3.6 0.0 0.0 0.0 0.9 0.1 0.8 0.9 0.2 0.6
EU-27 6.5 3.3 3.2 0.0 0.0 0.0 1.1 0.1 1.0 1.5 0.2 1.3
EA 5.8 2.3 3.5 0.0 0.0 0.0 1.2 0.1 1.2 1.8 0.2 1.6Permanent shock
Difference from baselineLost decade
Difference from baselineBaseline
Difference from baselineRebound
Level
Source:  Commission services 
 
2. THE EFFECT OF FISCAL CONSOLIDATION: AN MTO 
SCENARIO 
 
54 The impact of the ag eing population on the 
sustainability of the public finances requires that the sustainability gaps be closed, where they exist. 
In the light of the current financial and economic 
crisis, the short-term priority for fiscal policy is to find a balance between supporting the recovery of the economies of the Memb er States and without 
imposing too heavy a burden on the public finances over the long-term. For this reason, it is not the time to recomm end immediate action to 
address long-term sustainability issues related to ageing populations without an in-depth understanding of the situations in the various countries. 
 
Table IV.2.1:  Effect of the MTO balance on the S2 indicator and 
required primary balance (RPB) 
Baseline Baseline MTO
S2 S2 IBP* LTC RPB RPB
BE 5.3 1.0 -3.7 4.7 5.9 5.5
BG 0.9 -6.9 -9.1 2.2 2.3 2.6
CZ 7.4 2.0 -2.2 4.2 4.6 4.9
DK -0.2 -3.0 -3.4 0.4 2.0 1.1
DE 4.2 0.0 -3.7 3.8 5.1 5.1
EE 1.0 -5.0 -5.1 0.1 0.3 0.5
IE 15.0 2.0 -4.5 6.5 7.2 7.0
EL 14.1 8.1 -3.4 11.5 12.7 12.4
ES 11.8 2.8 -2.9 5.7 6.5 6.6
FR 5.6 -1.4 -3.2 1.8 2.9 2.7
IT 1.4 -1.7 -3.2 1.6 3.4 3.2
CY 8.8 4.3 -4.0 8.3 8.9 8.4
LV 9.9 0.3 -1.3 1.6 2.3 2.5
LT 7.1 -0.3 -4.2 3.9 4.1 4.6
LU 12.5 12.0 -1.3 13.4 13.6 13.4
HU -0.1 -2.4 -4.7 2.4 3.4 3.7
MT 7.0 0.8 -4.4 5.2 6.2 6.0
NL 6.9 3.4 -1.3 4.7 6.6 6.2
AT 4.7 0.1 -3.0 3.1 4.5 4.3
PL 3.2 -3.1 -3.2 0.2 1.1 1.4
PT 5.5 -1.3 -3.2 1.9 3.1 3.0
RO 9.1 -0.6 -5.8 5.2 5.3 5.6
SI 12.2 4.4 -3.7 8.1 8.4 8.4
SK 7.4 1.1 -2.5 3.6 4.0 4.4
FI 4.0 -0.7 -4.4 3.7 5.6 4.5
SE 1.8 -2.3 -4.6 2.2 3.2 3.2
UK 12.4 1.1 -2.5 3.6 4.6 4.6
EU-27 6.5 0.2 -3.2 3.4 4.5 4.5
EA 5.8 0.6 -3.1 3.7 4.9 4.8MTO scenario
Source:  Commission services 
 
Nevertheless, over the medium term a correction 
of the budgetary positions or reforms to reduce the cost of ageing will be necessary. Table IV.2.1 presents the effect of the sustainability calculations in terms of S2, assuming that the medium-term objectives (MTO) that were in place at the time of 
the 2008/09 round of stability and convergence programmes of Member States were met, through a gradual improvement in  the underlying fiscal 
position between 2010 and 2015. The MTOs used for the exercise are shown in the final column of the table. Where the actual MTOs are given as a 
range, the MTO used and presented in the table is from within this range.  For Member States with an MTO of a balanced budget (such as Ireland) and MTO of 0 is chosen. For the United Kingdom, which has not submitted a formal MTO in its convergence programme, an MTO of –1% of GDP 
is used. 
The results show, that ov erall, if fiscal policy 
followed this path, the improvement in the underlying position would be nearly sufficient to offset the increase in the long term cost of ageing, with an S2 gap of 0.2 % of GDP for EU 27, though large gaps would still exist for a number of Member States. 
This scenario shows that reaching the MTOs 
would give a first and decisive step towards sustainable public finances. However, it also suggests that the MTOs of some countries may need to be updated. Moreover, it confirms the evidence presented elsewhere in the report that for 
the many countries, in particular those with the largest sustainability imbalances, fiscal consolidation efforts – if not accompanied by structural reforms – will not suffice to close the sustainability gaps.  
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
55  
 Box IV.2.1: Medium-term debt projections under alternative consolidation scenarios
Rising government deficits and low growth, as well as financial support to the banking sector are leaving a 
legacy of fast growing government debt ratios in the EU. Reflecting concerns arising from durably high 
deficits, this box projects the gross debt-to-GDP ratio of  the EU Member States up to next 20 years or so, 
under three stylised scenarios. 
These projections are based on the Commission services’ spring 2009 forecast till 2010, which are then 
extended into the future taking into account the ‘lost decade’ macroeconomic scenario (see Chapter IV, section 1.1). Beyond 2020, the scenarios discussed in the box assume a return of growth to the long-term 
trend. 
These additional assumptions are also considered:   
• The increase in age-related expenditure is consistent with the macroeconomic scenario. Age-related 
expenditure in the EU increases, on average, by 0.4 p.p. of GDP in the EU as a whole up to 2020 (0.6 
p. 
p. in the euro area) and by 1.9 p.p. (2.2 in the euro area) up to 2030;  
• The tax-to-GDP ratios are projected to converge to their pre-2007 level for countries with 2010 tax 
burdens below their 2007 level. For countries with 2010 tax-to-GDP ratio above the pre-crisis level, it is assumed that the tax ratio remains constant;
 
• The implicit interest rate on government debt converges to 3% in real terms (the value assumed for the 
purposes of the long-term sustainability of public finance assessment) in 2020 and remains constant 
thereafter, for all countries; 
• Specific stimulus measures projected for 2010 are withdrawn in 2011; 
• Zero stock-flow adjustment; this means no further purchases of financial assets or recapitalisations of 
financial institutions, nor disposal of such assets.  
Graph 1 depicts the projected evolution for the government gross debt ratio, for the EU as a whole. The solid 
thick line shows the outcome for this stylised scenario  under the assumption of no fiscal consolidation 
measures (Scenario 1). The gross debt-to-GDP ratio would rise steadily over the projection period. By 2015, the average debt ratio would be at around 100% of GDP, both in the EU and the euro area. It will continue 
increasing to around 120% of GDP in 2020, though with large differences across countries. 
The highest increases in the debt ratio would take place in Ireland and Latvia. A particularly fast rise in the 
debt ratio would also occur under this simplified sc enario for the United Kingdom. Bulgaria, Denmark, 
Estonia, Cyprus, Luxembourg, Finland and Sweden would be the only Member States with debt ratios below 60% of GDP in 2020. 
The graph also shows the results of two further scenarios. In Scenario 2, from 2011 on, all Member States 
would implement fiscal consolidation efforts (measured in terms of structural primary balance) of 0.5% of 
GDP per year until they reach their medium-term objectives (MTOs). (
1) The graph clearly illustrates that 
this consolidation rhythm – which is the benchmark consolidation effort in the SGP – would not be enough to stabilise, let alone reduce, the debt ratio by 2030. 
                                                           
(1) The MTOs of Member States are shown in Table IV.2.1, taking into account information contained in the latest roun d
of stability and convergence programmes.  
(Continued on the next page) 
European Commission 
Sustainability Report - 2009 
 
56  
 Box (continued) 
 
A consolidation effort of 1% of GDP per year (Scenario 3) until the MTOs of each Member State are 
reached would stabilise the government debt ratio in the EU in 2016. Note, however, that by 2030, the debt 
ratio would still be substantially larger than in the pre-crisis years, and 5 points above the Maastricht reference value.  
Though these scenarios are based on a number of simplifying assumptions, they show that a fast debt 
reduction requires serious consolidation efforts, sales of assets and may also, in some countries require the 
update on their MTOs to more ambitious levels. Structural measures that contribute to avoid a ‘lost decade’ 
of slow GDP growth would also decisively contribute to an early stabilisation, and then fast reduction, of the 
government debt ratio.  Graph 1:  Medium-term debt projections under alternative assumptions (% of GDP) 
5060708090100110120
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029Scenario 1
(No consolidation)
Scenario 3
(Consolidation 1% of GDP)Scenario 2
(Consolidation 0.5% of GDP)% of GDP
Source:  Commission services. 
 
 
3. SENSITIVITY ANALYSIS NOT LINKED TO THE FINANCIAL 
CRISIS 
 
57 The analysis presented in this report is based on 
the projections set out in the 2009 Ageing Report. This section presents the changes in the S2 indicator under alternative assumptions for life expectancy, labour productivity, participation in the labour market, including for older workers, total employment, migration and the interest rate. For all these elements there is considerable uncertainty when predicting into the future, so considering the response of sustainability results to the underlying assumptions is important. The results are presented in Table IV.3.1. It should be noted that the scenarios cons idered in this analysis 
are not necessarily the most realistic ones, but serve to indicate how the results vary with the changes in the underlying assumptions. (
22)  
As the analysis in this report is a partial 
equilibrium analysis, some of the mechanisms for change are not fully taken into account. Thus, the sensitivity results may be either under or overestimated in case of some scenarios. The results presented should therefore be viewed within the context of the caveats  presented below. 
3.1. LIFE EXPECTANCY 
The baseline projections of this report are based on 
the EUROPOP 2008 population projection published in April 2008 by Eurostat. The projections are based on assumptions about fertility and mortality rates and the level of net migration in each Member State. Life expectancy at birth in 2008 averaged  76.1 years for men and 
82.1 for women (
23). Eurostat demographers 
forecast to increase to 84.6 and 89.1 years 
respectively, by 2060, with a narrowing in the range seen between countries. 
                                                          
 
(22) It may be just as plausible that the actual outcome is in the 
opposite direction to the example in the table; for example, 
while the analysis considers the effect of higher life 
expectancy, it could be that life expectancy is shorter rather than longer. While the re sults are not necessarily 
symmetric, they can serve as  an informal ‘ready reckoner’ 
for alternative outcomes. 
(
23) The range of forecasts is from  65.9 in Lithuania to 79.0 in 
Sweden for men and 76.6 in Romania and 84.3 in France 
for women. The higher life expectancy  scenario assumes an 
increase in life expectancy  of 1 year by 2060 on 
top of the Eurostat projections . Within this 
scenario, mortality falls for all age groups, which translates into a slightly  larger labour force and 
slightly higher GDP levels. Public expenditure increases as life expectan cy improves over time, 
thus usually implying longer periods in retirement (
24) and higher healthcare expenditure. 
Since the impact of high er life expectancy on 
public expenditure exceeds the positive impact on GDP, total age-related expenditure to GDP tends to increase. The S2 indi cator therefore increases 
with rising life expectancy . Table IV.3.1 shows the 
effect on S2. 
It shows that a 1 year in crease in life expectancy 
would result in a widening of the S2 sustainability gap by 0.5% of GDP across EU-27 and 0.4% in the euro area. This is driven by a required increase in 
health-care and pension expenditure that an even older population would require.  
The degree to which an in creased life expectancy 
will lead to increased costs depends on the pension schemes and the range of coverage of health and long-term care. Member St ates where the pension 
annuity explicitly depends on life expectancy at retirement age (such as Italy, Poland, Finland or Sweden) or where there system is set-up to take account of fiscal imbalances (such as through the sustainability factor in Germany) show a smaller increase in the gap due to a higher life expectancy. Conversely, Member States with high levels of pension expenditure with no such adjustment factors, such as Belgium,  are expected to face a 
higher increase in costs.  
Increases in life-expectancy  also affect healthcare 
expenditure. The extent to which healthcare expenditure will change depends in part on the particular healthcare system of the different Member States and on whether the additional year(s) of life are spent in good health. (
25) 
Increases in life expectancy due to improved 
                                                           
(24) Note, however, that the pension systems of some Member 
States include clauses which automatically adjust retirement ages to changes in longevity. 
(
25) The assumption is that half of the extra year of life will be 
healthy. 
European Commission 
Sustainability Report - 2009 
 
58 health are likely to be less costly to the healthcare 
budget than increases prim arily due to advances in 
medical technology.   
3.2. LABOUR PRODUCTIVITY 
A difference in labour productivity to that set out in the baseline scenario leads to a different trajectory for GDP growth. Age-related expenditures are also affected, although the 
indexation rules in place w ill determine the size of 
the effect. In particular, if  pension, health care and 
long-term care expenditure are closely related to productivity growth, for example by being indexed to wages, the time patterns of GDP and age-related expenditure are similar. On the contrary, if the indexation rules do not reflect the developments in productivity the two variables diverge. 
In the baseline scenario, labour productivity is 
assumed to increase at an average annual rate of 
1.8%, with higher rates in the earlier period for the new Member States, given their relative stages of development. In the alternative scenario considered in this section, the labour productivity growth rate is 0.25 percentage points higher than in the baseline. The increase in labour productivity is assumed to occur linearly between 2010 and 2020 and to remain at the higher level thereafter. The results in Table IV.3.1  show the effect of the 
higher labour productivity scenario on the S2 indicator. As age-related expenditure in percent of GDP falls with growing labour productivity in most of the EU Member States, the overall impact on S2 indicator is positive, i.e. S2 falls. The results indicate that such an increase in productivity would reduce the sustainability gap by 0.3% of GDP on average for EU-27, and by 0.4% in the Euro area.  
When considering this scenario, the partial 
equilibrium approach used should be borne in mind. In line with this approach, the analysis does not capture any increas e in the government 
revenue-to-GDP ratio. In other words, the no-policy assumption is implemented in such a manner that the faster GDP growth does not imply fiscal drag.. 
3.3. EMPLOYMENT RATE 
The baseline scenario  assumes that the 
employment rate of the working age population overall, and of older workers in particular, increases over the medium term from 70.4% of individuals aged 15-64 in 2007 to around 74% for EU-27 in 2060. Most of th is increase is assumed to 
come from older workers; those aged 55-64 are  
Table IV.3.1:  Sensitivity scenarios, difference in S2 indi cator compared to the baseline scenario 
Baseline
S2 Total Pension HealthcareLong term 
care Total IBP LTC
BE 5.3 0.5 0.2 0.3 0.0 -0.6 -0.4 -0.5 2.9 0.2 0.9 -0.7
BG 0.9 0.3 0.2 0.2 0.0 -0.2 0.0 -0.2 0.3 -0.3 0.1 -0.5
CZ 7.4 0.5 0.2 0.3 0.0 -0.1 0.5 0.5 1.1 -0.6 0.3 -0.9
DK -0.2 0.3 0.1 0.3 -0.1 0.0 -0.2 -0.4 1.2 0.3 0.1 0.1
DE 4.2 0.4 0.1 0.3 0.0 0.1 -0.1 -0.2 1.9 0.1 0.7 -0.6
EE 1.0 0.4 0.1 0.3 0.0 -0.1 0.0 0.0 0.3 0.1 0.1 0.0
IE 15.0 0.4 0.2 0.3 0.0 0.0 -0.2 0.1 1.8 -0.7 0.6 -1.4
EL 14.1 0.3 0.2 0.2 0.0 -1.3 -0.4 0.1 2.2 : ::
ES 11.8 0.4 0.2 0.2 0.0 -0.7 -0.2 -0.4 2.6 -0.7 0.4 -1.1
FR 5.6 0.6 0.3 0.3 0.0 -0.6 -0.5 -0.5 1.4 : ::
IT 1.4 0.3 0.1 0.2 0.0 -0.4 -0.1 -0.1 3.4 : ::
CY 8.8 0.4 0.2 0.2 0.0 -0.5 -0.1 0.6 4.7 : ::
LV 9.9 0.2 0.0 0.2 0.0 -0.1 -0.1 -0.1 0.2 : ::
LT 7.1 0.4 0.2 0.2 0.0 0.0 -0.2 0.2 -0.1 -0.4 0.2 -0.7
LU 12.5 0.6 0.3 0.3 0.0 -0.1 -0.2 -0.2 6.8 -2.4 0.0 -2.5
HU -0.1 0.6 0.2 0.4 0.0 -0.2 -0.2 -0.1 1.4 0.2 0.7 -0.5
MT 7.0 0.5 0.2 0.4 -0.1 -0.4 -0.2 0.5 1.8 -0.5 0.6 -1.1
NL 6.9 0.2 0.2 0.2 -0.2 0.0 -0.2 -0.4 1.1 -0.3 0.4 -0.7
AT 4.7 0.6 0.3 0.3 0.0 -0.8 -0.5 -0.5 4.4 : ::
PL 3.2 0.4 0.1 0.4 0.0 -0.3 -0.1 0.0 0.5 0.4 0.4 0.0
PT 5.5 0.7 0.3 0.4 0.0 -0.5 -0.2 -0.4 3.0 0.3 0.7 -0.4
RO 9.1 0.5 0.2 0.2 0.0 0.0 -0.3 0.5 0.3 -0.7 0.2 -0.9
SI 12.2 0.1 0.3 0.3 -0.5 -0.3 -0.5 -0.2 1.0 : ::
SK 7.4 0.4 0.2 0.3 0.0 -0.1 -0.1 0.3 0.4 -0.4 0.2 -0.6
FI 4.0 0.6 0.1 0.4 0.1 -0.3 -0.2 -0.3 0.9 -0.2 0.2 -0.4
SE 1.8 0.3 0.1 0.3 -0.1 -0.1 -0.2 -0.3 1.5 -0.1 0.3 -0.4
UK 12.4 0.7 0.3 0.5 0.0 0.0 -0.1 0.0 3.1 -0.1 0.6 -0.7
EU27 6.5 0.5 0.2 0.3 0.0 -0.3 -0.2 -0.3 2.2 : ::
EA 5.8 0.4 0.2 0.3 0.0 -0.4 -0.3 -0.3 2.3 : ::Zero 
migration 
TotalInterest rate Higher life expectancy Labour 
productivity 
TotalOlder 
workers 
TotalTotal 
Employment 
Total
Source:  Commission services 
 
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
59 assumed to see a rise in participation from 47.5% 
to around 62½% between 2007 and 2060. 
The higher total employment scenario is based on 
the assumption of a further increase in the employment rate of 1 percentage point, relative to the baseline projection. It assumes that this increase occurs linearly between 2010 and 2020 
and that employment remains higher from there on. The increase in employment is assumed to occur through a loweri ng of the NAIRU.  
The other employment scenario assumes an 
increase in the employment rate of older workers, equal to 5 percentage points relative to the baseline scenario, though the retirement age remains 
unchanged as compared to the baseline. Again, the increase is assumed to o ccur linearly between 2010 
and 2020 and remain higher thereafter. The increase occurs through a reduction in the inactive population.  
In the first instance, high er labour force increases 
GDP growth compared to the baseline However, an increase in the employment of older workers also has an impact on pension expenditure. Insofar as individuals postpone their exit from the labour market, pension expenditure decreases, due to individuals working rather than claiming pension benefits. However, as individuals work longer they accumulate more rights and subsequently receive higher pensions once they retire. Thus, the effect of higher employment changes over time and is spread over a long horizon.  Indeed, the exact effect 
will depend on the pension system (including penalties or encouragement for earlier retirement) the coverage and the ageing structure of each Member State. 
In general, a further increase in participation rates, 
either overall or specifically for older workers would reduce the sustainability gap in many of the Member States. Table IV.3.1  sets out the effect on 
the S2 sustainability gap. An increase in the employment rate of older workers will reduce the EU 27 sustainability gap by 0.2% of GDP, while an increase in total employment by 0.3%. In some Member States, though, the effect of higher pension entitlements which are accrued during the extra years of work over rides the GDP effect of 
more workers and is therefore costly to the public finances.   As in the case of the increase in labour 
productivity scenario, any increase in government 
revenues as a share of GDP, due to higher employment, faster growth and fiscal drag is not captured.  
3.4. MIGRATION 
The baseline scenario assu mes that the average net 
annual migration rate falls from 0.3% of the population in 2008 and 0.2% in 2060 for EU 27. Overall, an additional 59 million migrants are projected to join the Union between 2007 and 2060, with most joining the euro area. Countries 
that have recently experiences net outflows of migration (Estonia, Lithuania, Latvia, Poland, Bulgaria and Romania) are assumed to see a tapering off or reversal of the situation. 
Migration is of course very difficult to predict as it 
depends on socioeconomic and political, legal and social developments in both the EU and the rest of the world, in particular in the neighbouring countries. 
Migrants are an important addition to the work 
force as they tend to be of working age. Moreover, there is a longer-term e ffect on population since 
immigrant populations usually have higher fertility rate. Therefore, in the short and medium-run, an inflow of migrants lead s to increase in GDP of 
receiving country. However, as working migrants accumulate pension rights, over the long-term they 
too receive pensions and ot her social benefits paid 
the host country. 
Table IV.3.1 presents the effects that zero 
migration between each EU Member State and the rest of the world would have on the sustainability gap. This scenario should not be taken as a realistic prediction of possible outcomes for the future. It is included to provide a bound for the effect of reduced migration by showing the overall contribution that migrants are assumed to make to the growth rates of the EU economies and fiscal sustainability. Overall, assuming zero migration in the EU as a whole and in each Member States from now until 2060 would increase the sustainability gap by 2.2% of GDP in EU 27, with considerable variation between countries. 
 
European Commission 
Sustainability Report - 2009 
 
60  
 Box IV.3.1: Scenario on postponing retirement
This box presents a scenario where effective retirement ages of all Member States are increased in a uniform 
manner. The aim is to illustrate the impact of reforms aimed at increasing the retirement age on 
sustainability of public finances. 
Labour market exit ages vary however significantly be tween countries, which are thus in differing positions 
to address their sustainability challenges through reforms that would defer retirement. The effective exit 
ages in 2008 are reported in Graph 1: Luxembourg and Slovenia have the lowest exist ages, while the 
highest exist ages are in Sweden and Ireland. 
Graph 1:  Effective exit ages in 2008 
575859606162636465
LUSIATBEMTFRBGITPLHUSKEAELEUCZFI
NLESDEDKUKROLTLVEEPTCYIESEExit age
Source:  Ageing Report 2009. 
In the absence of policy measures aimed at postponing retirement ages – like a change in the statutory 
retirement ages or other encouragements for older workers to remain in the labour market – there will be a very slow increase in the exit ages (see Graph 2, baseline). This increase is related to the fact that different 
age cohorts have different participation rates. The av erage exit age for the EU-27 aggregate would increase 
from slightly below 62 in 2008 to just above 63 years in 2060. It should be noted that, according to the demographic projections, the remaining life expectancy at 62  is expected to increase from 20.2 years in 2008 
to 26.2 in 2060. 
The scenario is based on the assumption that exit ages for each Member State increase by two years – on top 
of the baseline – from 2010 to 2020 in a linear fashion. After 2020, the exit ages keep rising by two-thirds of 
the increase in remaining life expectancy. Graph 2 shows the trajectories of average exit ages in the baseline 
scenario and the postponed retirement scenario for the EU as a whole. The projected evolution in the 
remaining life expectancy at 62 is also shown. 
The scenario is purely illustrative; it is not realistic to assume that the retirement ages will increase the same 
in all countries. One may expect the retirement ages to  converge, that is, one may expect retirement ages to 
 
(Continued on the next page) 
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
61 Box (continued) 
 increase more in the countries that currently have the lows retirement ages, and by relatively less in the 
countries with the relatively high exit ages. 
Graph 2:  Exit ages (EU27, baseline and postponed retirement scenario) 
5052545658606264666870
2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060
Year1517192123252729313335Exit age: baselineExit age: postponed 
retirement scenario
Remaining life expectancy at 62 (rhs )
Source:  Commission services. 
These additional assumptions are also considered n this scenario: 
• The extension of working lives increases total labour supply in a proportional manner. Labour 
productivity for those older workers who continue to stay in the labour force due the deferral of 
the exit age is assumed to be 90 percent of the productivity of an average worker; 
• Total pension expenditure is reduced in proportion to the decrease of average years in retirement, 
which is proxied by the remaining life expectancy at the average exit age. Compared with the 
baseline, the average pension increases in line with GDP; 
• The ratio-to-GDP of other age-related expenditure (health care, long-term care, education and 
unemployment benefits) evolves according to the baseline scenario. 
The main implications of the increase in exit ages are related to increase in labour supply and the cut in 
overall pension expenditure as compared with the baseline. Given the increase in labour supply, GDP growth rises on average 0.14 percent per year: by 2060 the GDP level is around 7½ percent larger than in the 
baseline. The ratio to GDP of pension expenditure in the EU as a whole falls by 1.8 percentage points of 
GDP; the average pension increases in line with GDP, but the number of pensions paid is lower than in the baseline. 
The postponed retirement scenario yields a sustainability gap (S2) for EU-27 of 4.8 percent of GDP, which 
is 1.7 points lower than in the baseline scenario. Therefore, a substantial gap would remain. 
The intuition behind these results is as follows: postponing exit ages, as described, practically eliminates the 
increase in pension expenditure as a share of GDP, though  there is an increase in the average pension.  Note, 
 
(Continued on the next page) 
European Commission 
Sustainability Report - 2009 
 
62 Aside from the plausibility of the scenario, the 
results for certain Member States need to be considered within the context of their economies. For Luxembourg and Cyprus, the baseline scenario is for net migration between 2008 and 2060 to contribute to an increase of around 40 and 50% of their 2007 populations.  Both these countries' economies are heavily relia nt of migrant workers 
at the moment, and despite the strong increase in population in the baseline assumptions, it still corresponds to a marked d ecrease in the rate of net 
migration. When interpreting the results of the sensitivity analysis, however, it should be borne in mind that the zero migration scenario is a large departure from the baseline for these (and a number of other) countries, so the magnitude of these results should be interpreted carefully.  
3.5. INTEREST RATE 
The alternative scenario  considered in Table 
IV.3.1. assumes a real interest rate of 4%, rather than the 3% assumed in the baseline.  
The effect of this change in the interest rate 
assumption is to reduce the LTC component but increase the IBP component. A higher interest rate 
reduces the amount that a country has to save to pay for an ageing population in the future, but increases the amount required to service existing debt. (
26)  
For Member States with ageing profiles where the 
costs are set to increase further rather than earlier 
in the future, a higher interest rate allows them to finance these costs throug h smaller increases now 
compared with the baselin e. Countries such as 
Ireland, Spain, Luxembourg and Malta, with a 
                                                          
 
(26) It can be seen that the effect of changing the interest rate 
assumption has a larger eff ect on countries with higher 
starting levels of debt, su ch as Greece and Italy. large increase in public expenditure over the 
medium term, therefore benefit from a higher real interest rate.  
In interpreting all these results, it should be borne 
in mind that the effect of a higher interest rate on the growth rate of the economy has not been modelled. The implicit assumption is that a higher interest rate is consistent with unchanged GDP growth rates. 
3.6. ALTERNATIVE HEALTH CARE SCENARIOS 
Table IV.3.2 shows the impact on the sustainability gap of a faster increase in healthcare and long-term care spending, irrespective of demographic and macroeconomic assumptions. The data shows that several variables drive the evolution in healthcare expenditure. 
Healthcare spending tends to increase with GDP 
growth and is an important component of government spending. Moreover, its response to increased longevity is more difficult to predict that pension spending because it crucially depends on both on the health status of the population and, in many Member States, on de mand factors. It is also 
difficult to predict the effect that technology will have on the demand for government spending in this area. 
The baseline scenario assumes that half the 
additional years of life fr om the increase in life 
expectancy are healthy,  whereas half entail 
additional costs associated with age and morbidity.  
The ‘pure ageing’ scenario  assumes that the age-
related morbidity rates do not improve and all gains in life expectancy ar e assumed to be spent in 
bad health. This attempts to isolate the pure effect of an ageing population on health-care spending, but in doing so ignores the fact that people might, Box (continued) 
 however, that the projected increase in pension expenditure in the baseline scenario is only half of the 
overall long-term increase in age-related expenditure (healthcare spending and long-term care remain unchanged). Moreover, for EU-27, LTC (the required adjustment given the long-term change in 
expenditure) is around half of S2 in the baseline scenario. Therefore, the reduction in the sustainability 
imbalance is around one-fourth of S2 in the baseline scenario. 
 
 
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
63 in part, be living longer because they are healthier. 
Such a scenario would increase the EU 27 sustainability gap by 0.1% of GDP. 
Conversely, the ‘constant health’ scenario assumes 
that the number of years spent in bad health are 
constant with all gains longevity from now on being healthy ageing. Such a scenario would reduce the sustainability gap by 0.6% of GDP in the EU-27 countries. This is a much bigger absolute effect than in the opposite case (the pure demographic scenario) because health-care costs increase disproportionately with age and this scenario looks at changi ng the assumptions made 
about the oldest old.  
Spending on healthcare is concentrated on 
individuals' final years. The ‘death-related costs’ scenario projects healthcare spending by linking health-care spending to th e remaining years of life. This scenario has been constructed by looking at 
the different costs for descendents and survivors provided by Member States and applies them to the EUROPOP2008 demographic projections. It shows a small fall in the sustainability gap overall, but some variation across countries. 
The ‘income elasticity’ scenario departs from the 
baseline assumption of a constant income elasticity of demand for healthcare of 1. Instead, it assumes an elasticity of 1.1 which converges to 1 by 2060, reflecting a higher demand for healthcare as society becomes wealthier. It shows an increase of the sustainability gap of 0.4% of GDP for the EU 27 countries.  
So far, all the scenarios presented approach the 
costs of healthcare as being demand rather than supply driven. The final two scenarios do the opposite. The ‘EU12 cost convergence’ scenario  
Table IV.3.2:  Sensitivity scenarios, difference in S2 indi cator compared to the baseline scenario 
Pure AgeingConstant Health 
StatusDeath-related 
CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour Intensity
BE 0.2 -0.7 0.1 0.4 : 0.7
BG 0.0 -0.5 0.0 0.3 1.9 0.6
CZ 0.1 -0.7 0.0 0.4 0.4 1.1
DK 0.2 -0.5 0.1 0.4 : 0.6
DE 0.1 -0.6 -0.1 0.4 : 0.6
EE 0.0 -0.6 0.0 0.3 1.3 0.8
IE 0.2 -0.6 0.0 0.4 : 0.8
EL 0.0 -0.5 0.0 0.3 : 0.7
ES 0.1 -0.5 0.0 0.3 : 0.6
FR 0.1 -0.6 0.0 0.4 : 0.7
IT 0.1 -0.4 0.0 0.3 : 0.5
CY 0.2 -0.4 0.1 0.3 3.1 0.5
LV 0.0 -0.4 0.0 0.2 2.5 0.7
LT 0.1 -0.5 0.0 0.3 1.6 0.7
LU 0.1 -0.6 0.0 0.4 : 0.1
HU 0.3 -0.7 0.1 0.6 1.1 0.9
MT 0.3 -0.7 -0.4 0.6 1.3 0.9
NL 0.1 -0.4 0.0 0.3 : 0.7
AT 0.1 -0.6 0.0 0.4 : 0.8
PL 0.2 -0.9 0.2 0.5 2.1 0.9
PT 0.2 -0.7 0.0 0.5 : 0.8
RO 0.0 -0.5 0.0 0.3 2.1 0.7
SI 0.0 -0.6 -0.1 0.4 0.4 1.4
SK 0.0 -0.7 -0.1 0.4 1.0 0.6
FI 0.3 -0.5 0.2 0.5 : 0.8
SE 0.1 -0.5 0.1 0.3 : 0.7
UK 0.2 -0.7 -0.4 0.5 : 0.6
EU27 0.1 -0.6 -0.1 0.4 : 0.7
EA 0.1 -0.5 0.0 0.4 : 0.6
Source:  Commission services 
 
European Commission 
Sustainability Report - 2009 
 
64 assumes that the costs of  delivering healthcare in 
the most recently acceded Member States (EU12) 
increase to the average observed in the EU15 countries by 2060, thus increasing significantly the cost of ageing in the new Member States. As healthcare spending in EU is significantly below spending in the rest of the EU, if this scenario materialised, the sustainability gap in those countries would widen quite substantially. 
Finally, the ‘labour intensity’ scenario assumes 
that healthcare costs are driven by productivity 
increases, as healthcare is a relatively labour intensive sector. This scenario serves to provide and insight into the effects of unit costs on healthcare expenditure. It assumes that costs increase with GDP per wo rker rather than per 
capita and shows an overall increase in the sustainability gap of 0.7% of GDP for EU 27. 
3.7. CHANGES IN THE LONG-TERM CARE 
ASSUMPTIONS 
The final section of this chapter considers the 
effect on the sustainability gap of changing the underlying assumptions on the costs associated with long-term care. The re sults are shown in table 
IV.3.3. 
The first two columns show the effect on S2 of a 
pure demographic change, where, just as in the healthcare scenario, it is assumed that there is not improvement in the rate of disability and ability of individuals to care for themselves as life expectancy increases. This would increase the sustainability gap by an average of 0.1 percentage points (p.p.) of GDP. The overall effect on the gap though would the sum of this and the effect on 
healthcare presented in the previous section. 
Conversely, the constant disability scenario 
assumes that trends in age-specific disability rates decline in the future – it is therefore analogous to the constant health states assumption in the healthcare scenarios. It assumes that the level of disability in the Member States stays constant despite the increase in older people. This would lead to a decrease in the contribution of long term 
care to the S2 indicator by an average 0.1 % of GDP. The next two scenar ios show the impact on 
S2 of a change in care arrangements. The baseline scenario assumes no policy change, meaning that Member States which cu rrently offer little long 
term care assistance will continue to do so in the future. In the light of an ageing population this may not be realistic and, moreover, may have other adverse consequences on the relatives of the old.  
The first scenario looks at the increase in S2 from 
a shift away from inform al care to home-based 
care. It models the impact of a yearly shift of 1% of the disabled elderly w ho receive only informal 
care receiving formal care at home, over the first 10 years of the forecasting period. Such a shift would increase the gap by an average of 0.2 % of 
GDP. A shift to institutional care, however, would be more expensive with a corresponding increase 
in S2 of 0.5% of GDP. 
Finally, the last two scenarios look at the supply 
side and present the results for different assumptions about the growth in the costs of providing care. The fast/slow unit growth scenarios show the effect of increasing or reducing the assumed rate of growth of unit costs which are supposed to evolve in line with GDP per worker in the baseline scenario. The ef fect is to increase the 
sustainability gap by an average of 0.3% of GDP for the fast growth or reduce it by 0.8% in the slow growth scenario.  
Chapter IV 
The potential impact of the current economic crisis and sensitivity analysis 
 
65  
  
Table IV.3.3:  Sensitivity scenarios, difference in S2 indi cator compared to the baseline scenario 
Pure AgeingConstant 
DisabilityAt homeIn an 
institutionFast growth in 
unit costsSlow growth in 
unit costs
BE 0.1 -0.1 0.3 0.6 0.3 -1.0
BG 0.0 0.0 0.1 0.1 0.0 -0.1
CZ 0.0 0.0 0.0 0.1 0.1 -0.3
DK 0.2 -0.2 0.4 0.2 0.4 -1.2
DE 0.1 -0.1 0.2 0.4 0.2 -0.9
EE 0.0 0.0 0.0 0.1 0.0 -0.1
IE 0.1 -0.1 0.2 0.4 0.2 -1.0
EL 0.1 -0.1 0.3 0.6 0.4 -1.4
ES 0.0 0.0 0.1 1.3 0.1 -0.5
FR 0.1 -0.1 0.1 0.4 0.2 -0.6
IT 0.1 -0.1 0.4 0.8 0.3 -0.8
CY 0.0 0.0 0.0 0.0 0.0 0.0
LV 0.0 0.0 0.1 0.6 0.1 -0.3
LT 0.0 0.0 0.1 0.2 0.1 -0.3
LU 0.1 -0.1 0.3 0.7 0.4 -1.6
HU 0.0 0.0 0.1 0.3 0.1 -0.2
MT 0.1 -0.1 0.1 0.5 0.3 -1.0
NL 0.3 -0.3 0.5 1.1 0.9 -3.3
AT 0.1 -0.1 0.2 0.1 0.3 -0.8
PL 0.0 0.0 0.2 0.0 0.1 -0.4
PT 0.0 0.0 0.0 0.1 0.0 -0.1
RO 0.0 0.0 0.0 0.0 0.0 0.0
SI 0.0 0.0 0.2 0.4 0.2 -1.1
SK 0.0 0.0 0.1 0.0 0.0 -0.2
FI 0.1 -0.1 0.2 0.9 0.4 -1.9
SE 0.2 -0.2 0.4 0.8 0.6 -1.7
UK 0.0 0.0 0.1 0.1 0.1 -0.4
EU27 0.1 -0.1 0.2 0.5 0.3 -0.8
EA 0.1 -0.1 0.2 0.6 0.3 -0.9Shift to formal care
Source:  Commission services 
 

Chapter V 
Other factors 
  

SUMMARY 
 
69 Chapter III of this report presented the 
sustainability indicators and chapter IV discussed and quantified some of the uncertainty surrounding them. This chapter expands on the discussion of the uncertainty by looking at  aspects that cannot be 
quantified as readily, but are nonetheless important in assessing the overall sustainability of a country's public finances.  
The level of debt of an economy enters the 
sustainability indicators directly and affects sustainability through the need to service the debt. However, beyond this direct effect, the level of debt can have further consequences on both the real and political side of the economy. A high level of debt can reduce a countr y's ability to deal with 
even a temporary shock to its interest rate or growth rate. With the costs of servicing the debt being more significant the higher the level of debt, a shock to the cost of servicing has the potential to be markedly more signifi cant than for countries 
with a lower stock of debt to re-finance. Moreover, a high level of debt can also affect the interest rate paid on it with threshold effects being a possibility. These occur when debt reaches a certain level beyond which interest rates are pushed up. The levels of debt in the EU Member States are therefore considered as an  additional risk factor 
over and above their contribution to the sustainability gaps.  
The chapter also considers the possibility that the 
assumptions about pension expenditure underlying the Member States' pension expenditure projections may be difficult to implement socially and politically. While pension reform is important for many countries, it is also important that the expected levels of average pension are realistic. Countries forecasting a strong fall in the relative generosity of their pensions may find that they are unable to deliver this for political, electoral and social reasons. For this reason, such countries may face a higher sustainability challenge than is apparent by looking just at the indicators, although the extent to which this occurs will depend on private pension provision and whether individuals anticipate the decline in th e state pension and make 
alternative arrangements for the retirement. 
Moreover, private pensions themselves are not 
without risk. Insofar as they depend on the vagaries of financial markets a shortfall in their performance can result in pressure on the government to address shor tfalls. Indeed, there is a 
wide range of expenditure that governments may be faced with that is not included in the projections. Contingent liabilities are those which the government only needs to  assume if particular 
situations arise. These may be implicit – such as dealing with natural disasters – or explicit, such as loan guarantees. In the light of the economic and financial crisis, many Member States have taken on explicit contingent liabilities to aid the functioning of the financial sector and other industries. Depending on whether or not these are called in, the public finances of the Member States may find themselves with additional spending that is currently not being budgeted for. 
A final factor that is considered is the apparent 
scope which Member States' governments have to address the sustainability problems illustrated in this report. In theory, a sustainability gap can be filled by increasing tax revenues or reducing spending, while in the short-term an increase in debt is a possibility for countries with low levels of debt and a back loaded ageing profile. Reducing spending means either reducing spending on non-age-related expenditure or reforming the social security system so that th e costs of ageing can be 
contained. For countries with current very high levels of tax or low levels of spending the options may be more limited as it may be difficult and economically costly for them to increase tax further. 
    
1. DEBT AND ASSETS 
 
70 Chapter III of this report presented the estimates of 
the sustainability indicators and chapter IV discussed and quantified some of the uncertainty surrounding them. This chapter expands on the discussion of the uncertainty by looking at aspects that cannot be integrated in the sustainability indicators, or quantified, as readily, but are nonetheless important in assessing the overall sustainability of a country's public finances. The issues discussed in this chapter will be taken into account in the overall assessments presented in chapter VI and, on a country by country basis, chapter VII. 
1.1. THE LEVEL AND EVOLUTION OF GROSS 
DEBT 
The current level of government debt directly 
affects sustainability through the need to service the interest payments on the debt. It enters S1 and S2 through the term that relates to the initial budgetary position (IBP) (
27). It also enters S1 in 
the debt requirement (DR) term which measures additional effort to the debt stabilisation for Member States with debt  initially above 60% of 
GDP to reach that level in 2060.   
Beyond this direct effect, the level of debt can 
have further consequences on the economy and on policy making. A high level of debt can reduce a country's ability to deal with shocks to interest rates or growth rates, even  if those are temporary. 
With the costs of servicing the debt being more significant the higher the level of debt, a shock to 
                                                          
 
(27) The definition of debt used in this report is the one relevant 
for the EU budgetary surveillan ce procedures. It has been 
established by the Treaty Prot ocol on the excessive deficit 
procedure and specified in Council Regulation (EC) No 
479/2009 (which has recently c odified Regulation (EC) No 
3605/93 and a number of amending acts) through cross references to the European System of Accounts (ESA95). It 
is gross debt for all government, consolidated at face value. 
It includes loans, deposits and bonds, in national and foreign currencies. The debts of public enterprises, which are classified by statisticians in the corporate sector, are not 
included, even if some governments take over public 
enterprises’ debts from time to time. Spending in arrears is not included either. Contingent liabilities (which are 
discussed later in this chap ter) and the debts of special 
purpose vehicles active in the management of the current 
crisis are not included. It also does not include the net 
present value of the accrued-to-date pensions to be paid to 
civil servants or beneficiaries of social security. the cost of servicing has the potential to be 
markedly more significant than for countries with a lower stock of debt to re-finance. For example, in countries where government debt exceeds annual GDP, a relatively small rise of 10 basis points in financing costs increase government outlays by more than 0.1% of GDP per year. 
A high level of debt is likely to lead to threshold 
effects, whereby once debt reaches a certain level, further increases to debt will push interest rates higher.  This increase occurs in order to continue to attract buyers of government debt, and may have the effect of crowding out private investment. The level of debt at which it happens will vary by country and depend on characteristics such as size, economic development, the structure of financial market, debt maturity, external imbalances and the monetary regime. 
The effect of increasing debt servicing costs and a 
consequent increase in interest rates faced by governments issuing (and/or re-financing) debt, can also play a disciplinary role. In particular, once the financial markets signal a decreased willingness to take on a government’s debt by 
requiring higher interest rates in return, this can exert pressure on governm ents to contain their 
fiscal deficits. By setting out credible plans to stop and reverse the increase in their debt levels, governments can try to reduce the perceived sovereign risk. Once debt  reaches a certain high 
level, such actions may become necessary to contain the snowball effect of government debt and ensure the continued sustainability of a country's economy.  
Table V.1.1 shows the government debt-to-GDP 
ratios for the EU Member States for 2000, 2005 to 2008, as well as forecasts  for 2009 and 2010 on the 
Commission 2009 Spring forecasts. The forecast 
change in ratio between 2009 and 2010 is also shown. The figures show a marked increase in debt between 2009 and 2010 – primarily as result of the ongoing economic and financial crisis. At the end of 2008 Italy had a government gross debt that exceeded 100% of annual GDP, while Greece's debt was close to that threshold and Belgium's stood at nearly 90% of GDP. By 2010, the forecasts show both Greece and Belgium returning to above the 100% threshold. 
Chapter V 
Other factors 
 
71 1.2. PRIMARY BALANCE 
The primary balance is a crucial determinant of the 
change in the debt ratio. Table V.1.1 shows the structural primary balance for the years 2005-2010, with the values given for 2009 and 2010 being the Commission 2009 Spring forecasts. It shows that overall, for the years 2005 to 2007, EU 27 countries had a structural primary surplus, while for 2008, 2009 and 2010 a growing structural primary deficit is forecast. For countries 
which already have a significant level of debt, a weak structural primary balance is a risk that must be taken into consideration. 
The level of debt also affects the political climate 
within which economic policy is determined. Even in the absence of adverse shocks, a high level of debt involves a higher level of interest payments and therefore requires a consistently positive primary surplus purely to  service the debt, and higher surpluses to reduce its level. This can be 
politically and socially difficult to sustain and when compounded with the need for additional surpluses to address th e needs of an ageing 
population, can make the required adjustments even more difficult. How significant a factor this is will depend on the institutions and the political debate within a country;  experience shows that 
while some countries are ab le to find the political 
consensus and will to reduce high levels of debt, others have proven less able or willing to do this.  
Whether or not the ability to take measures to 
contain the cost of ageing will be correlated with past experience in reducing debt remains to be seen. However, insofar as countries with large sustainability gaps also have persistently high levels of debt, the ability to run required surpluses must be judged as an additional risk point, over and above the risk attributable to the high levels of debt.  
Table V.1.1:  General government gross debt ratio 
2000 2005 2006 2007 20082009 
(forecast)2010 
(forecast)Change in debt 
ratio in 2009 and 
2010
BE 107.8 92.2 87.9 84.0 89.6 95.7 100.9 11.4
BG 74.3 29.2 22.7 18.2 14.1 16.0 17.3 3.2
CZ 18.5 29.8 29.6 28.9 29.8 33.7 37.9 8.1
DK 51.7 37.1 31.3 26.8 33.3 32.5 33.7 0.3
DE 59.7 67.8 67.6 65.1 65.9 73.4 78.7 12.8
EE 5.2 4.5 4.3 3.5 4.8 6.8 7.8 3.0
IE 37.7 27.5 24.9 25.0 43.2 61.2 79.7 36.4
EL 101.8 98.8 95.9 94.8 97.6 103.4 108.0 10.4
ES 59.2 43.0 39.6 36.2 39.5 50.8 62.3 22.8
FR 57.3 66.4 63.7 63.8 68.0 79.7 86.0 18.0
IT 109.2 105.8 106.5 103.5 105.8 113.0 116.1 10.3
CY 58.8 69.1 64.6 59.4 49.1 47.5 47.9 -1.3
LV 12.3 12.4 10.7 9.0 19.5 34.1 50.1 30.7
LT 23.7 18.4 18.0 17.0 15.6 22.6 31.9 16.3
LU 6.4 6.1 6.7 6.9 14.7 16.0 16.4 1.7
HU 54.2 61.7 65.6 65.8 73.0 80.8 82.3 9.3
MT 55.9 69.8 63.7 62.1 64.1 67.0 68.9 4.8
NL 53.8 51.8 47.4 45.6 58.2 57.0 63.1 4.8
AT 66.4 63.7 62.0 59.4 62.5 70.4 75.2 12.7
PL 36.8 47.1 47.7 44.9 47.1 53.6 59.7 12.7
PT 50.4 63.6 64.7 63.5 66.4 75.4 81.5 15.1
RO 24.6 15.8 12.4 12.7 13.6 18.2 22.7 9.1
SI 26.8 27.0 26.7 23.4 22.8 29.3 34.9 12.1
SK 50.3 34.2 30.4 29.4 27.6 32.2 36.3 8.7
FI 43.8 41.4 39.2 35.1 33.4 39.7 45.7 12.3
SE 53.6 51.0 45.9 40.5 38.0 44.0 47.2 9.2
UK 41.0 42.3 43.4 44.2 52.0 68.4 81.7 29.7
EA-16 69.2 70.0 68.3 66.0 69.3 77.7 83.8 14.5
EU-27 61.8 62.7 61.3 58.7 61.5 72.6 79.4 17.8Debt as a % of GDP, outturn and forecast
Source:   Commission services, Eurostat. 
 
European Commission 
Sustainability Report - 2009 
 
72  
Table V.1.2:  General government financial assets as a share of 
GDP 
1995 2000 2005 2006 2007
BE 20.8 16.2 13.9 14.3 14.6
BG .. 78.9 39.3 35.2 30.7
CZ .. .. 45.5 44.6 ..
DK 43.3 31.4 33.7 36.6 35.7
DE 25.4 26.0 21.2 21.3 21.0
EE 52.6 40.2 41.1 40.1 38.4
IE .. 23.5 26.2 27.6 28.5
EL 20.2 26.1 28.6 29.6 33.9
ES 17.7 22.3 20.5 22.4 23.5
FR 24.6 30.0 32.2 33.5 35.0
IT 23.6 26.1 26.3 26.5 25.4
CY .. 25.1 28.8 26.8 27.1
LV .. 31.2 19.7 19.3 17.9
LT 65.3 54.3 35.5 35.2 31.6
LU 47.2 59.9 56.3 .. ..
HU 64.1 28.2 22.5 20.2 19.3
MT .. .. 32.8 25.6 25.5
NL 35.5 28.9 26.1 23.4 24.1
AT 30.9 36.2 32.7 32.7 31.2
PL 66.6 29.9 34.6 35.5 ..
PT 43.8 33.7 29.1 29.0 26.9
RO .. 74.8 36.6 30.2 31.2
SI .. .. 41.7 42.9 46.5
SK 68.9 45.1 33.5 27.4 33.0
FI 69.4 83.5 106.3 112.9 112.6
SE 55.5 59.2 64.3 69.1 68.2
UK .. .. .. .. ..
Source:  Commission services. 
 
At the end of 2008, si x countries (Germany, 
France, Hungary, Malta, Austria and Portugal) had a debt ratio between 60% and 80% of GDP. By 2010, it is forecast that four countries (France, 
Hungary, Portugal and the United Kingdom) will have debts between 80% and 100% of GDP, while six (Germany, Ireland, Spain, Malta, the Netherlands and Austria) will stand at between 60% and 80%. 
All countries except Cyprus are expected to see an 
increase in their debt ratios between 2009 and 2010 and for some of these the increase is 
substantial. While on average the EU  27 debt ratio is set to increase by 14.5 percentage points, for Ireland, Latvia and the United Kingdom the increase is forecast to be around or above 30 percentage point of GDP. Nine countries, however, (Bulgaria, the Czech Repu blic, Denmark, Estonia, 
Lithuania, Luxembourg, Romania, Slovenia and Slovakia) are still expected to have debt at below 40% of GDP at the end of 2010. 
1.3. GOVERNMENT ASSETS 
The debt figures used in this report are defined in gross and consolidated terms; this means that financial and non-financial assets controlled by government are not netted out, unless they are liabilities issues by other government units. 
Governments may, however, have significant other financial assets in their possession as shown in Table V.1.2. 
Assets should be taken into account when 
assessing the sustainability position of countries, as their disposal may contribute to reimburse debt and because they generate property income. Assets have particularly an impact on sustainability in cases where the real valu e and the book value of 
assets differ or the returns on assets are different from the interest rate on debt.  
 
Table V.1.3:  Structural primary balances as a share of GDP 
2005 2006 2007 2008 2009 2010
BE 3.2 2.5 2.3 1.5 0.7 0.0
BG 2.7 3.3 3.1 1.0 1.1 2.4
CZ -1.6 -2.8 -1.4 -2.3 -2.9 -2.5
DK 6.5 5.2 4.5 5.6 2.9 1.2
DE -0.2 0.7 1.6 1.6 0.6 -0.9
EE 0 . 4 - 0 . 5- 0 . 7- 3 . 9- 0 . 6- 1 . 4
IE 2.3 2.8 -0.9 -6.4 -7.6 -9.0
EL -1.3 0.0 -0.4 -2.1 -1.0 0.1
ES 2.9 3.4 3.2 -2.4 -5.2 -6.3
FR -1.5 -0.9 -1.2 -1.5 -2.7 -2.5
IT -0.6 0.7 2.1 1.8 2.0 2.0
CY 0.4 1.9 5.8 2.9 0.2 0.1
LV -1.1 -2.8 -4.1 -4.9 -8.1 -9.2
LT -1.0 -1.4 -2.1 -4.5 -3.1 -3.9
LU -0.2 -0.4 1.1 2.3 1.2 0.7
HU -4.8 -6.6 -1.5 -0.2 3.1 2.9
MT -0.2 0.4 0.0 -1.6 -0.2 0.7
NL 2.6 2.4 1.2 1.7 0.0 -1.6
AT 1.5 0.6 1.0 0.8 -0.1 -0.6
PL -1.6 -1.9 -0.9 -3.1 -3.1 -2.7
PT -2.9 -1.1 -0.5 -0.9 -2.5 -1.8
RO -0.7 -2.3 -3.7 -7.2 -3.7 -3.1
SI 0 . 3 - 0 . 7- 0 . 4- 1 . 3- 3 . 3- 3 . 4
SK -0.1 -2.3 -2.4 -3.5 -3.7 -3.3
FI 4.4 4.3 4.6 4.2 2.1 0.7
SE 2.9 2.3 3.7 3.4 0.9 -0.5
UK -1.9 -1.2 -1.5 -3.3 -7.8 -9.2
EA-16 0.2 0.9 1.1 0.2 -0.9 -1.5
EU-27 0.0 0.5 0.7 -0.4 -1.8 -2.5Structural primary balance as a % of GDP, outturn and forecast
Source:  Commission services. 
 
 
  
2. PENSION PROJECTIONS 
 
73 2.1. PENSION EXPENDITURE PROJECTIONS 
AND SOCIAL AND POLITICAL RISKS. 
The relationship between having an ageing 
population and the increase in the long-term expenditure on pensions is not linear. Countries with less generous schemes or with planned reductions to their generosity face less pressure on their public finances for same ageing profile than countries which provide more generous benefits for the aged.  
Public pension expenditure can be decomposed 
into four main parts. Thes e are (i) the change in the 
dependency ratio which is a function of the demographic profile, (ii) the change in the coverage ratio which considers the number of individuals eligible for public pensions relative to population aged over 65, (iii) the change in the employment rate amongst those of working age and (iv) the benefit ratio which measures the generosity of public pensions in relation to the average wage (
28). 
Overall, the expected change in the benefit ratio 
will contribute to lessening the impact of an ageing population on the public finances as the generosity of public pensions is expected to fall. This is shown in Table V.2.1, alon g with the effect that 
any change in the benefit ratio will have on public pension expenditure as a share of GDP. Only in Ireland, Greece, Cyprus, Romania and the United 
Kingdom are changes in th e benefit ratio expected 
to contribute to the increase in the long-term change in expenditure – in all other countries a reduction in the relative value of age related social security benefits compared  with the gross average 
wage is envisaged. Greece not only has an increasing benefit ratio, but starts from the highest benefit ratio of all EU Member States. 
At the other end of the sc ale, reductions in the 
benefit ratio in Poland, Italy, Austria, Portugal, 
                                                          
 
(28) To wit: 
:  
444484444764444844447644448444476444844476
Effect Ratio Benefit Effect Rate Employmenteffect Ratio Coverage Effect Ratio Dependency
Worked HoursGDPPension Average
People WorkingPopulationPopulationPensionersof Number
PopulationPopulation
GDPExp Pension
71 1564 1564 1565 64 1565 .
−×−−×+×−+=
 Sweden, France, Latvia and Estonia are expected 
to lead to a decline in the ratio of the public pension expenditure relative to GDP of over 3% of GDP. For all these countries, the ratio between the average pensions and the economy-wide average wage is set to fall by between 25% (France) and 54% (Poland). The effect that this will have on the standard living of pensioners will depend on the extent that it is anticipated and on the other provision that pensioners have made (whether through mandatory or voluntary private funded pension provision or their own personal savings). For example, in Sweden, Estonia, Latvia, Poland and Slovakia, reductions in the public pension benefit ratio are not so stark once the accompanying increase in funded private pension is taken into account. A lternatively, individuals 
may change their behaviour in the light of reduced public pensions and choose to work longer, thus accumulating pension entitlements and relieving pressure on the pension system and providing them with a higher standard of living when they do retire. 
Countries whose current policy will lead to strong 
declines in their benefit ratios may come under significant political pressure to introduce ad hoc  
increases to pension levels or to change their social security systems to increas e the standard living of 
pensioners. As Chapter 2 showed, the ratio of people aged 65 or above relative to the working age population is projected to more than double from 25% in 2007 to 2060 to 54% making them a significant constituent of electorates. 
Aside from the countries th at are forecast to have 
significant falls in their benefit ratios, there are countries that are expected  to have low levels of 
pension provision, even if the decrease in the ratio is not as significant. By  2060, Bulgaria, the Czech 
Republic, Denmark, Estonia, Ireland, Latvia, Lithuania, Hungary, Austria, Poland, Portugal, Romania, Slovenia, Slovak ia, Sweden and the UK 
are predicted to have benefit ratios of below 40%, although once private pensions are taken into account only the Czech Republic, Estonia, Ireland, Latvia, Lithuania, Hungary, Austria, Poland, 
European Commission 
Sustainability Report - 2009 
 
74 Portugal and the UK remain below this 
threshold (29).  
The countries forecasting low benefit ratios are 
also liable to pressure to increase spending. This may be particularly in the case of the newer Member States, which have lower benefit ratios on average. However, it is difficult to assess the possible magnitude of these pressures, as even in the absence of private pensions individuals may have other forms of support such as drawing down of accumulated assets or savings and it is likely to be the overall standard of living of pensioners that is important. Individuals might also change their behaviour by choosing to retire later or provide for their retirement. On the other hand, the provision of support from a private scheme also entails substantial of uncertainty in so far as the level of the pensions received depends on the performance of asset markets or other factors of the economy, depending on the way the private pension schemes are organised, how they in vest their assets and the 
                                                          
 
(29) For some countries, data on the expected benefit ratios 
from funded private pensions are not available, which may 
have implication on data comparability. kind of guarantees or other support the government 
provides to those schemes.  
The final column in table V.2.1 shows the average 
real increase in pensions implied by the benefit ratios for the public pensions. On average, pensions are set to increase by 1.4% per annum in real terms for the EU as a whole. Within that total, all countries, even those with marked falls in their benefit ratios are forecastin g real terms increases. 
In addition, some countries with falls in their benefit ratios (such as Latvia) have reasonably high increases in their real  levels, as comparatively 
high growth is forecast. Nevertheless, a real rate of growth may not be sufficient to ease the political pressure of pensions falling relative to wages in a number of Member States.  
The projections of pension expenditure depend 
significantly on the statutory rules (and assumptions) on indexation. In a large number of countries (Belgium, Bulgar ia, the Czech Republic, 
Denmark, Germany, Estonia, Greece, Spain, Ireland, Italy, Latvia, the Netherlands, Portugal,  
Table V.2.1:  Benefit ratio – 
Change in  Average real
GDP ratio due %change in pensions
2007 2060 % change 2007 2060 % change to benefit ratio per year 2010-2060
BE 45 43 -4 -1.0 1.6
BG 44 36 -20 44.4 40.9 -7.8 -1.8 2.4
CZ 45 38 -17 -1.2 1.8
DK 39 38 -4 64.0 74.6 16.6 -0.5 1.6
DE 51 42 -17 51.4 42.5 -17.3 -2.2 1.3
EE 26 16 -40 26.5 21.8 -17.7 -3.1 1.5
IE 27 32 16 0.7 2.0
EL 73 80 10 0.8 2.2
ES 58 52 -10 62.1 56.9 -8.3 -1.7 1.6
FR 63 48 -25 -4.0 1.1
IT 68 47 -31 -5.5 0.8
CY 54 57 5 -0.3 1.9
LV 24 13 -47 24.0 24.8 3.5 -3.9 1.3
LT 33 28 -16 33.1 32.5 -1.9 -1.8 2.2
LU 46 44 -4 45.8 44.0 -3.9 1.2 2.0
HU 39 36 -8 38.9 37.6 -3.2 -1.1 2.1
MT 42 40 -6 -0.5 1.8
NL 44 41 -7 73.8 80.9 9.6 -0.6 1.6
AT 55 39 -30 -5.0 1.0
PL 56 26 -54 56.2 31.2 -44.4 -7.1 0.9
PT 46 33 -29 47.3 32.6 -31.2 -4.5 1.2
RO 29 37 26 29.4 41.4 41.0 1.7 3.4
SI 41 39 -6 40.9 40.2 -1.7 -0.7 2.1
SK 45 33 -27 45.2 40.2 -10.9 -2.4 1.9
FI 49 47 -5 -0.9 1.7
SE 49 30 -39 63.9 46.4 -27.5 -4.3 0.8
UK 35 37 7 0.5 1.9
EA-16 1.4
EU-27 1.3benefit ratio %
public pensions public and private pensions
Source:  Commission services 
 
Chapter V 
Other factors 
 
75 Finland, Sweden, the UK) (30) the projection for 
minimum pensions/old age allowances assumes indexation in part to wages, and in some of them (Bulgaria, the Czech Republic, Greece, Spain, Ireland, Italy, Finland, Sweden, Lithuania), the 
pension projection for minimum pensions/old age allowances assumes a higher indexation than foreseen in the legislation (e.g. to wages despite the fact that the legislat ed indexation postulates 
indexation to prices). Under the assumption that the minimum pension/old age allowances are set at a level considered to ensure a minimum income for subsistence (a basic social safety net), this modelling choice may be considered as fairly neutral.  
For the countries that assume price indexation, the 
projections, may underestimate the future actual spending on minimum pensions due to the political need to ensure adequate pension income for older people – particularly those at the bottom of the income distribution. Still, since in almost all Member States the proportion of public minimum pensions in relation to total public pension expenditure is small, the size of this possible underestimation may not be of a very significant magnitude. 
2.2. PRIVATE FUNDED PENSION SCHEMES AND 
FINANCIAL RISKS  
Alongside public pensions, private funded pension 
schemes, both mandatory and voluntary, are increasingly becoming an important part of retirement income, and are likely to be even more so in the future. This development is supported by policies in a number of Member States; reforms that enhance the sustainability of public pension systems reduce their generosity, and incentives for private pillars are being initiated to fill the gap in pension provision.  
Graph V.2.1 shows the private pension projections 
by pillar for the Member States for which data are available.
 The graph is not comprehensive; for 
some countries' private pensions schemes it was not possible to provide data or projections. This is 
                                                          
 
(30) It should be noted that for some countries, projection for 
minimum pensions or social allowances are not available. 
This missing data may underest imate pension expenditure. in part because the expenditure of non-public 
pension schemes will depend on the assets held in them and this can be difficult to quantify,. Indeed, for occupational pension expenditure, only six Member States (Denmark, Ireland, Spain, Netherlands, Portugal and Sweden) provided projections, while only thirteen Member States (Denmark, Greece, Ireland,  the Czech Republic, 
Estonia, Hungary, Lith uania, Latvia, Malta, 
Poland, Slovakia, Bulgaria and Romania) have indicated that non-public occupational pension schemes do not exist. For the remaining eight countries the data ar e missing. For private 
mandatory pension schemes, eight Member States (Bulgaria, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia and Sweden) have provided projections while nine Member States (Belgium, Denmark, Greece, Spain, Ireland, Netherlands, Portugal, Czech Republic and Malta) report that such pension do not exist. For private non-mandatory pension expenditure, only three Member States (Spain, Slovenia and Sweden) have provided projections and seven (Denmark, Germany, Ireland, Latvia, Malta, Poland and Bulgaria) report that they do not exist. 
A number of countries have implemented systemic 
pension reforms, shifting part of the previously public pillar to a mandatory funded private pillar (Bulgaria, Germany, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia and Sweden). For the Member States for which data on these schemes are available, graph V.3.1 shows that while these private pillars are making very small disbursements for the time being, their importance will increase in the future reaching around 1.5 to 2.5% of GDP in Bulgaria, Estonia, Poland, Romania, Lithuania, Hu ngary, Slovakia and 
Sweden and nearly 5% of GDP in Latvia. As these funds have not started to pay out pensions, only Hungary and Sweden provided a level of pension expenditures by mandatory private funds for 2007, although in comparison to GDP the value is close to zero. In addition, significant pension income is already received in Sweden, Denmark and the Netherlands from occupational pension schemes and this is set to increase considerably by 2060. By then it is forecast to reach over 3% of GDP in Sweden, around 9% in Denmark and over 12% in the Netherlands. It should be pointed out that these schemes have been in place for a long time and so are already providing top-ups to public schemes. 
European Commission 
Sustainability Report - 2009 
 
76 Pension income from these pension funds is 
affected not only by the contributions made, but also by developments in the financial markets. The volatility of pension income, at least in the short term, with respect to financial markets will depend on the design of the pension scheme, which can influence the final effect of shocks on the value of the fund's assets. A first distinction is that between defined benefit and defined contribution schemes. In a defined benefit scheme, a contributor to the scheme received an pension scheme that is fixed in 
advance – this is the case, for example, in final salary schemes where the level of pension income is set as a percentage of final (or average) salary. Conversely, purely individual schemes where individuals contribute over the working lives into a personal fund which is invested and which is then used to purchase an annuity are defined contribution schemes, where the value of the pension is a function of the total size of the assets of accumulated. Defined contribution schemes are typically more affected by the performance of financial markets in the short term, although the extent to which they are will depend on the investment strategy followed. An important characteristic of such schemes though is that all the risk associated with the level of pension income is transferred to the individuals while in defined benefit schemes the organisation running the 
scheme absorbs some or all of the risk. 
However, over the longer terms economic shocks 
or lower returns to capital will also affect defined benefit schemes, albeit while spreading the risk between more individuals and over the longer period.  Over the longer term, however, all private pension schemes will need to break even and the returns to individuals investing in the schemes will need to adjust to reflect the overall returns to capital. Nevertheless, for a given individual just before retirement, there is usually more risk in a defined contribution scheme. 
In recent years, many defined benefit occupational 
pension schemes have switched towards defined contribution schemes. Most private pension funds were constructed as defined contribution schemes from the beginning. An increasing role of defined contribution schemes has and will have important implications for the pensioners' asset value depending on the rate of return and the volatility of asset markets. While they provide an addition to the pension income provided by the state, they also present an element of risk in the event of the performance of the funds not matching expectations.  Graph V.2.1:  Expenditure of non-public occupational, private mandatory and non-mandatory pension (% of GDP) 
02468101214
2007
20602007
2060
200720602007
2060
2007206020072060
2007
2060200720602007
2060
200720602007
2060
2007206020072060
2007
2060PT SI ES BG EE PL RO LT HU SK LV SE DK NL
Occupational Private mandatory Private non-mandatory
Source:   Commission services, EPC 
3. CONTINGENT LIABILITIES 
 
77 Government debt includes the explicit liabilities 
that governments have incurred through borrowing – short and long-term loans and bonds –and that they need to service. However, there are a number of other government commitments that are typically not included in debt. These consist of implicit and contingent liabilities. Implicit liabilities are not backed up by law, but involve spending for which there is an expectation that it will continue or materialise. Contingent liabilities are those which the government will only need to assume if certain situations occur.  
Implicit and contingent liabilities are not mutually 
exclusive categories but different dimensions of categorisation. Spending commitments can be either implicit or explicit depending on their legal backing and contingent or non-contingent depending on whether their status depends on the realisation of an uncertain event outside the government's full control. 
The scale of contingent co mmitments of the public 
sector can only be assessed by setting out explicit parameters that determine what will and what will not be considered. This is because aside from the explicit contingent liabilities that are backed up by legal provision – such as guarantees to borrowing of public and private enterp rises –, there are also 
implicit contingent liabilities whose scope is open. Moreover, even once the scope of liabilities to be considered has been decided, the data may not be available. Increased interest in contingent liabilities due to government support measures in the crisis should lead to improved statistical understanding and measures of these liabilities in due course. An assessment of the value of those liabilities and commitments would require an understanding of the probability of situations that give rise to liabilities occurring, and the size of these liabilities under the various outcomes. This is an exercise beyond the scope of this report and which can only ever be undertaken incompletely.  
In the light of the economic and financial crisis, 
many Member States have taken on explicit contingent liabilities to aid the functioning of the financial sector. These are presented in the first six data columns of table V.3.1, and how they affect the public sector risk differs depending on their nature. Columns three and four show the approved and effective guarantees provides to financial institutions. These are explicit contingent liabilities 
as they represent the magnitude of government 
underwriting that will not appear on the government's balance sheet unless the guarantees are called in. For some Member States these are particularly significant. 
In addition to these, the government have aided 
their financial sectors through capital injections, the relief of impaired assets, and underwriting liquidity and bank support schemes. The capital injections appear on th e public sector's balance 
sheet and so provide the governments with assets 
which they sell in the future, but whose value is nevertheless subject to uncertainty. The asset relief and liquidity and bank support schemes, are a mixed set of interventions, some of which transfer risk to the public sector without an outlay that appears in debt, thereby also increasing the explicit contingent liabilities of the government (
31). 
However, aside from these schemes which have 
been quantified, governments also provide guarantees to depositors, which will only impose a cost to the government if  they are called in. The 
final column of table V.3.1 shows the value of limit of the deposits that Member States guarantee. While different governments have different explicit limits, implicitly it might well be the case that Member States with lower limits find themselves under political pressure to reimburse the full amount of deposits in the event of a bank run or collapse. 
                                                          
 
(31) For an explanation on the recording in national accounts of 
these measures, see ‘Public Finances in EMU-2009,’ 
section II.1, European Economy ,5/2009. 
European Commission 
Sustainability Report - 2009 
 
78  
Table V.3.1:  Public interventions in the banking sector as a share of GDP 
Total 
approved 
measuresEffective 
capital 
injections Total 
approved 
measuresGuarantees 
grantedTotal 
approved 
measuresEffective 
interventions
BE 5.3 6.1 70.8 16.3 8.1 8.1 100 000
BG 0.0 0.0 0.0 0.0 0.0 0.0 50 000
CZ 0.0 0.0 0.0 0.0 0.0 0.0 50 000
DK 6.1 2.4 253.0 2.5 0.3 0.3 100%
DE 4.4 2.0 18.6 7.2 1.4 1.4 100%
EE 0.0 0.0 0.0 0.0 0.0 0.0 50 000
IE 6.6 6.5 164.7 164.7 0.0 0.0 100 000
EL 2.0 1.5 6.1 1.2 3.3 1.8 100 000
ES 0.0 0.0 18.6 2.1 2.8 1.8 100 000
FR 1.2 1.2 16.6 5.5 0.2 0.2 70 000
IT 1.3 0.1 NA 0.0 0.0 0.0 circa 103 000
CY 0.0 0.0 0.0 0.0 0.0 0.0 100 000
LV 1.4 0.9 25.7 2.8 10.9 4.7 50 000
LT 0.0 0.0 0.0 0.0 0.0 0.0 100 000
LU 6.9 7.9 12.4 NR 0.9 0.9 10000.0
HU 1.1 0.1 5.9 0.0 0.0 2.6 100%
MT 0.0 0.0 0.0 0.0 0.0 0.0 100 000
NL 6.4 6.8 34.3 7.7 11.4 5.5 100 000
AT 5.5 1.7 25.7 6.8 7.1 2.0 100%
PL 0.0 0.0 0.0 0.0 0.0 0.0 50 000
PT 2.4 0.0 10.0 3.3 0.0 0.0 100 000
RO 0.0 0.0 0.0 0.0 0.0 0.0 50 000
SI 0.0 0.4 32.8 6.3 0.0 0.0 100%
SK 0.0 0.0 0.0 0.0 0.0 0.0 100%
FI 0.0 0.0 27.7 0.0 0.0 0.0 50 000
SE 1.6 0.2 48.5 11.0 12.6 0.0 50 000
UK 3.5 2.6 21.7 11.3 16.4 14.7 50 000 (**)
EA-16 2.7 1.7 24.6 7.8 4.1 3.0
EU-27 2.7 1.7 20.5 7.8 2.1 1.4guarantees 
on deposits 
(€ or % of 
deposits)Public interventions in the banking sector (% GDP)
Capital injectionsGuarantees on bank 
liabilitiesRelief of impaired asset 
and liquidity and bank 
support
Source:  Commission services 
 
4. TAX RATIO 
 
79 The sustainability gap analysis shows the 
additional resources that must be channelled into making the public finances sustainable. A first option would be to reduce the costs imposed by ageing population through reform of support for pensioners or through changes to the labour market. Previous chapters presented an overview of the expected trajectory of the level of pensions and discussed potential risks around their level.  
Graph V.4.1:  Receipts and spending as a share of GDP 
25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0DKSEBEFRATFIITEA - 16DEEU- 27NLLUSIHUUKESPTCZELMTBGPLCYSKIEEELVLTRO
2000-07 average tax burden 2008 tax burden 2000-07 average spending
Source:  Eurostat 
In the absence of reforms to the costs of ageing, or 
cuts in other expenditure categories, the sustainability gap  will have to be closed by adjusting tax revenues. How feasible or easy that is will depend, in part, on the pre-existing situation in the different Member Stat es. Member States with 
high levels of tax revenues, might find it hard to increase taxation further. This is both because it might be politically difficult to persuade voting taxpayers to increase taxes and because economically there might be concern about the deadweight cost of high taxes on the economy, as higher taxes will usually constitute a disincentive to work and reduce competitiveness. Conversely, amongst some countries with traditionally high 
levels of tax, there might be other factors that would ease the pressure against tax raising measures. For example, Member States with relatively efficient tax and expenditure systems, or which place more weight on distributional than efficiency arguments, might be more willing have larger government sectors. 
Graph V.4.1 shows general government total tax 
receipts (including social security contributions) as 
a share of GDP for the 2000–07 period on average, and for 2008, as well as spending over the 2000-07 year on average. It shows that there is considerable 
variation between Member  States' tax receipts, 
with Romania, Lithuania, and Latvia receiving under 30% of GDP on average between 2000 and 2007 and France, Belgium, Sweden and Denmark over 45% (
32).  
None of the countries in the top third of tax 
burdens are amongst the highest in terms of their sustainability gap. Instead, countries with significant sustainability gaps tend to have low to medium tax burdens. It is the countries in the middle of table with very large sustainability gaps (Luxembourg, Slovenia, the United Kingdom and Spain) that will turn into relatively high tax/large government economies if they close their sustainability gaps mainly through additional taxation.. 
 
                                                          
 
(32) In addition to tax, countries  receive income from property 
and own production which is not represented in the graph. 

Chapter VI 
Overall classification of the long-term risks to the 
sustainability of public finances 
  

SUMMARY 
 
83 On the basis of the quantitative sustainability 
indicators (Chapter III), the sensitivity analysis (Chapter IV) and additional  factors (Chapter V), an overall assessment of the long-term risks to public finance sustainability the different Member States might face is reached, i.e. how important the long-term risks to public finance sustainability are and where they mainly stem from. This chapter sums up the results of the analysis carried out in the previous chapters and explains how the different factors are taken into account so as to reach an overall assessment of the long-term sustainability of public finances.   
In order to indicate the relative importance of the 
risks, a three level categorisation is used in this report: low / medium / high long-term risk, similar to the one used in the 2006 Sustainability Report and by the Commission and the Council in the assessments for the previous rounds of the stability and convergence programmes. It provides a clear distinction of the degree of risk countries might face with regard to l ong-term public finance 
sustainability and at the same time recognises that ageing population represents a budgetary challenge over the long-term for all countries, albeit to varying degrees. In particular, low long-term risk countries also face a risk and may need to implement reforms. However, an assessment of low long-term risk impl ies that the need for 
adjustments of the country is less severe or less urgent than for countries assessed to be at medium and high long-term risk.  
While this categorisation gives a clear indication 
of the relative degree of long-term risk different countries are facing, the overall assessment also provides an indication of where the long-term risks 
mainly stem from. In particular, the extent to which the long-term risks are mainly related to medium-term or to long-term budgetary developments is addressed.  
 
1. OVERALL ASSESSMENT 
 
84 1.1. THE SUSTAINABILITY INDICATORS  
The sustainability indicators provide a firm and 
objective basis to classify the long-term public finances sustainability risks in the EU Member States, though the margin s of error surrounding the 
projections are large, and there are even some projection inconsistencies given the partial equilibrium approach. 
This report has put emphasis on the more stringent 
S2 indicator. The starting point for the long-term projections was the budgetary projection for 2009 of the Commission’s spring  2009 forecasts. The S2 
indicator is consistent with the concept of sustainability of public finances over an infinite horizon and is based on regarding budgetary developments and on the most recent comparable information regarding the long-term impact of ageing populations on public expenditure.  
Alongside the S2 indicator, the relative value of 
the S1 indicator is considered as it gives an indication of the urgency of  any necessary reforms. 
Where the S1 indicator is markedly lower than the S2, the satiability constraints will materialise further in the future and therefore allows the Member State a bit more time to implement the necessary reforms without risking as large an impact on their government gross debt. 
1.2. ADDITIONAL FACTORS 
To make an overall assessment on the sustainability of public finances, other additional relevant factors are taken into account in order to 
better qualify the assessment with regard to where the main risks are likel y to stem from and to 
consider the impact of re levant factors not (or not 
sufficiently) reflected in the sustainability indicators. Taking into account these other relevant factors may lead to a somehow different overall assessment than the one that would result from 
evaluating the sustainability indicators only.  1.2.1. Additional factors concerning the 
current and medium-term budgetary 
position  
The level of the outstanding government debt  is 
arguably the most important additional factor (see Chapter V). Indeed, while the sustainability indicators already incl ude information on the 
current level of debt, they  do not incorporate all 
the specific risks faced by  countries with a large 
initial level of debt. First, high-debt countries are more sensitive to short/medium term shocks to economic growth and to interest rates changes. Second, a high level of debt may lead to higher interest rate than assumed in the projections and increase further the risks to public finance sustainability. Third, when calculating the sustainability indicators, it is assumed that all countries are able keep th eir primary balance as a 
share of GDP at its current level in the future. High-debt countries need to maintain large primary surpluses for a prolonged period of time in order to reduce their debt ratio. This may prove difficult in view of other competing budgetary pressures. This factor is used symmetrically as a risk-increasing factor for very high debt countries (notably Belgium, Greece, Italy a nd Hungary) and a risk-
decreasing factor for very low debt countries (notably Bulgaria, Estonia, Luxembourg and Romania). A note of caution is added to assessments of France, Portugal and United Kingdom, where the difficulties of the economic and financial crisis seem likely to add to their sustainability risk through high resulting levels of debt.  
A country's primary balan ce is also informative 
with regards to changes to its debt level. A negative primary balance is associated with a 
rising debt burden while a positive one with falling debt as a share of GDP. The Commission 2009 spring forecasts are used to look at the structural 
primary balance  evolution over the years 2008 to 
2010.  The forecast deterior ation of the structural 
primary balance, is seen as risk increasing factor 
for eleven Member States (Denmark, Germany, Ireland, Spain, Cyprus, Latvia, Netherlands, Slovenia, Finland, Sweden and United Kingdom), of which three (Denmark, Latvia and UK) have a particularly marked deterioration which should be flagged as a strong risk-increasing factor. In the 
Chapter VI 
Overall classification of the long-term risks to the sustainability of public finances 
 
85 case of Denmark, however, the deterioration 
comes from a very healthy starting position. 
The analysis of contingent liabilities  (see Chapter 
V, Section 4) is an increasingly important part of the budgetary surveillance process regarding the medium-term budgetary developments, as their stock is non-negligible and may entail significant fiscal risks. However, as data are scarce and only available on explicit contingent liabilities and as the distinction between explicit and implicit liabilities is not so clear-cut economically a level of caution must be exercised when determining the relative risks of different countries.  
1.2.2. Additional factors concerning the long-
term budgetary developments 
The evolution of the benefit ratio  is strongly 
driven by the pension system features and therefore by any reforms that have been enacted (see Chapter V). A decrease in the public benefit ratio usually leads to a reduction (or slowdown) in government expenditure in pensions. However, it can also lead to other risks to public finances, if: (i) it leads to a substantial increase in the poverty rate of older people, which may require government assistance; (ii)  moreover, the projected 
fall in the benefit ratio may be associated to a large increase in the relative share of social contributions that are divert ed from social security 
or other public pension schemes to private schemes, which may affect public revenue. The sustainability indicators in Poland are clearly dependent on such a marked decrease in the benefit ratio that there is significant upward risk to the sustainability gap from political pressure. For Austria, Portugal and Sweden the decrease is also an additional risk. Conversely, the high and increasing benefit ratio for Greece must be seen an indication of the types of reforms that are necessary in the country to address its very large sustainability gap. 
The assessment is made fundamentally on the 
basis of a central demographic and macroeconomic scenario, which is further discussed in the Ageing report. However, sensitivity tests  provide 
information on the robustness of the results with respect to changes in some key parameters. Also, different assumptions concerning the main drivers of expenditure can have a large impact on the size 
of the increase in age-related expenditures, for example concerning the income elasticity for 
health-care. There is th erefore some uncertainty 
regarding the size of the sustainability challenge that EU countries are facing. Sensitivity tests illustrate the possible impact of different uncertainties materialising. 
A high current tax ratio leaves limited room of 
manoeuvre for using tax increases to finance additional public expenditure as compared to a lower tax ratio (see Chapter IV.5). This is the case for Belgium, Denmark, Italy and Sweden, with Belgium combining a high tax ratio with a need to reduce its very high debt.  By contrast, low tax ratios are not considered to be a risk-reducing factor, since a possible decision regarding an increase of the tax ratio would not only take into account the financing needs resulting from ageing but would depend on the size of public procurement of good and services, the effectiveness of tax system s, the structure of the 
tax system and its impact on growth.  
1.3. OVERALL ASSESSMENT 
Table V.1.1 presents an assessment of the long-
term risks associated with the S2 indicator and lists the main additional factors that are taken into account when reaching an overall assessment for 
the 27 Member States. As noted in this section, information on certain factors is incomplete, which prevents a fully consistent analysis and use of all factors at this stage, e.g. concerning contingent liabilities, and the evolution of the benefit ratio.  
The relationship between the overall classification 
and the S2 indicator is shown in Graph V.1.1 which indicates that in general, the synthetic S2 indicator summarises the overall degree of long-term risks well. Specifically, the overall assessment is different from an assessment that would be based solely on the value of the S2 indicator in the main scenario in a few cases, namely: Both Italy and Hungary are deemed to be at medium long-term risk despite a low S2 indicator due mainly to their very high debt and in the case of Italy also to its high tax ratio. Despite a very large sustainability gap, Luxembourg is assessed as being at medium long-term risk due to its low level of debt, the large level of assets and the significantly lower S1 indicator which allows it 
European Commission 
Sustainability Report - 2009 
 
86 some more time to correct its gap than would be 
the case with a higher S1. 
Finland is assessed to be low long-term risk, 
though the projected increase on age-related 
expenditure is substantial and the fiscal cost of the crisis has been large. However, the large stock of financial assets in the government’s portfolio (above 100 percent of GDP) provides a cushion to absorb the crisis-related deterioration in government accounts. 
It should be noted that countries with different 
characteristics can overall face a similar degree of 
risks to fiscal sustainability. For example, the projected cost of ageing in BE is high while the budgetary position is relatively sound, with a small structural primary deficit and a very high level of government debt. By contrast, PL, which is in the same medium long-term risk category, has a projected cost of ag eing which marginally 
improves its long-term sustainability while its sustainability difficulties arise from its weak budgetary position. Despite having the same classification and S2 gaps within 2 percentage points of GDP of each other, the priorities are 
different; PL needs to consolidate its public finances once the upswing is underway and the time is right, while BE might consider appropriate introducing measures to curb the projected high 
increase in age-related expenditure.  
An overall assessment of risks to the long-term 
sustainability of public finances is given in the following section for the 27 Member States. Moreover, a more detailed assessment per Member State is given in Chapter VI. As noted in this section, information on certain factors is incomplete, which prevents a consistent analysis and use of all factors at th is stage, e.g. concerning 
contingent liabilities.  
Table VI.1.1:  Main factors considered in reaching an overall as sessment of the public finance sustainability risks 
S2 indicatorLevel of 
debtChange in the structural 
primary balancetax ratioDifference 
between the S1 
and S2 
indicatorsBenefit 
ratioOverall 
assessment
Baseline 2009 2008 - 2010 %change
BE medium very high – medium
BG low very low low
CZ high low high
DK low low – – – low
DE medium high – medium
EE low very low low
IE high high – high
EL high very high high
ES high medium – high
FR medium high medium
IT low very high – medium
CY high medium – + high
LV high low – – high
LT high low high
LU high very low + medium
HU low very high medium
MT high high high
NL high medium – high
AT medium high – medium
PL medium medium – medium
PT medium high – medium
RO high very low high
SI high low – high
SK high low high
FI medium low – low
SE low medium – – – low
UK high high – – high
Note: '-' factor tends to increase the risk to long-term sustaina bility, '+' factor tends to decrease the risk to long-term sus tainability 
Source:  Commission services 
 
Chapter VI 
Overall classification of the long-term risks to the sustainability of public finances 
 
87 Graph VI.1.1:  Overall risk classification and the sustainabili ty gaps (S2 and S1 in the baseline scenario) 
Assessment
BE
BGCZ
DKDE
EEIE EL ES
FR ITCY LV LT
LU HUMTNL
AT PL PTRO SI SK
FI SEUK
- 2 02468 1 0 1 2 1 4 1 6High long-term risk countriesS1
S2
Low long-term risk countriesMedium long-term risk countries
S1
S2S1
S2
Source:  Commission services. 
2. ASSESSMENT OF SUSTAINABILITY RISKS FOR THE MEMBER 
STATES 
 
88 The budgetary impact of ageing populations is a 
concern for the sustainability of public finances in all EU Member States. There is however a large variation in the degree of risks that they are facing and where they mainly come from. This section summarises the different ri sks that the EU Member 
States are facing with re gard to the long-term 
sustainability of the public finances. Overall, thirteen countries are assessed to be at high risk, nine at medium risk and five at low risk. Compared with the results of the 2006 Sustainability Report, ten Member States are in a higher risk category, while  two are in lower risk 
group.  
2.1. LOW LONG-TERM RISK COUNTRIES 
Bulgaria, Denmark, Estonia, Finland, Sweden have in general come furthest in coping with ageing, which implies a strong budgetary position (running large surpluses prior to the crisis, reducing debt and/or accumulating assets) and/or comprehensive pension reforms, sometimes including a shift towards private funded pension schemes, and present therefore a low long-term risk. 
Of these countries, Finland has an above average 
projected increase in ag e-related expenditure over 
the long-term. Although, the large stock of public financial assets provides a buffer against the negative budgetary impacts of the crisis.  
For Bulgaria, Denmark, Estonia and Sweden the 
forecast increases in age-related expenditure are amongst the lowest in EU and their budgetary positions are either in or close to surplus. This does not mean that in these c ountries there are no risks 
regarding the long-term sustainability of public finances however, but that  their social protection 
systems (pension and healthcare) at present appear able to deal with the pressures of an ageing 
population on current estimates. In particular, in case of Bulgaria and Estonia, a positive impact of low debt level and implemented pension reforms should be seen in the context of the ongoing convergence to the levels observed in the rest of EU. 
 2.2. MEDIUM-RISK COUNTRIES 
The intermediate group of countries (Belgium, 
Germany, France, Italy, Luxembourg, Hungary, Austria, Poland and Portugal) consists of Member States with very different  characteristics but three 
distinct categories can be distinguished: 
Belgium, Germany, Austri a are countries with a 
significant cost of agei ng and where measures 
might be needed to curb these costs, but which currently have relatively strong budgetary positions. For these countries, reforms to address the rising cost of ageing  are a priority and these 
can be undertaken without waiting for the end of the financial crisis, insofar as the reforms do not adversely affect the recovery. This is also the case for Luxembourg which faces the highest increase in age-related expenditure of all EU countries, but which is included in the medium long-term risk category due to its low level of debt, high stock of assets and lower ageing co sts at the beginning of 
the period as shown by its lower S1 indicator. For Belgium, the strong budg etary position in recent 
years is counterweighted by very high levels of debt ratio-to-GDP which is forecast to reach 100% by 2010. Nevertheless, Belgium is assessed to present medium long-term ri sk because of its track 
record of running consistently high primary surpluses over time and reduce its debt when the 
economy is not in crisis.  
France, Poland, and Portug al are countries that 
need to consolidate, though to different degrees, their public finances over the medium-term but for which the costs of ageing are relatively less of a concern, usually as a result of reforms made to their pension systems. It may be that the government accounts improve when the recovery comes, but where this is not the case budgetary consolidation will be n ecessary and should be 
undertaken as soon as the time is right in order to reduce risks to public finance sustainability. In Poland’s and Portugal’s cases, there is an added risk in relation to the sharp reduction in the benefit ratio. 
For Italy and Hungary neither the budgetary 
position nor the long term cost of ageing are particularly high. However the initial levels of debt 
Chapter VI 
Overall classification of the long-term risks to the sustainability of public finances 
 
89 give cause for concern. In both Italy and Hungary, 
rapid budgetary consolidation is required to ensure a steady reduction of the currently very high level of debt, although it will need to be undertaken at a time when it does not adversely affect the recovery from the economic and financial crisis.  
2.3. HIGH LONG-TERM RISK COUNTRIES  
This category of countries (Czech Republic, Ireland, Greece, Spain, Cyprus, Latvia, Lithuania, Malta, Netherlands, Romania, Slovenia, Slovakia and United Kingdom) are characterised by a very significant rise in age-related expenditure over the long-term, underlining that measures aimed at curbing them will prove necessary. Of these, 
Latvia is the exception, where age-related expenditure is forecast to be just 1.3 percentage points (p.p.) of GDP higher in 2060 compared with 2010. For Greece and Slovenia (as well as Luxembourg) the increase in these expenditures is over 10 p.p. of GDP.  
Conversely, Romania is ch aracterised by very low 
levels of debt which stand at below 20% of GDP, while for Czech Republic, Latvia, Lithuania, Slovenia and Slovakia debt ratios stand at below 40%. At the other end of the spectrum, Greece has a government dent of nearly 100% of GDP, which is combined with one of the highest increases in 
age-related expenditure grouping the whole EU. Latvia, while characterised by very low debt levels, is forecast to have a very large increase in debt by 2010.  
For most of the Member St ates in this high long-
term risk category it will be necessary to address 
both the long-term costs of ageing through reforms to pension systems and the weakness of the budgetary positions. For so me Member States the 
deficits may return to surplus when the recovery comes, but where this is not the case budgetary consolidation will be n ecessary and should be 
undertaken as soon as the time is right in order to reduce risks to public finance sustainability. 
Conversely, the reforms to the pension and 
healthcare system which will not adversely affect the recovery of the Member States' economies should be approached with urgency. This is particularly the case for countries where age related expenditure is a significant source of unsustainability: Ireland, Greece, Spain, Cyprus, 
Malta, Netherlands, Romania and Slovenia. As not all pension and healthcare reforms are neutral with respect to the recovery, care should be taken to consider the effect of any changes undertaken. 
Within the high long-term risk countries, the case 
of Cyprus should also be noted. Thanks to successful consolidation in the pre-crisis years, Cyprus managed to significantly reduce its debt ratio. Moreover, although the planned increases in age-related expenditure is very large, its demographic projections ar e such that the increase 
in ageing-related expenditure will be relatively contained in the first half of the projection horizon. 
   

Chapter VII 
Sustainability assessment per Member State 
  
1. BELGIUM 
 
 
92 1.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure Belgium has a sustainability gap (S2) of 5.3% of GDP, which is below the EU average (6.5% of GDP). This means that to put public finances on a sustainabl e path, Belgium should 
improve its structural prim ary balance in a durable 
manner by 5.3% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. Alternatively the social protection system (in particular public pensions, health and long-term care) would have to be reformed to decelerate the planned increase in age-related expenditure. 
The Belgian sustainability gap is to a limited 
extent the result of the initial budgetary position, as the required adjustment to stabilise the debt ratio is slightly positive (0.6% of GDP) but clearly below the EU average (3.3% of GDP).  This reflects starting position in terms of the structural primary balance, which is relatively sounder than in several other Member States. On the other hand, the required adjustment given the long-term cost of ageing (4.8% of GDP) is significantly above the EU average (3.2% of GDP) . The long-term cost of 
ageing is mainly driven by an increase in pension expenditure (by 4.5 p.p. in 2060 relative to 2010), while health care and long-term care also contribute less but still significantly to the long-term cost of ageing (increasing by 1.1 p.p. and 1.3 p.p. respectively). 
In the 2006 Sustainability Report, the S2 gap was 
1.8% of GDP. The difference between that report and the current results (3.5 p.p.) stems from the deterioration of the initial budgetary position (4.2 p.p.), while component of the long-term cost of ageing actually has fallen (-0.5 p.p.). The extension of the projection period from 2050 (in the 2006 report) to 2060 had no impact for Belgium on these results.  The Belgian government debt in 2009, the base 
year of the analysis, stood at 95.7% of GDP and is forecast to increase to around 100% of GDP in 
2010. The structural primar y balance is forecast to 
decrease from 0.7% in 2009 to 0.0% in 2010. Belgian debt is far above both EU average and the 60% ceiling set by the Maastricht criteria thus poses risks for the medium and long term sustainability.  
1.2. OVERALL ASSESSMENT 
Belgium appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is above 
the EU average, mainly as  a result of a relatively 
high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position has worsened in 2009 and now compounds the budgetary impact of population ageing on the sustainability gap. Moreover, the current level of gross debt, which is far above the Treaty reference value, adds to the sustainability risk. Also, the further deteri oration of the structural 
primary balance may widen the sustainability gap.  
Belgium has little scope to increase its already 
high tax burden thus focus should be put on decreasing public spending in order to diminish its sustainability gap. Further reforming the Belgian social security system would improve the sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Chapter VII 
Sustainability assessment per Member State, Belgium 
 
93 Graph VII.1.1:  Determinants of fiscal sustainability (Belgium) 
BE
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)Note on interpretation: This chart allows to compare countries on the 
basis of the main variables that ar e taken into account in the overall 
assessment of sustainability risk per country: S2, S1, the required adjustment given the initial budgetary position (IBP), the required adjustment given the long-term change in age-related expenditure 
(LTC), the government debt ratio in 2009, the debt ratio at the end of the 
projection horizon (2060) under an unchanged policy assumption, and the stock of financial assets. The scale for each variable corresponds to the range of data in the EU. Data ar e in percent of GDP. Countries with 
high sustainability risks have each or most of the variables close to the centre of the chart; for countries with low sustainability risks, the area in the chart is larger. 
Source:  Commission services. 
 
  
Table VII.1.1:  Summary table (Belgium) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 10.6 10.8 11.1 11.3 11.5 11.7 12.0 12.2 12.3 1.7
Working age population (15-64) % of total 65.9 66.0 65.0 63.8 62.4 60.9 59.2 58.6 57.8 -8.1
Old-age dependency ratio (65+/15-64) 25.9 26.1 28.2 30.6 33.8 37.6 42.3 43.9 45.8 19.9
Participation rate (15-64) 67.3 68.0 69.5 69.8 69.4 69.4 69.7 69.7 69.7 2.4
 - Older workers (55-64) 36.2 39.3 46.0 48.9 48.9 48.8 49.5 49.4 49.1 13.0
Unemployment rate (15-64) 7.5 10.3 6.8 6.2 6.2 6.2 6.2 6.2 6.2 -1.3Real potential GDP (growth rate) 1.9 1.0 2.3 1.9 1.6 1.6 1.8 1.7 1.7 -0.2
Expenditure projections
Pensions 10.0 10.3 10.9 11.8 13.0 13.9 14.6 14.7 14.7 4.8
Benefit ratio 44.8 46.5 47.5 48.2 48.3 47.9 46.3 44.6 43.2 -1.6
Health care 7.6 7.7 7.9 8.1 8.2 8.4 8.7 8.8 8.8 1.2
Long-term care 1.5 1.5 1.6 1.7 1.8 2.0 2.5 2.8 2.9 1.4
Education 5.5 5.4 5.2 5.1 5.3 5.4 5.4 5.4 5.5 0.0Unemployment benefits 1.9 1.9 1.7 1.5 1.5 1.5 1.5 1.5 1.5 -0.4
Total age-related expenditure 26.5 26.8 27.3 28.2 29.7 31.1 32.7 33.3 33.4 6.9
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 1.5 0.7 0.0
Public debt 89.6 95.7 100.9 103.1 116.3 137.8 199.0 278.1 372.4
Cost of ageing
Net age-
related 
expenditurePension 
taxationeloss age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 5.9 0.7 6.6 4.5 1.1 1.3 -0.3 -0.2
Crisis scenario: lost decade 7.7 0.7 8.4 5.7 1.1 1.5 0.1 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 4.5 0.5 0.6 3.5 5.3 0.6 4.8 0.3 5.9
Crisis scenario: lost decade 6.1 0.7 0.6 4.9 7.0 0.7 6.4 0.5 7.0
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero mielation Interest rate
AWG scenarios 5.3 0.5 -0.6 -0.4 -0.5 2.9 0.2
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.7 0.1 0.4 : 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast elowth in 
unit costsSlow elowth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.3 0.6 0.3 -1.0
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 46.6 47.0
 (End year 2050) 1.8 5.3 4.2 -0.7S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
2. BULGARIA 
 
 
94 2.1. OVERVIEW OF THE RESULTS 
The sustainability analysis indicates that on the 
basis of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related 
expenditure Bulgaria has a sustainability gap (S2) of 0.9% of GDP, which is clearly below the EU average (6.5% of GDP). Th is means that to put 
public finances on a sustainable path, Bulgaria should improve its structur al primary balance in a 
durable manner by 0.9% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. Alternatively the social protection system would have to be reformed to decelerate the planned increase in age-related expenditure. 
The Bulgarian sustainability gap is partially offset 
by the initial budgetary position i.e. the required adjustment to stabilise the debt ratio is negative (-0.6% of GDP), clearly below the EU average (3.3% of GDP). The required adjustment given the   long-term cost of agei ng (1.5% of GDP) is 
significantly lower than the EU average (3.2% of GDP). The long-term cost of ageing is driven by 
an increase in public pension expenditure (by 2.2 p.p. in 2060 relative to 2010) and to a lesser extend by an increase of healthcare and long-term care expenditure (by 0.6 p.p. and 0.2 p.p. increasing).  
The Bulgarian government debt in 2009, the base 
year for the analysis, stood at 16.0% of GDP and is forecast to increase to around 17% of GDP in 2010. The structural primar y balance is forecast to 
increase from 1.1% of GDP in 2009 to 2.4% of GDP in 2010. Bulgaria's debt is among the lowest among EU Member States and way below the Maastricht limit. 
2.2. OVERALL ASSESSMENT 
Bulgaria appears to be at low risk with regard to the long-term sustainability of public finances. The budgetary position in 2009, with a large structural 
primary surplus, contributes significantly to debt reduction before considering the long-term budgetary impact of ag eing. Maintaining high 
primary surpluses over the medium-term and further reforming the Bulg arian social security 
system would limit risks to the long-term sustainability of public finances.  
The current context of economic and financial 
crisis entails that any change exacerbating its effects should be ruled out, which means that Bulgaria should keep a prudent fiscal policy stance.  
Graph VII.2.1:  Determinants of fiscal sustainability (Bulgaria) 
BG
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium.  
Source:  Commission services. 
 
  
Chapter VII 
Sustainability assessment per Member State, Bulgaria 
 
95  
  
Table VII.2.1:  Summary table (Bulgaria) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 7.7 7.6 7.4 7.2 7.0 6.8 6.3 5.9 5.5 -2.2
Working age population (15-64) % of total 69.3 69.1 67.0 65.4 64.7 64.2 61.3 56.4 53.8 -15.5
Old-age dependency ratio (65+/15-64) 24.9 25.3 28.2 31.1 33.7 36.3 43.6 55.4 63.5 38.7
Participation rate (15-64) 66.8 67.8 69.9 70.3 69.6 69.0 68.0 67.9 69.3 2.4
 - Older workers (55-64) 46.6 46.4 47.4 48.2 48.8 49.8 49.0 47.6 50.2 3.6
Unemployment rate (15-64) 6.9 7.8 4.7 4.7 4.7 4.7 4.7 4.7 4.7 -2.2Real potential GDP (growth rate) 5.9 3.5 3.0 2.4 2.0 1.7 1.4 0.3 0.8 -5.1
Expenditure projections
Pensions 8.3 9.1 8.6 8.4 8.4 8.6 9.5 10.8 11.3 3.0
Benefit ratio 44.4 49.9 47.1 44.3 42.2 40.3 37.3 35.6 35.6 -8.8
Health care 4.7 4.8 4.9 5.0 5.0 5.1 5.4 5.5 5.4 0.7
Long-term care 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.4 0.2
Education 3.3 2.9 2.7 2.8 2.9 2.9 2.7 2.9 3.0 -0.2Unemployment benefits 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0
Total age-related expenditure 16.6 17.1 16.5 16.5 16.7 16.9 17.9 19.6 20.2 3.7
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 1.0 1.1 2.4
Public debt 14.1 16.0 17.3 3.4 -3.6 -9.9 -17.2 -11.9 9.8
Cost of ageing
Net age-
related 
expenditurePension 
taxationeloss age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 3.2 0.0 3.2 2.2 0.6 0.2 0.2 -0.2
Crisis scenario: lost decade 2.4 0.0 2.4 1.5 0.6 0.2 0.0 -0.3
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario -0.6 -0.7 -0.5 0.6 0.9 -0.6 1.5 0.1 2.3
Crisis scenario: lost decade -1.2 -0.7 -0.5 0.0 0.3 -0.6 0.9 0.0 1.9
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero mielation Interest rate
AWG scenarios 0.9 0.3 -0.2 0.0 -0.2 0.3 -0.3
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.5 0.0 0.3 1.9 0.6
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast elowth in 
unit costsSlow elowth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 0.1 0.0 -0.1
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 33.9 33.2
 (End year 2050) : 0.6 : :S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:  Commission services. 
 
3. THE CZECH REPUBLIC 
 
 
96 3.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure, the Czech Republic has a sustainability gap (S2) of 7.4% of GDP, which is above the EU average (6.5 % of GDP).  This means 
that to put public finan ces on a sustainable path, 
the Czech Republic should  improve its structural 
primary balance in a durable manner by 7.4% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system (in particular public pensions and health care) would have to be re formed to decelerate the 
projected increase in age-related expenditure. 
The Czech sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (3.7% of GDP), slightly above the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(3.7% of GDP) is somewh at above the EU average 
(3.2% of GDP). The long-term cost of ageing is mainly driven by an increase in pension expenditure (by 4.0 p.p. in 2060 relative to 2010), while health care also contributes to the long-term cost of ageing (increasing by 2.0 p.p.). 
In the 2006 Sustainability Report, the S2 gap was 
5.5% of GDP. The difference between that report and the current results (2.0 p.p.) stems from the deterioration of the initial budgetary position (3.2 p.p.), while the component of the long-term cost of ageing has actually d ecreased (-1.9 p.p.) due 
mainly to reforms to the pension and health care systems. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.7 p.p. 
The Czech government debt in 2009, the base year 
of the analysis, stood at 33.7% of GDP and is forecast to increase to ar ound 37.9% of GDP in 
2010. The structural primar y balance is forecast to 
improve slightly from -2.9% in 2009 to -2.6% in 2010. Czech debt is both below the EU average 
and the 60% ceiling set by the Maastricht criteria, however the continuing structural primary deficits may widen the sustainability gap of its public finances. 
3.2. OVERALL ASSESSMENT 
The Czech Republic appears to  be at high risk with 
regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is above the EU average according to the 
projections made in 2009. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.  
Improving the primary balance over the medium 
term and further reforms to the social security system would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis  
Graph VII.3.1:  Determinants of fiscal sustainability (The Czech 
Republic) 
CZ
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium.  
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, The Czech Republic 
 
97  
  
Table VII.3.1:  Summary table (The Czech Republic) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 10.3 10.4 10.5 10.5 10.5 10.4 10.2 9.9 9.5 -0.8
Working age population (15-64) % of total 71.2 70.5 67.5 65.1 64.5 64.3 61.6 56.5 54.4 -16.9
Old-age dependency ratio (65+/15-64) 20.2 21.8 26.5 31.1 33.8 35.7 42.7 54.8 61.4 41.2
Participation rate (15-64) 70.0 71.0 73.5 73.9 72.9 72.5 72.3 73.5 73.5 3.6
 - Older workers (55-64) 48.9 53.0 56.8 58.1 58.5 60.8 63.4 66.8 67.5 18.6
Unemployment rate (15-64) 5.3 7.4 4.5 4.5 4.5 4.5 4.5 4.5 4.5 -0.8Real potential GDP (growth rate) 3.9 2.9 3.0 2.5 1.6 1.4 0.9 0.7 1.1 -2.8
Expenditure projections
Pensions 7.8 7.1 6.9 6.9 7.0 7.1 8.4 10.2 11.0 3.3
Benefit ratio 45.2 41.6 38.7 36.8 35.7 35.4 36.5 37.6 37.6 -7.5
Health care 6.2 6.4 6.7 6.9 7.1 7.4 7.8 8.1 8.4 2.2
Long-term care 0.2 0.2 0.3 0.3 0.3 0.4 0.5 0.5 0.7 0.4
Education 3.5 3.2 3.0 3.0 3.1 3.1 2.9 3.0 3.2 -0.3Unemployment benefits 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0
Total age-related expenditure 17.9 17.0 16.9 17.2 17.7 18.1 19.8 22.0 23.4 5.5
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -2.3 -2.9 -2.6
Public debt 29.8 33.7 37.9 65.9 87.4 114.9 192.4 317.0 486.7
Cost of ageing
Net age-
related 
expenditurePension 
taxationeloss age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 6.3 0.0 6.3 4.0 2.0 0.4 0.0 -0.3
Crisis scenario: lost decade 6.3 0.0 6.3 4.0 1.9 0.4 0.0 -0.3
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 5.3 3.6 -0.3 1.9 7.4 3.7 3.7 0.6 4.6
Crisis scenario: lost decade 5.3 3.6 -0.3 2.0 7.5 3.8 3.7 0.6 4.6
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero mielation Interest rate
AWG scenarios 7.4 0.5 -0.1 0.5 0.5 1.1 -0.6
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.7 0.0 0.4 0.4 1.1
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast elowth in 
unit costsSlow elowth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.0 0.1 0.1 -0.3
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 36.7 35.9
 (End year 2050) 5.5 6.7 3.2 -1.9S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
4. DENMARK 
 
 
98 4.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure, Denmark has a negative sustainability gap (S2) of -0.2% of GDP, which is clearly below the EU average (6.5% of GDP).   
While the Danish sustainability gap is negative, the 
required adjustment given the long-term cost of ageing is positive (1.4% of GDP), which is below the EU average (3.3% of GDP). In parallel, the 
initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is negative (-1.6% of GDP) clearly be low the EU average (3.2% 
of GDP). The increase in the long-term cost of 
ageing is mainly driven by long-term care and health care expenditure (increasing by 1.5 p.p. and 0.9 p.p. respectively in 2060 relative to 2010), while the ratio of pension expenditure to GDP decreases by 0.2 p.p.  
In the 2006 Sustainability Report, the S2 gap was 
negative (-2.2% of GDP). The difference between that report and the current results (2.0 p.p.) stems mainly from the deterioration of the initial budgetary position (4.5 p.p.), while the component of the long-term cost of  ageing has decreased by 
2.1 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 decreases the sustainability gap by 0.4 p.p. 
The Danish government debt in 2009, the base 
year of the analysis, stood at 32.5% of GDP and is forecast to increase to around 33% of GDP in 2010. The structural primar y balance is forecast to 
decrease from 2.8% in 2009 to 1.2% in 2010. Danish debt is both below the EU average and the 60% ceiling set by the Maastricht criteria.  
 4.2. OVERALL ASSESSMENT 
Denmark appears to be at low risk with regard to 
the long-term sustainability of public finances. The long-term budgetary impact of the cost of ageing is 
lower than on average in the EU, notably due to 
the recent pension reform. Moreover, the budgetary position with a structural surplus will further limit risks to the sustainability of public finances. 
High primary surpluses over the medium term 
would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
In addition, Denmark gave guarantees to its 
banking sector which if actually granted, could threaten the sustainability of Danish public finances, due to their magnitude.  
Graph VII.4.1:  Determinants of fiscal sustainability (Denmark) 
DK
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Denmark 
 
99  
  
Table VII.4.1:  Summary table (Denmark) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 5.4 5.5 5.6 5.7 5.7 5.8 5.9 5.9 5.9 0.5
Working age population (15-64) % of total 66.1 65.5 64.1 63.1 62.0 60.3 58.2 59.2 58.7 -7.4
Old-age dependency ratio (65+/15-64) 23.2 25.0 29.1 31.8 34.5 37.8 42.7 41.3 42.7 19.5
Participation rate (15-64) 80.3 79.8 79.8 79.6 79.6 79.6 80.6 81.0 80.8 0.6
 - Older workers (55-64) 61.3 60.3 61.1 62.6 64.4 64.0 66.6 70.3 69.3 8.1
Unemployment rate (15-64) 3.8 6.6 3.2 3.2 3.2 3.2 3.2 3.2 3.2 -0.6Real potential GDP (growth rate) 1.7 0.7 1.7 1.6 1.8 1.5 1.7 1.9 1.6 -0.1
Expenditure projections
Pensions 9.1 9.4 10.2 10.6 10.5 10.6 10.4 9.6 9.2 0.1
Benefit ratio 39.4 39.4 38.9 38.3 38.0 38.3 37.7 37.5 37.8 -1.6
Health care 5.9 6.0 6.2 6.4 6.6 6.7 6.8 6.9 6.9 1.0
Long-term care 1.7 1.8 1.9 2.1 2.3 2.6 3.0 3.2 3.2 1.5
Education 7.1 7.2 7.4 7.4 7.3 7.4 7.5 7.4 7.2 0.2Unemployment benefits 1.0 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 -0.2
Total age-related expenditure 24.8 25.2 26.5 27.4 27.5 28.1 28.6 27.9 27.4 2.6
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 5.6 2.8 1.2
Public debt 33.3 32.5 33.7 12.2 10.3 11.3 17.4 21.3 18.3
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 1.0 1.2 2.2 -0.2 0.9 1.5 0.1 -1.1
Crisis scenario: lost decade 0.8 1.2 2.0 -0.3 0.8 1.4 0.0 -1.1
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario -0.6 -1.9 -0.5 1.8 -0.2 -1.6 1.4 0.0 1.9
Crisis scenario: lost decade -0.8 -1.9 -0.5 1.6 -0.4 -1.6 1.2 0.0 1.9
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios -0.2 0.3 0.0 -0.2 -0.4 1.2 0.3
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.5 0.1 0.4 : 0.6
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.2 -0.2 0.4 0.2 0.4 -1.2
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 49.4 50.0
 (End year 2050) -2.2 0.1 4.5 -2.1S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
5. GERMANY 
 
 
100 5.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure Germany has a sustainability gap (S2) of 4.2% of GDP, which is significantly below the EU average (6.5% of GDP). This means that to put 
public finances on a sustainable path, Germany should improve its structur al primary balance in a 
durable manner by 4.2% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. The new budgetary rule anchor ed in the German 
Constitution, setting a 0.35% of GDP ceiling for the federal budget in structural terms as of 2016 and prescribing structurally balanced budgets for the Länder governments as of 2020, will be a cornerstone of future consolidation efforts. In parallel, the social protection system would have to be reformed further and the achievements of the past reforms would have to be preserved. In particular, recent deviation from the pension adjustment formula resulting in higher outlays for pension benefits in 2008 and 2009 would have to be reversed as envisaged as of 2010. 
The German sustainability gap is slightly 
compounded by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (0.9% of GDP), clearly below the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(3.3% of GDP) is close to  the EU average (3.2% of 
GDP). The long-term cost of ageing is mainly 
driven by an increase in pension expenditure (by 2.6 p.p. in 2060 relative to 2010), while health care and long-term care contribute  to the long-term cost 
of ageing by a lesser but still significant amount (increasing by 1.6 p.p. and 1.4 p.p. of GDP respectively). 
In the 2006 Sustainability Report, the S2 gap was 
4.4% of GDP. The difference between that report and the current results (-0.2 p.p.) stems from the improvement of the initial budgetary position (0.5 p.p.), while the component of the long-term cost of ageing has increased slig htly (0.1 p.p.). The 
extension of the projection period from 2050 (in the 2006 report) increases the sustainability gap by 0.2 p.p.  
The German government debt in 2009, the base 
year of the analysis, stood at 73.4% of GDP and is forecast to increase to around 78% of GDP in 2010. The structural primary balance is projected to decrease from 0.6% in 2009 to -0.9% in 2010. German debt is above both  the EU average and the 
60% ceiling set by the Maastricht criteria which poses risks for the medium and long term. The deterioration of its structural primary balance may also pose some risk for the long-term sustainability of its public finances. 
5.2. OVERALL ASSESSMENT 
Germany appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is close 
to the EU average. The budgetary position has worsened in 2009 and now compounds the budgetary impact of population ageing on the sustainability gap. Moreover the current level of gross debt is above the Treaty reference value and on a rising trend. The decrease of the structural primary balance may widen the sustainability gap.  
Improving primary surpluses over the medium 
term, preserving the achievements of past pension reforms and further reforms to the social security system aimed at curbing th e increase in age-related 
expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
 
Chapter VII 
Sustainability assessment per Member State, Germany 
 
101 Graph VII.5.1:  Determinants of fiscal sustainability (Germany) 
DE
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
  
Table VII.5.1:  Summary table (Germany) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 82.3 82.1 81.9 81.5 80.9 80.2 77.8 74.5 70.8 -11.6
Working age population (15-64) % of total 66.3 66.0 65.9 64.6 62.6 59.7 56.7 56.2 55.0 -11.3
Old-age dependency ratio (65+/15-64) 29.9 31.2 32.2 35.3 39.5 46.2 54.7 56.4 59.1 29.2
Participation rate (15-64) 76.2 77.3 78.7 79.1 78.8 79.3 80.2 79.7 79.8 3.6
 - Older workers (55-64) 57.3 60.3 67.6 69.9 69.6 70.5 74.7 73.9 73.9 16.5
Unemployment rate (15-64) 8.4 10.4 7.1 6.2 6.2 6.2 6.2 6.2 6.2 -2.2Real potential GDP (growth rate) 0.9 0.8 1.9 1.5 0.9 1.3 1.1 1.0 1.0 0.1
Expenditure projections
Pensions 10.4 10.2 10.1 10.5 11.0 11.5 12.1 12.3 12.8 2.3
Benefit ratio 51.4 50.4 49.7 49.7 47.8 45.9 42.9 42.5 42.5 -8.9
Health care 7.4 7.6 7.9 8.1 8.3 8.5 9.0 9.2 9.2 1.8
Long-term care 0.9 1.0 1.1 1.2 1.3 1.4 1.8 2.2 2.4 1.4
Education 3.9 3.7 3.4 3.2 3.2 3.3 3.4 3.4 3.5 -0.4Unemployment benefits 0.9 0.9 0.8 0.6 0.6 0.6 0.6 0.6 0.6 -0.3
Total age-related expenditure 23.6 23.3 23.2 23.6 24.5 25.4 26.9 27.8 28.4 4.8
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 1.6 0.6 -0.9
Public debt 65.9 73.4 78.7 77.7 86.8 102.5 152.1 222.1 318.9
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 5.1 0.0 5.1 2.5 1.6 1.4 -0.4 -0.2
Crisis scenario: lost decade 6.7 0.0 6.7 3.9 1.5 1.5 -0.3 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 3.1 0.8 0.2 2.1 4.2 0.9 3.3 0.4 5.0
Crisis scenario: lost decade 4.7 1.0 0.2 3.6 5.8 1.0 4.8 0.6 5.7
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 4.2 0.4 0.1 -0.1 -0.2 1.9 0.1
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.6 -0.1 0.4 : 0.6
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.2 0.4 0.2 -0.9
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 40.7 41.1
 (End year 2050) 4.4 4.0 -0.5 0.1S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
6. ESTONIA 
 
 
102 6.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary of 2009, position based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Estonia has a sustainability gap (S2) of 1.0% of GDP, which is clearly below the EU average (6.5% of GDP).  This means that to put 
public finances on a sustainable path, Estonia should improve its structur al primary balance in a 
durable manner by 1.0% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure.  
The Estonian sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (1.0% of GDP), below th e EU average (3.2% of 
GDP). The sustainability gap is mitigated by the required adjustment given the long-term cost of ageing is negative (-0.1 % of GDP) and clearly 
lower than the EU average (3.3% of GDP). The long-term cost of ageing ar e driven by an increase 
in health care expenditure (by 1.1 p.p. in 2060 relative to 2010), while long-term care expenditure contribute less to the long-term cost of ageing (increasing by 0.1 p.p.). At the same time, the GDP share of pension expenditure is expected to fall by 1.6 p.p. 
In the 2006 Sustainability Report, the S2 gap was  
-3.4% of GDP. The difference between that report and the current results (4.4 p.p.) stems mainly from the deterioration of the initial budgetary position (2.9 p.p.), while the co mponent of the long-term 
cost of ageing has increased by 1.5 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 had no impact for Estonia on these results. 
The Estonian government debt in 2009, the base 
year of the analysis, stood at 6.8% of GDP and is forecast to increase to arou nd 8% of GDP in 2010. 
The structural primary ba lance is forecast to 
increase from -0.6% in 2009 to -1.4% in 2010. 
Estonian debt is well below the EU average and the 60% ceiling set by the Maastricht criteria. Despite the deterioration of its structural primary 
balance, Estonia has sustainable public finances.  
6.2. OVERALL ASSESSMENT 
Estonia appears to be at low risk with regard to the   long-term sustainability of public finances. The long-term budgetary impact of ageing is among the lowest in the EU, mainly due to the reforms of the pension system, and social protection system at present appears able to d eal with the pressures of 
an ageing population based on current estimates. However, the adjustment needed due to the structural primary deficit in 2009 outweighs the budgetary impact of population ageing and increases the sustainability gap. This assessment should be seen in the co ntext of the ongoing cost 
convergence, as well as an initially low level of total age-related expenditure compared to the EU average level. 
Improving the primary balance over the medium 
term would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.6.1:  Determinants of fiscal sustainability (Estonia) 
EE
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Estonia 
 
103  
  
Table VII.6.1:  Summary table (Estonia) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 1.3 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.1 -0.2
Working age population (15-64) % of total 68.0 67.9 66.1 64.3 63.5 63.2 62.1 58.1 55.3 -12.7
Old-age dependency ratio (65+/15-64) 25.1 25.0 26.7 29.2 31.9 34.4 39.0 47.2 55.6 30.5
Participation rate (15-64) 72.9 74.4 75.4 75.4 74.6 74.3 74.1 73.7 74.5 1.6
 - Older workers (55-64) 62.4 63.3 60.6 62.8 63.7 64.6 64.5 61.9 64.1 1.7
Unemployment rate (15-64) 4.7 14.1 3.5 3.5 3.5 3.5 3.5 3.5 3.5 -1.2Real potential GDP (growth rate) 4.8 1.0 3.2 2.6 2.3 2.2 1.0 0.6 1.2 -3.6
Expenditure projections
Pensions 5.6 6.4 6.2 5.9 5.8 5.6 5.4 5.3 4.9 -0.7
Benefit ratio 26.5 33.7 31.8 29.2 26.9 24.8 21.9 18.5 15.8 -10.6
Health care 4.9 5.1 5.2 5.3 5.4 5.5 5.8 6.0 6.1 1.2
Long-term care 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Education 3.7 3.1 3.0 3.3 3.5 3.4 3.1 3.2 3.5 -0.2Unemployment benefits 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total age-related expenditure 14.3 14.8 14.5 14.6 14.7 14.6 14.4 14.7 14.7 0.4
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -3.9 -0.6 -1.4
Public debt 4.8 6.8 7.8 19.2 23.7 28.5 40.1 57.4 81.4
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario -0.1 0.0 -0.1 -1.6 1.1 0.1 0.3 -0.3
Crisis scenario: lost decade -0.5 0.0 -0.5 -2.0 1.0 0.1 0.4 -0.4
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 0.3 1.0 -0.6 -0.2 1.0 1.1 -0.1 0.1 0.3
Crisis scenario: lost decade 0.1 1.1 -0.6 -0.5 0.7 1.2 -0.5 0.1 0.1
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 1.0 0.4 -0.1 0.0 0.0 0.3 0.1
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.6 0.0 0.3 1.3 0.8
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.0 0.1 0.0 -0.1
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 32.8 31.2
 (End year 2050) -3.4 1.0 2.9 1.5S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
7. IRELAND 
 
 
104 7.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure, Ireland has a sustainability gap (S2) of 15.0% of GDP, which is clearly above the EU 
average (6.5% of GDP).  This means that to put 
public finances on a sustainable path, Ireland should improve its structur al primary balance in a 
durable manner by 15.0% of GDP. In principle, this adjustment could take place via both an 
increase in revenues a nd cuts in expenditure. 
Additionally, the social protection system (in particular public pensions and health care) would have to be reformed to decelerate the projected increase in age-related expenditure. 
The Irish sustainability gap is compounded by the 
initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (8.3% of GDP), clearly above the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(6.7% of GDP) is agai n clearly above the EU 
average (3.2% of GDP). The long-term cost of 
ageing is mainly driven by an increase in pension expenditure (by 5.9 p.p. in 2060 relative to 2010), while health care and long-term care also contribute less but still significantly to the long-term cost of ageing (increasing by 1.7 p.p. and 1.3 p.p. of GDP respectively). 
In the 2006 Sustainability Report, the S2 gap was 
2.9% of GDP. The difference between that report and the current results (12.1 p.p.) stems from the deterioration of the initial budgetary position (11.6 p.p.), while the component of the long-term cost of ageing has decreased by 0.7 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 1.2 p.p. 
The Irish government debt in 2009, the base year 
of the analysis, stood at to 61.2% of GDP and is forecast to increase to around 80% of GDP in 2010. The structural primar y balance is forecast to deteriorate from -7.6% % in 2009 to -9.0% in 
2010. Irish debt is still both below the EU average but already above the 60% ceiling set by the Maastricht criteria. The widening of already large structural primary deficits will aggravate the stance of Irish public finances. 
7.2. OVERALL ASSESSMENT 
Ireland appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is well 
above the EU average, ma inly as a result of a 
relatively high projected  increase in pension 
expenditure over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap. 
Improving the primary balance over the medium 
term and further reforms to the social security system would contribute to reducing the high risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
In addition, the extent of guarantees on bank 
liabilities granted should be considered a potential risk factor. 
Graph VII.7.1:  Determinants of fiscal sustainability (Ireland) 
IE
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Ireland 
 
105  
     
Table VII.7.1:  Summary table (Ireland) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 4.3 4.6 5.1 5.4 5.7 5.9 6.2 6.5 6.8 2.4
Working age population (15-64) % of total 68.6 68.0 66.6 65.6 65.2 65.1 63.3 58.8 57.8 -10.7
Old-age dependency ratio (65+/15-64) 16.1 16.7 18.4 20.2 22.3 24.6 30.6 40.4 43.6 27.4
Participation rate (15-64) 72.5 73.9 75.2 75.7 75.7 75.7 76.0 76.3 76.3 3.9
 - Older workers (55-64) 55.1 57.1 62.3 65.6 66.6 68.1 68.6 68.3 69.1 14.0
Unemployment rate (15-64) 4.6 15.7 5.1 5.1 5.1 5.1 5.1 5.1 5.1 0.5Real potential GDP (growth rate) 3.7 -1.2 3.4 2.9 2.6 2.3 1.8 1.6 2.0 -1.7
Expenditure projections
Pensions 5.2 5.5 5.9 6.4 7.0 7.5 8.7 10.5 11.3 6.1
Benefit ratio 27.3 28.5 29.1 29.7 30.0 30.4 31.0 31.5 31.6 4.3
Health care 5.8 5.9 6.0 6.1 6.3 6.5 6.9 7.3 7.6 1.8
Long-term care 0.8 0.9 0.9 0.9 1.0 1.1 1.4 1.8 2.2 1.3
Education 4.5 4.4 4.4 4.4 4.4 4.4 4.0 4.1 4.2 -0.3Unemployment benefits 0.8 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.1
Total age-related expenditure 17.2 17.5 18.0 18.7 19.5 20.3 21.9 24.5 26.2 8.9
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -6.4 -7.6 -9.0
Public debt 43.2 61.2 79.7 154.7 203.8 260.8 403.8 606.3 848.5
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 8.7 0.0 8.7 5.9 1.7 1.3 -0.2 -0.1
Crisis scenario: lost decade 14.9 0.0 14.9 10.1 1.5 2.2 1.1 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 12.1 8.2 0.2 3.7 15.0 8.3 6.7 0.7 7.2
Crisis scenario: lost decade 16.7 8.6 0.2 7.9 20.6 8.5 12.1 1.1 11.1
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 15.0 0.4 0.0 -0.2 0.1 1.8 -0.7
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.6 0.0 0.4 : 0.8
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.2 0.4 0.2 -1.0
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 30.0 31.7
 (End year 2050) 2.9 13.8 11.6 -0.7S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
8. GREECE 
 
 
106 8.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Greece has a sustainability gap (S2) of 14.1% of GDP, which is clearly above the EU 
average (6.5% of GDP).  This means that to put 
public finances on a sustainable path, Greece should improve its structur al primary balance in a 
durable manner by 14.1% of GDP. In principle, this adjustment could take place via both an 
increase in revenues a nd cuts in expenditure. 
Additionally, the social protection system (in particular public pensions) would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Greek sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (2.6% of GDP), below th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of agei ng (11.5% of GDP) is 
clearly above the EU aver age (3.2% of GDP). The 
long-term cost of ageing is mainly driven by an increase in pension expenditure (by 12.5 p.p. of GDP in 2060 relative to 2010). 
In the 2006 Sustainability Report, the S2 gap was 
3.0% of GDP (
33). The difference between that 
report and the current results (11.0 p.p.) stems mainly from the increase in the long term cost of ageing (9.9 p.p.), while the deterioration of the initial budgetary position has a clearly smaller impact (0.7). The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.5 p.p. 
Greek debt is far above both the EU average and 
the 60% ceiling set by the Maastricht criteria. The Greek government debt in 2009, the base year of 
the analysis, stood at 103.3% of GDP and is 
                                                          
 
(33) In 2006 no pension projections were available for Greece, 
and the rise in age-relate d expenditure was therefore 
underestimated. forecast to increase to around 108% of GDP in 
2010. The structural primar y balance is forecast to 
improve from -0.9% in 2009 to 0.3% in 2010.  
8.2. OVERALL ASSESSMENT 
Greece appears to be at hi gh long-term risk with 
regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is well above the EU  average, mainly as a 
result of a relatively high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.  
Improving primary surpluses over the medium 
term and especially a further reform of the pension system aimed at curbing th e substantial increase in 
age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.8.1:  Determinants of fiscal sustainability (Greece) 
EL
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Greece 
 
107  
    
Table VII.8.1:  Summary table (Greece) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 11.2 11.3 11.5 11.6 11.6 11.6 11.6 11.4 11.1 -0.1
Working age population (15-64) % of total 67.1 66.8 65.5 64.5 63.8 62.8 58.9 55.3 55.4 -11.7
Old-age dependency ratio (65+/15-64) 27.6 28.2 30.6 32.8 35.4 38.5 48.2 57.0 57.1 29.5
Participation rate (15-64) 67.1 68.2 69.3 69.4 68.8 68.3 68.4 69.1 68.8 1.7
 - Older workers (55-64) 44.3 44.8 47.1 48.7 50.4 50.9 51.5 51.3 51.7 7.5
Unemployment rate (15-64) 8.3 9.7 7.1 6.2 6.2 6.2 6.2 6.2 6.2 -2.1Real potential GDP (growth rate) 3.5 2.0 2.7 2.9 1.8 1.3 1.0 1.2 1.4 -2.1
Expenditure projections
Pensions 11.7 11.6 12.2 13.2 14.8 17.1 21.4 24.0 24.1 12.4
Benefit ratio 73.1 72.2 74.7 77.9 81.4 85.6 86.9 83.7 80.5 7.4
Health care 5.0 5.1 5.3 5.4 5.5 5.7 6.0 6.3 6.4 1.4
Long-term care 1.4 1.5 1.7 1.8 1.9 2.0 2.5 3.1 3.6 2.2
Education 3.7 3.5 3.3 3.3 3.4 3.4 3.4 3.5 3.7 0.0Unemployment benefits 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 -0.1
Total age-related expenditure 22.1 21.9 22.7 23.9 25.9 28.5 33.6 37.2 37.9 15.9
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -2.1 -0.9 0.3
Public debt 97.6 103.3 107.9 133.7 160.3 205.9 360.5 596.5 884.0
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 16.0 0.0 16.0 12.5 1.3 2.1 0.1 -0.2
Crisis scenario: lost decade 15.1 0.0 15.1 3.8 1.3 2.1 7.9 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 10.8 2.4 0.7 7.7 14.1 2.6 11.5 1.1 12.7
Crisis scenario: lost decade 10.1 2.5 0.7 6.9 13.3 2.7 10.6 1.0 12.3
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 14.1 0.3 -1.3 -0.4 0.1 2.2 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.5 0.0 0.3 : 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.3 0.6 0.4 -1.4
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 33.8 34.6
 (End year 2050) 3.0 13.6 0.7 9.9S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
9. SPAIN 
 
 
108 9.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure, Spain has a sustainability gap (S2) of 11.8% of GDP, which is clearly above the EU average (6.5% of GDP).  This means that to put 
public finances on a sustainable path, Spain should improve its structural prim ary balance in a durable 
manner by 11.8% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Additionally, the social protection system (in particular public pensions and health care) would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Spanish sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (6.1% of GDP), clearly above the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(5.7% of GDP) is agai n clearly above the EU 
average (3.3% of GDP). The long-term cost of 
ageing is mainly driven by an increase in pension expenditure (by 6.2 p.p. in 2060 relative to 2010), while health care and long-term care also contribute less but still significantly to the long-term cost of ageing (increasing by 1.6 p.p. and 0.7 p.p. respectively). 
In the 2006 Sustainability Report, the S2 gap was 
3.2% of GDP. The difference between that report and the current results (8.6 p.p.) stems from the deterioration of the initial budgetary position (8.9 p.p.), while the component of the long-term cost of ageing has decreased by 0.5 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.2 p.p. 
The Spanish government debt in 2009, the base 
year of the analysis, stood at to 50.8% of GDP and is forecast to increase to  around 62% of GDP in 
2010. The structural primar y balance is forecast to deteriorate from -5.2% % in 2009 to -6.2% in 
2010. Spanish debt is still both below the EU average and the 60% ceiling set by the Maastricht criteria, however the widening of already large structural primary deficits will bring Spanish government debt above the Maastricht limit already in 2010 and will aggravate the stance of its public finances. 
9.2. OVERALL ASSESSMENT 
Spain appears to be at high risk with regard to the   
long-term sustainability of public finances. The long-term budgetary imp act of ageing is well 
above the EU average, ma inly as a result of a 
relatively high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.  
Improving the primary balance over the medium 
term and further reforms to the social security system would contribute to reducing the high risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.9.1:  Determinants of fiscal sustainability (Spain) 
ES
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Spain 
 
109  
   
Table VII.9.1:  Summary table (Spain) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 44.5 46.7 49.4 51.1 52.1 52.7 53.3 53.2 51.9 7.4
Working age population (15-64) % of total 68.8 68.3 67.0 66.3 65.7 64.5 59.6 54.7 54.7 -14.1
Old-age dependency ratio (65+/15-64) 24.2 24.4 25.8 27.4 30.2 34.3 46.4 58.7 59.1 34.9
Participation rate (15-64) 71.6 73.3 75.2 75.7 75.8 76.4 77.2 77.6 77.3 5.7
 - Older workers (55-64) 47.5 51.3 58.4 63.5 66.8 70.9 72.7 73.1 74.0 26.4
Unemployment rate (15-64) 8.3 20.5 7.5 6.2 6.2 6.2 6.2 6.2 6.2 -2.1Real potential GDP (growth rate) 2.9 0.2 3.1 3.4 2.5 1.8 0.9 1.1 1.6 -1.3
Expenditure projections
Pensions 8.4 8.9 9.2 9.5 10.1 10.8 13.2 15.5 15.1 6.7
Benefit ratio 57.8 62.6 65.9 65.2 63.3 61.0 57.2 54.5 52.2 -5.6
Health care 5.5 5.6 5.7 5.9 6.1 6.3 6.8 7.1 7.2 1.6
Long-term care 0.5 0.7 0.9 0.9 0.9 1.0 1.1 1.3 1.4 0.9
Education 3.5 3.4 3.4 3.5 3.5 3.4 3.2 3.5 3.6 0.1Unemployment benefits 1.3 1.4 1.2 0.9 0.9 0.9 0.9 0.9 0.9 -0.4
Total age-related expenditure 19.3 20.0 20.4 20.7 21.5 22.4 25.3 28.4 28.3 9.0
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -2.4 -5.2 -6.2
Public debt 39.5 50.8 62.3 111.0 144.5 188.2 320.2 528.0 766.6
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 8.0 0.3 8.3 6.2 1.6 0.7 -0.2 -0.3
Crisis scenario: lost decade 11.5 0.3 11.8 8.9 1.5 0.9 0.4 -0.4
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 9.5 5.9 -0.1 3.6 11.8 6.1 5.7 0.8 6.4
Crisis scenario: lost decade 11.9 6.1 -0.1 5.9 14.8 6.2 8.6 1.0 8.5
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 11.8 0.4 -0.7 -0.2 -0.4 2.6 -0.7
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.5 0.0 0.3 : 0.6
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 1.3 0.1 -0.5
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 34.3 36.2
 (End year 2050) 3.2 11.6 8.9 -0.5S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
10.  FRANCE 
 
 
110 10.1. OVERVIEW OF RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure France has a sustainability gap (S2) of 5.6% of GDP, which is below the EU average (6.5% of GDP). This means that to put public finances on a sustainabl e path, France should 
improve its structural prim ary balance in a durable 
manner by 5.6% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. Alternatively the social protection system would have to be reformed to decelerate the planned increase in age-related expenditure. 
The French sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (3.8% of GDP), above th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (1.8% of GDP) is 
below the EU average (3 .2% of GDP). The long-
term cost of ageing is main ly driven by an increase 
in health care expenditure (by 1.1 p.p. in 2060 relative to 2010), while pensions and long-term care contribute to the long -term cost of ageing by a 
lesser amount (increasing by 0.6 p.p. and 0.7 p.p. respectively). 
In the 2006 Sustainability Report, the S2 gap was 
4.0% of GDP. The difference between that report and the current results (1.6 p.p.) stems from the deterioration of the initial budgetary position (2.5 p.p.), while the component of the long-term cost of ageing has actually decreased (-0.7 p.p.). The extension of the projection period from 2050 (in the 2006 report) increases the sustainability gap by 1.6 p.p.  
The French government debt in 2009, the base 
year of the analysis, stood at 79.7% of GDP and is forecast to increase to around 86% of GDP in 2010. The structural primar y balance is forecast to 
slightly improve from -2.7% in 2009 to -2.5% in 2010. French debt is above both the EU average and the 60% ceiling set by the Maastricht criteria 
which poses risks for the medium and long term. The continuing structural primary deficits may also pose some risk for the long-term sustainability of its public finances. 
10.2. OVERALL ASSESSMENT 
France appears to be at medi um risk with regard to 
the long-term sustainability of public finances. The long-term budgetary imp act of ageing is lower 
than the EU average, due to reforms to the social 
security system already enacted. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap. Moreover, the current level of gross debt, which is above the Treaty reference value, adds to the sustainability risk. Also, the forecast structural 
primary deficits may widen the sustainability gap.  
Given that France has little scope to increase its 
tax burden, already one of the highest in the European Union, focus should be put on cuts in public expenditure. Specifically, further reforms to the social security syst em aimed at curbing the 
increase in age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.10.1:  Determinants of fiscal sustainability (France) 
FR
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, France 
 
111  
       
Table VII.10.1:  Summary table (France) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 61.5 62.6 64.2 65.6 66.8 68.0 69.9 71.0 71.8 10.3
Working age population (15-64) % of total 65.2 64.8 63.1 61.6 60.5 59.4 57.6 57.3 57.4 -7.8
Old-age dependency ratio (65+/15-64) 25.2 25.8 29.3 32.8 35.8 39.0 44.0 44.7 45.2 20.0
Participation rate (15-64) 70.3 70.0 70.6 70.8 70.7 70.9 71.7 71.5 71.6 1.3
 - Older workers (55-64) 41.0 39.3 42.9 46.1 47.7 48.8 49.4 48.4 49.3 8.3
Unemployment rate (15-64) 8.4 10.7 7.0 6.2 6.2 6.2 6.2 6.2 6.2 -2.2Real potential GDP (growth rate) 1.6 0.7 2.0 1.9 1.8 1.7 1.8 1.8 1.8 0.2
Expenditure projections
Pensions 13.0 13.5 13.5 13.6 13.9 14.2 14.4 14.2 14.0 1.0
Benefit ratio 63.3 63.3 60.6 57.7 55.0 52.9 50.3 48.3 47.5 -15.8
Health care 8.1 8.2 8.4 8.6 8.7 8.9 9.2 9.3 9.4 1.2
Long-term care 1.4 1.5 1.5 1.6 1.6 1.8 2.0 2.2 2.2 0.8
Education 4.7 4.6 4.6 4.6 4.7 4.7 4.6 4.7 4.6 0.0Unemployment benefits 1.2 1.2 1.1 0.9 0.9 0.9 0.9 0.9 0.9 -0.3
Total age-related expenditure 28.4 29.0 29.1 29.4 29.8 30.5 31.3 31.3 31.2 2.7
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -1.5 -2.7 -2.5
Public debt 68.0 79.7 86.0 122.4 147.4 177.4 250.5 336.5 431.3
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 2.1 0.0 2.2 0.6 1.1 0.7 -0.2 -0.2
Crisis scenario: lost decade 3.0 0.0 3.0 1.2 1.1 0.8 -0.1 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 5.5 3.8 0.4 1.4 5.6 3.8 1.8 0.3 2.8
Crisis scenario: lost decade 6.6 3.9 0.4 2.3 6.6 3.9 2.7 0.4 3.3
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 5.6 0.6 -0.6 -0.5 -0.5 1.4 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.6 0.0 0.4 : 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.1 0.4 0.2 -0.6
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 44.8 45.5
 (End year 2050) 4.0 5.8 2.5 -0.7S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
11.  ITALY 
 
 
112 11.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure, Italy has a sustainability gap (S2) of 1.4% of GDP, which is significantly below the EU average (6.5% of GDP). Th is means that to put 
public finances on a sustainable path, Italy should improve its structural prim ary balance in a durable 
manner by 1.4% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Italian sustainability gap is mainly due to the 
required adjustment given the long-term cost of ageing (1.5% of GDP), which is below the EU 
average (3.3% of GDP). In contrast, the sustainability gap is mitigated by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is negative (-0.1% of GDP) clearly below the EU average (3.2% of GDP). The increase in the long-term co st of ageing is mainly 
driven by health-care and long-term care expenditure (increasing by respectively 1.0 p.p. and 1.2 p.p.  in 2060 relative to 2010), while the ratio of pension expenditure to GDP is expected to fall by 0.4 p.p.  
In the 2006 Sustainability Report, the S2 gap was 
3.1% of GDP. The difference between that report and the current results (-1.7 p.p.) stems mainly from the improvement of the initial budgetary position (1.2 p.p.), while  the component of the 
long-term cost of ageing has increased by 0.2 p.p. 
The extension of the projection period from 2050 (in the 2006 report) to 2060 decreases the sustainability gap by 0.6 p.p. 
The Italian government debt in 2009, the base year 
of the analysis, stood at 113.0% of GDP and is forecast to increase to around 116% of GDP in 
2010. The structural primar y surplus is forecast to 
stay at the level of 2.0% both in 2009 and 2010. Italian debt is far above both the EU average and 
the 60% ceiling set by the Maastricht criteria which poses significant risks for the long-term sustainability of its public finances. 
11.2. OVERALL ASSESSMENT 
Italy appears to be at medium risk with regard to the long-term sustainability of public finances. The 
long-term budgetary imp act of ageing is lower 
than the EU average. However pension expenditure as a share of GDP remains among the highest in the EU and the projections hinge upon the assumption that the adopted reforms are fully implemented. The budgetary position in 2009 would be sufficient to stabilise the current debt ratio but would not contribute to offsetting the projected long-term budgeta ry impact of ageing. 
Moreover, the current level of gross debt , which is 
above the Treaty reference value, adds to the sustainability risk.   
Achieving high primary surpluses would therefore 
contribute to limiting the medium risk to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.11.1:  Determinants of fiscal sustainability (Italy) 
IT
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Italy 
 
113  
  
Table VII.11.1:  Summary table (Italy) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 59.1 60.0 60.9 61.4 61.7 61.9 62.0 61.2 59.4 0.3
Working age population (15-64) % of total 66.0 65.6 64.5 63.9 63.3 61.6 57.0 55.1 55.1 -10.9
Old-age dependency ratio (65+/15-64) 30.2 31.0 33.6 35.5 38.0 42.4 54.1 59.2 59.3 29.2
Participation rate (15-64) 62.6 63.7 65.7 66.4 66.9 67.4 67.7 67.9 67.7 5.1
 - Older workers (55-64) 34.7 39.2 48.7 54.0 58.8 62.3 61.9 62.8 63.1 28.4
Unemployment rate (15-64) 6.1 9.4 5.8 5.8 5.8 5.8 5.8 5.8 5.8 -0.3Real potential GDP (growth rate) 0.9 0.5 2.1 1.9 1.7 1.4 1.0 1.3 1.4 0.5
Expenditure projections
Pensions 14.0 14.0 14.0 14.1 14.3 14.8 15.6 14.7 13.6 -0.4
Benefit ratio 68.5 71.3 71.9 70.5 67.5 64.1 57.3 51.7 47.3 -21.2
Health care 5.9 5.9 6.1 6.2 6.4 6.5 6.9 7.0 6.9 1.1
Long-term care 1.7 1.7 1.8 1.8 1.9 2.0 2.3 2.8 3.0 1.3
Education 4.1 4.0 3.9 3.8 3.7 3.6 3.6 3.8 3.8 -0.3Unemployment benefits 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.0
Total age-related expenditure 26.0 26.0 26.0 26.3 26.6 27.3 28.7 28.6 27.6 1.6
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 1.7 2.0 2.0
Public debt 105.8 113.0 116.1 109.9 109.0 112.2 136.6 173.1 205.9
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 1.6 0.0 1.6 -0.4 1.0 1.2 -0.2 -0.2
Crisis scenario: lost decade 1.8 0.0 1.7 -0.4 1.0 1.3 -0.1 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 1.9 -0.2 0.7 1.4 1.4 -0.1 1.5 0.1 3.4
Crisis scenario: lost decade 2.7 0.0 0.7 1.9 1.8 0.0 1.8 0.2 3.5
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 1.4 0.3 -0.4 -0.1 -0.1 3.4 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.4 0.0 0.3 : 0.5
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.4 0.8 0.3 -0.8
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 43.1 41.8
 (End year 2050) 3.1 2.0 -1.2 0.2S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
12.  CYPRUS 
 
 
114 12.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Cyprus has a sustainability gap (S2) of 8.8% of GDP, which is significantly above the EU average (6.5% of GDP) .  This means that to 
put public finances on a sustainable path, Cyprus should improve its structur al primary balance in a 
durable manner by 8.8% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Additionally, the social protection system (in particular public pensions) would have to be  reformed to decelerate 
the projected increase in age-related expenditure. (
34) 
The Cypriot sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is slightly positive (0.5% of GDP), below the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(8.3% of GDP) is clearly above the EU average (3.2% of GDP). The long-term cost of ageing is mainly driven by an increase in pension expenditure (by 10.8 p.p. in 2060 relative to 2010). 
In the 2006 Sustainability Report, the S2 gap was 
8.5% of GDP. The difference between that report and the current results (0.3 p.p.) stems mainly from the deterioration of the initial budgetary position (0.4 p.p.), while the co mponent of the long-term 
cost of ageing has actually  decreased (-1.7 p.p.). 
The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 1.6 p.p. 
The Cypriot government debt in 2009, the base 
year of the analysis, stood at 47.5% of GDP and is 
                                                          
 
(34) In February 2009 the Cypriot government adopted a 
pension reform which places  the burden on contribution 
increases but does not addr ess the large increases in 
pension expenditures. The effects of the reform were not 
reflected in the 2009 Ageing report pension projections. forecast to increase to around 47% of GDP in 
2010. The structural primar y balance is forecast to 
decrease slightly from 0.2% in 2009 to 0.1% in 2010. Currently, Cypriot debt is both below the EU average and the 60% ceiling set by the Maastricht criteria.  
12.2. OVERALL ASSESSMENT 
Cyprus appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is well 
above the EU average, ma inly as a result of a 
relatively high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds slightly the budgetary impact of population ageing on the sustainability gap.  
Improving primary surpluses over the medium 
term and especially a further reform of the pension system aimed at curbing th e substantial increase in 
age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.12.1:  Determinants of fiscal sustainability (Cyprus) 
CY
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Cyprus 
 
115  
   
Table VII.12.1:  Summary table (Cyprus) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 0.8 0.8 0.9 1.0 1.0 1.1 1.2 1.3 1.3 0.5
Working age population (15-64) % of total 69.8 70.3 69.3 67.5 66.1 65.4 64.9 61.7 58.8 -10.9
Old-age dependency ratio (65+/15-64) 17.6 18.0 19.9 22.3 24.9 27.4 30.8 37.7 44.5 26.8
Participation rate (15-64) 72.9 74.6 76.9 78.5 78.6 78.4 78.0 78.0 78.0 5.1
 - Older workers (55-64) 57.6 58.9 61.1 62.7 63.1 64.6 66.6 65.4 65.1 7.4
Unemployment rate (15-64) 4.0 5.9 3.4 3.4 3.4 3.4 3.4 3.4 3.4 -0.6Real potential GDP (growth rate) 2.9 2.4 3.8 3.9 3.2 2.9 2.3 1.8 1.8 -1.1
Expenditure projections
Pensions 6.3 6.9 7.8 8.9 9.8 10.8 12.8 15.5 17.7 11.4
Benefit ratio 53.7 57.6 59.1 60.0 58.2 57.4 59.2 58.4 56.5 2.9
Health care 2.7 2.8 2.8 2.9 2.9 3.0 3.1 3.2 3.3 0.6
Long-term care 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Education 6.1 5.6 4.9 4.8 4.9 5.0 4.8 4.7 5.0 -1.2Unemployment benefits 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 -0.1
Total age-related expenditure 15.4 15.5 15.8 16.8 17.9 19.1 21.0 23.7 26.2 10.8
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 2.9 0.2 0.1
Public debt 49.1 47.5 47.9 42.6 51.6 67.8 119.2 204.4 335.5
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 10.7 0.0 10.7 10.8 0.6 0.0 -0.6 -0.5
Crisis scenario: lost decade 10.6 0.0 10.6 10.4 0.5 0.0 -0.4 -0.5
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 4.6 0.2 -0.3 4.7 8.8 0.5 8.3 0.4 8.9
Crisis scenario: lost decade 4.6 0.3 -0.3 4.6 8.7 0.5 8.2 0.4 8.4
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 8.8 0.4 -0.5 -0.1 0.6 4.7 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.4 0.1 0.3 3.1 0.5
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.0 0.0 0.0 0.0
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 39.4 33.1
 (End year 2050) 8.5 7.2 0.4 -1.7S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
13.  LATVIA 
 
 
116 13.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Latvia has a sustainability gap (S2) of 9.9% of GDP, which is significantly above the EU average (6.5% of GDP) .  This means that to 
put public finances on a sustainable path, Latvia should improve its structur al primary balance in a 
durable manner by 9.9% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Latvian sustainability gap is mainly due to the 
initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (8.9% of GDP), clearly above the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(1.0% of GDP) is below the EU average (3.2% of GDP). The limited increase in the long-term cost 
of ageing is mainly dr iven by long-term care and 
health-care expenditure (increasing by 0.5 p.p. and 0.5 p.p. respectively in 2060 relative to 2010), while the ratio of pension expenditure to GDP remains at the current level. 
In the 2006 Sustainability Report, the S2 gap was 
0.8% of GDP. The difference between that report and the current results (9.1 p.p.) stems only from the deterioration of the initial budgetary position (9.5 p.p.), while the co mponent of the long-term 
cost of ageing has actually  decreased (-0.1 p.p.). 
The extension of the projection period from 2050 (in the 2006 report) to 2060 decreases the sustainability gap by -0.2 p.p. 
The Latvian government debt in 2009, the base 
year of the analysis, stood at 34.1% of GDP and is forecast to increase to around 50% of GDP in 2010. The structural primar y balance is forecast to 
decrease slightly from -8.1% in 2009 to -9.2% in 2010. Currently, Latvian debt is both below the EU average and the 60% ceiling set by the Maastricht 
criteria, however the dramatic size of its structural primary deficit poses an additional risk to the sustainability of public finances. 
13.2. OVERALL ASSESSMENT 
Latvia appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is lower 
than the EU average, as a result of the pension reforms already enacted. However, the deterioration of the budgetary position significantly increases  the risks to the 
sustainability of public finances. 
Increasing the primary balances over the medium 
term would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.13.1:  Determinants of fiscal sustainability (Latvia) 
LV
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Latvia 
 
117  
  
Table VII.13.1:  Summary table (Latvia) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 2.3 2.2 2.2 2.2 2.1 2.0 1.9 1.8 1.7 -0.6
Working age population (15-64) % of total 68.9 69.0 67.6 66.1 65.0 64.2 62.4 57.8 53.3 -15.6
Old-age dependency ratio (65+/15-64) 24.8 25.2 26.2 28.1 31.1 34.6 40.7 51.2 64.5 39.7
Participation rate (15-64) 72.9 74.2 76.1 75.3 74.0 73.9 73.7 72.0 74.2 1.3
 - Older workers (55-64) 60.4 59.3 60.0 58.5 56.2 58.6 58.8 54.4 58.1 -2.3
Unemployment rate (15-64) 6.0 16.0 4.8 4.8 4.8 4.8 4.8 4.8 4.8 -1.2Real potential GDP (growth rate) 5.3 -0.2 3.0 2.1 2.0 1.8 0.7 -0.1 1.1 -4.2
Expenditure projections
Pensions 5.4 5.1 4.8 5.2 5.6 5.9 6.1 5.8 5.1 -0.4
Benefit ratio 24.0 25.7 25.3 25.2 24.3 23.4 21.3 16.1 12.6 -11.4
Health care 3.5 3.5 3.6 3.7 3.7 3.8 3.9 4.0 4.1 0.6
Long-term care 0.4 0.4 0.4 0.4 0.5 0.5 0.6 0.7 0.9 0.5
Education 3.7 3.1 2.8 3.0 3.2 3.2 2.9 3.1 3.3 -0.3Unemployment benefits 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.0
Total age-related expenditure 13.2 12.3 11.8 12.4 13.2 13.5 13.8 13.8 13.6 0.4
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -4.9 -8.1 -9.2
Public debt 19.5 34.1 50.1 122.2 173.6 230.6 385.9 619.7 898.1
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 1.3 0.0 1.3 0.0 0.5 0.5 0.3 -0.2
Crisis scenario: lost decade 1.8 0.0 1.8 0.2 0.5 0.6 0.5 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 9.4 8.8 -0.2 0.9 9.9 8.9 1.0 0.9 2.2
Crisis scenario: lost decade 10.2 9.0 -0.2 1.4 10.6 9.0 1.6 1.0 2.5
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 9.9 0.2 -0.1 -0.1 -0.1 0.2 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.4 0.0 0.2 2.5 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 0.6 0.1 -0.3
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 29.6 29.4
 (End year 2050) 0.8 10.1 9.5 -0.1S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
14.  LITHUANIA 
 
 
118 14.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Lithuania has a sustainability gap (S2) of 7.1% of GDP, which is above the EU average (6.5% of GDP).  This means that to put 
public finances on a sustainable path, Lithuania should improve its structur al primary balance in a 
durable manner by 7.1% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system (in particular public pensions and health care) would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Lithuanian sustainability gap is compounded 
by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (3.9% of GDP), above th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (3.2% of GDP) is at 
the EU average. The long-term cost of ageing is mainly driven by an increase in pension expenditure (by 4.9 p.p. in 2060 relative to 2010), while health and long-term care expenditure also contribute to the long-term cost of ageing by growing 1.0 p.p. and 0.6 p.p. 
In the 2006 Sustainability Report, the S2 gap was 
1.8% of GDP. The difference between that report and the current results (5.9 p.p.) stems from the deterioration of the initial budgetary position (3.4 p.p.), while the component of the long-term cost of ageing has increased by 1.3 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.5 p.p. 
The Lithuanian government debt in 2009, the base 
year of the analysis, stood at 22.6% of GDP and is forecast to increase to around 32% of GDP in 2010. The structural primar y balance is forecast to 
deteriorating from -3.1% in 2009 to -3.9% in 2010. Lithuanian debt is both below the EU average and the 60% ceiling set by the Maastricht criteria, 
however the widening of already large structural primary deficits may aggravate the sustainability gap of its public finances. 
14.2. OVERALL ASSESSMENT 
Lithuania appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is at the 
EU average, the rise is due mainly to pension expenditure. The budgetary position has worsened considerably in 2009 and compounds the budgetary impact of population ageing on the sustainability gap.  
Improving the primary balance over the medium 
term and further reforms to the social security system would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.14.1:  Determinants of fiscal sustainability (Lithuania) 
LT
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Lithuania 
 
119  
  
Table VII.14.1:  Summary table (Lithuania) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 3.4 3.3 3.3 3.2 3.2 3.1 2.9 2.7 2.5 -0.8
Working age population (15-64) % of total 68.5 69.2 69.1 67.6 65.7 63.8 61.5 58.1 52.9 -15.6
Old-age dependency ratio (65+/15-64) 22.7 23.2 24.0 26.0 29.7 34.7 42.8 51.1 65.7 42.9
Participation rate (15-64) 68.1 69.0 70.6 71.0 70.1 69.1 68.3 67.6 68.2 0.1
 - Older workers (55-64) 55.5 58.5 59.9 59.4 56.3 56.0 56.9 54.8 54.1 -1.4
Unemployment rate (15-64) 4.3 15.9 3.5 3.5 3.5 3.5 3.5 3.5 3.5 -0.8Real potential GDP (growth rate) 6.2 1.4 3.6 2.5 1.8 1.5 0.8 0.2 0.4 -5.7
Expenditure projections
Pensions 6.8 6.5 6.5 6.9 7.6 8.2 9.1 10.4 11.4 4.6
Benefit ratio 33.1 33.5 33.2 32.7 32.2 31.6 30.3 29.0 27.7 -5.4
Health care 4.5 4.6 4.7 4.9 5.0 5.1 5.3 5.5 5.6 1.1
Long-term care 0.5 0.5 0.5 0.5 0.5 0.6 0.7 0.9 1.1 0.6
Education 4.0 3.5 2.9 2.8 2.9 3.0 2.9 2.8 3.1 -0.9Unemployment benefits 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total age-related expenditure 15.8 15.1 14.8 15.1 16.0 16.9 18.1 19.6 21.2 5.4
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -4.5 -3.1 -3.9
Public debt 15.6 22.6 31.9 61.8 83.9 113.9 204.3 341.2 545.9
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 6.0 0.0 6.0 4.9 1.0 0.6 -0.4 -0.2
Crisis scenario: lost decade 6.9 0.0 6.9 5.5 0.9 0.7 -0.2 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 5.4 3.7 -0.3 2.0 7.1 3.9 3.2 0.7 4.2
Crisis scenario: lost decade 6.1 3.9 -0.3 2.5 7.8 4.0 3.8 0.8 4.7
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 7.1 0.4 0.0 -0.2 0.2 -0.1 -0.4
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.5 0.0 0.3 1.6 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 0.2 0.1 -0.3
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 30.7 29.2
 (End year 2050) 1.8 6.6 3.4 1.3S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
15.  LUXEMBOURG 
 
 
120 15.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Luxembourg has a sustainability gap 
(S2) of 12.5% of GDP, which is clearly above the EU average (6.5% of GDP) .  This means that to 
put public finances on a sustainable path, Luxembourg should improve its structural primary balance in a durable manner by 12.5% of GDP. In principle, this adjustment  could take place via both 
an increase in revenues and cuts in expenditure. Additionally, the social protection system (in particular public pensions) would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The sustainability gap in Luxembourg is mitigated 
by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is slightly negative (-0.4% of GDP), below the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(12.9% of GDP) is the highest in the EU. The long-term cost of ageing is mainly driven by an increase in pension expenditure (by 7.4% p.p. in 2060 relative to 2010). 
In the 2006 Sustainability Report, the S2 gap was 
9.5% of GDP. The difference between that report and the current results (3.0 p.p.) stems mainly from the increase in the long-ter m cost of ageing (3.6 
p.p.), while the initial budgetary position has actually improved by 0.4 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 1.1 p.p. 
The Luxemburgish government debt in 2009, the 
base year of the analysis, stood at 16.0% of GDP and is forecast to decrease  to around 16% of GDP 
in 2010. The structural pr imary balance is forecast 
to decrease from 1.2% in 2009 to 0.7% in 2010. The Luxemburgish debt is both below the EU average and the 60% ceiling set by the Maastricht criteria.  15.2. OVERALL ASSESSMENT 
Luxembourg appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing in Luxembourg is among the highest in the EU, influenced notably by a very considerable projected increase in pe nsion expenditure. The 
budgetary position in 2009, the low debt ratio, the significant assets accumulated in social security, and a structural primary surplus contribute to 
offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to cover the sizeable increase in age-
related expenditure.  
Achieving high primary surpluses over the 
medium term and implementing measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing the medium risk to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.15.1:  Determinants of fiscal sustainability (Luxembourg) 
LU
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
  
Chapter VII 
Sustainability assessment per Member State, Luxembourg 
 
121  
  
Table VII.15.1:  Summary table (Luxembourg) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 0.5 0.5 0.5 0.6 0.6 0.6 0.7 0.7 0.7 0.3
Working age population (15-64) % of total 67.6 67.8 67.6 66.9 65.4 63.5 61.1 60.8 60.3 -7.4
Old-age dependency ratio (65+/15-64) 20.7 21.1 22.3 24.2 27.1 30.8 36.3 37.8 39.1 18.3
Participation rate (15-64) 66.4 67.0 67.1 66.9 66.8 66.9 67.3 67.1 66.8 0.4
 - Older workers (55-64) 33.0 36.4 39.0 40.6 40.9 40.4 41.9 42.3 41.3 8.4
Unemployment rate (15-64) 4.2 7.0 4.6 4.6 4.6 4.6 4.6 4.6 4.6 0.4Real potential GDP (growth rate) 3.5 1.9 4.0 2.7 2.3 2.1 2.2 2.2 2.0 -1.5
Expenditure projections
Pensions 8.7 8.6 8.9 9.9 12.1 14.2 18.4 22.1 23.9 15.2
Benefit ratio 45.8 41.4 38.0 37.0 39.1 39.3 41.1 42.9 44.1 -1.7
Health care 5.8 5.9 6.1 6.2 6.4 6.5 6.8 7.0 7.0 1.2
Long-term care 1.4 1.4 1.4 1.5 1.6 1.8 2.4 3.0 3.4 2.0
Education 3.8 3.6 3.2 3.1 3.1 3.2 3.3 3.3 3.3 -0.5Unemployment benefits 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.0
Total age-related expenditure 20.0 19.9 20.0 21.1 23.7 26.1 31.3 35.7 38.0 18.0
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 2.3 1.2 0.7
Public debt 14.7 16.0 16.4 6.3 14.8 35.6 118.2 253.8 437.5
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 16.2 1.9 18.2 15.3 1.1 2.0 -0.3 -0.8
Crisis scenario: lost decade 16.4 1.9 18.3 14.9 1.0 2.4 0.0 -0.8
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 6.2 -0.6 -0.8 7.5 12.5 -0.4 12.9 0.5 13.6
Crisis scenario: lost decade 7.5 -0.6 -0.8 8.9 13.2 -0.4 13.5 0.6 13.4
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 12.5 0.6 -0.1 -0.2 -0.2 6.8 -2.4
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.6 0.0 0.4 : 0.1
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.3 0.7 0.4 -1.6
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 38.6 38.8
 (End year 2050) 9.5 11.5 -1.6 3.6S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
16.  HUNGARY 
 
 
122 16.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure, Hungary has a negative sustainability gap (S2) of -0.1% of GDP, which is clearly below the EU average (6.5% of GDP).  
While the Hungarian overall sustainability gap is 
negative, the required adjustment given the long-term cost of ageing is positive (1.5% of GDP), which is below the EU average (3.3% of GDP). In contrast, the sustainability gap is mitigated by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is negative (-1.6% of GDP) clearly be low the EU average (3.2% 
of GDP). The increase in the long-term cost of 
ageing is mainly driven by pension and health care 
expenditure (increasing by 2.6 p.p. and 1.3 p.p. respectively in 2060 relative to 2010), while the ratio of long-term care expenditure to GDP increases by 0.4 p.p.  
In the 2006 Sustainability Report, the S2 gap was 
(9.8% of GDP). The difference between that report and the current results (-9.9 p.p.) stems both from the improvement of the initial budgetary position (6.2 p.p.) and the decrease in the long-term cost of ageing (4.0 p.p.) The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.3 p.p. 
The Hungarian government debt in 2009, the base 
year of the analysis, stood at 80.8% of GDP and is forecast to increase to around 82% of GDP in 2010. The structural primar y surplus is forecast to 
decrease from the level of 3.1% in 2009 to 2.9 in 2010. Hungarian debt is above both the EU average and the 60% ceiling set by the Maastricht criteria which poses significant risks for the long-term sustainability of its public finances. 16.2. OVERALL ASSESSMENT 
Hungary appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary im pact of ageing is lower 
than the EU average. However pension expenditure as a share of GDP remains above the EU average. The budgetary position in 2009 would be sufficient to stabilise the current debt ratio but would not contribute to offsetting the projected long-term budgetar y impact of ageing. Moreover, 
the current level of gross debt , which is above the 
Treaty reference value, adds to the sustainability risk.  
Achieving high primary surpluses and further 
reforms to the social security system  would 
therefore contribute to limiting the medium risk to 
the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.16.1:  Determinants of fiscal sustainability (Hungary) 
HU
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Hungary 
 
123  
   
Table VII.16.1:  Summary table (Hungary) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 10.1 10.0 10.0 9.9 9.8 9.7 9.4 9.1 8.7 -1.3
Working age population (15-64) % of total 68.9 68.6 67.4 65.4 64.3 64.5 62.2 57.7 55.4 -13.5
Old-age dependency ratio (65+/15-64) 23.2 24.2 26.3 30.3 33.3 34.1 40.1 50.8 57.6 34.5
Participation rate (15-64) 61.7 63.4 65.4 66.6 66.8 65.9 64.3 64.9 65.0 3.2
 - Older workers (55-64) 34.1 42.1 46.4 47.2 50.4 50.8 48.8 49.4 49.3 15.2
Unemployment rate (15-64) 7.4 11.2 7.0 6.2 6.2 6.2 6.2 6.2 6.2 -1.2Real potential GDP (growth rate) 1.4 0.1 2.8 2.4 2.1 2.1 1.1 0.8 1.0 -0.3
Expenditure projections
Pensions 10.9 11.3 10.9 11.0 10.9 11.0 12.2 13.2 13.8 3.0
Benefit ratio 38.9 42.3 41.6 41.3 40.1 38.8 37.7 36.6 35.8 -3.1
Health care 5.8 5.8 5.9 6.0 6.2 6.4 6.7 6.9 7.0 1.3
Long-term care 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.5 0.6 0.4
Education 4.4 4.1 3.8 3.8 3.8 3.7 3.7 3.8 4.0 -0.4Unemployment benefits 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 -0.1
Total age-related expenditure 21.6 21.8 21.2 21.3 21.5 21.7 23.2 24.7 25.7 4.1
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -0.3 3.1 2.9
Public debt 73.0 80.8 82.3 54.4 38.0 21.8 -5.2 -21.1 -26.3
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 3.3 0.7 4.0 2.6 1.3 0.4 -0.3 -0.2
Crisis scenario: lost decade 3.5 0.7 4.1 2.5 1.2 0.4 0.0 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario -1.1 -1.9 0.4 0.4 -0.1 -1.6 1.5 0.0 3.5
Crisis scenario: lost decade 0.3 -1.6 0.4 1.5 0.9 -1.4 2.3 0.1 3.6
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios -0.1 0.6 -0.2 -0.2 -0.1 1.4 0.2
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.3 -0.7 0.1 0.6 1.1 0.9
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 0.3 0.1 -0.2
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 40.6 38.1
 (End year 2050) 9.8 -0.4 -6.2 -4.0S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
17.  MALTA 
 
 
124 17.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Malta has a sustainability gap (S2) of 7.0% of GDP, which is above the EU average (6.5% of GDP).  This means that to put public finances on a sustainable path, Malta should improve its structural prim ary balance in a durable 
manner by 7.0% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Additionally, the social protection system (in particular public pensions, health care an d long-term care) would 
have to be reformed to decelerate the projected increase in age-related expenditure. 
The Maltese sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilize the debt ratio is positive (1.4% of GDP), below th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (5.7% of GDP) is 
clearly above the EU aver age (3.2% of GDP). The 
long-term cost of ageing is mainly driven by an increase in pension and health-care expenditure (by 5.1 p.p. and 3.1 p.p. of GDP respectively in 2060 relative to 2010), while long-term care also contributes less but still significantly to the long-term cost of ageing increasing by 1.6 p.p. in 2060 relative to 2010. 
In the 2006 Sustainability Report, the S2 gap was -
0.3% of GDP. The difference between that report and the current results (7.3 p.p.) stems mainly from the increase in the long-ter m cost of ageing (4.6 
p.p.), while the initial budgetary position has deteriorated less marked ly (1.6 p.p.). The 
extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 1.1 p.p. 
The Maltese government debt in 2009, the base 
year of the analysis, stood at 67.0% of GDP and is forecast to increase to around 68% of GDP in 2010. The structural primar y balance is forecast to improve from -0.2% in 2009 to 0.7% in 2010. 
Currently, Maltese debt is below the EU average but above the 60% ceiling set by the Maastricht criteria. 
17.2. OVERALL ASSESSMENT 
Malta appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is well 
above the EU average, ma inly as a result of a 
relatively high increase in  pension and health-care 
expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.  
High primary surpluses over the medium term and 
further reforms of the social security system aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.17.1:  Determinants of fiscal sustainability (Malta) 
MT
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Malta 
 
125  
  
Table VII.17.1:  Summary table (Malta) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.0
Working age population (15-64) % of total 69.7 69.6 67.4 65.1 63.0 61.8 61.6 58.4 54.9 -14.8
Old-age dependency ratio (65+/15-64) 19.4 21.2 26.7 31.2 35.9 39.1 41.7 49.8 59.1 39.7
Participation rate (15-64) 59.5 59.4 61.2 63.0 64.1 65.1 64.4 64.4 64.4 4.9
 - Older workers (55-64) 31.6 27.7 32.0 38.1 43.4 50.6 51.6 51.1 50.3 18.7
Unemployment rate (15-64) 6.4 7.7 6.2 6.2 6.2 6.2 6.2 6.2 6.2 -0.2Real potential GDP (growth rate) 2.0 1.1 2.7 2.7 1.9 1.7 1.2 0.8 1.0 -1.0
Expenditure projections
Pensions 7.2 8.3 9.1 9.3 9.1 9.3 10.5 12.0 13.4 6.2
Benefit ratio 42.3 42.5 42.3 39.8 37.0 37.4 39.9 41.0 40.0 -2.3
Health care 4.7 4.9 5.3 5.6 6.0 6.4 7.2 7.6 8.0 3.3
Long-term care 1.0 1.0 1.1 1.2 1.5 1.6 2.0 2.2 2.6 1.6
Education 5.0 4.6 4.2 4.0 3.9 3.9 3.7 3.7 4.0 -1.0Unemployment benefits 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.0
Total age-related expenditure 18.2 19.2 20.1 20.5 20.9 21.7 23.8 25.8 28.4 10.2
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -1.6 -0.2 0.7
Public debt 64.1 67.0 68.9 85.3 97.1 114.0 173.7 277.3 432.5
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 9.2 0.0 9.2 5.1 3.1 1.6 -0.7 -0.1
Crisis scenario: lost decade 13.3 0.0 13.3 9.3 3.1 1.6 -0.7 -0.1
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 4.7 1.1 0.2 3.4 7.0 1.4 5.7 0.6 6.3
Crisis scenario: lost decade 8.8 1.3 0.2 7.4 11.2 1.5 9.7 1.0 7.3
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 7.0 0.5 -0.4 -0.2 0.5 1.8 -0.5
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.3 -0.7 -0.4 0.6 1.3 0.9
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.1 0.5 0.3 -1.0
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 35.6 33.5
 (End year 2050) -0.3 6.0 1.6 4.6S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
18.  THE NETHERLANDS 
 
 
126 18.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Netherlands has a sustainability gap (S2) of 6.9% of GDP, which is slightly above the EU average (6.5% of GDP) .  This means that to 
put public finances on a sustainable path, Netherlands should improve its structural primary balance in a durable manner by 6.9% of GDP. In principle, this adjustment  could take place via both 
an increase in revenues and cuts in expenditure. Additionally, the social protection system (in particular public pensions and long-term care) would have to be reformed to decelerate the projected increase in age-related expenditure. 
The Dutch sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (1.9% of GDP), below th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (5.0% of GDP) is 
clearly above the EU aver age (3.2% of GDP). The 
long-term cost of ageing is mainly driven by an increase in long-term care and pension expenditure (by 4.6 p.p. and 4.8 p.p. respectively in 2060 relative to 2010), while health care also contributes less but still significantly to the long-term cost of ageing by increasing by 0.9 p.p. 
In the 2006 Sustainability Report, the S2 gap was 
1.3% of GDP. The difference between that report and the current results (5.6 p.p.) stems mainly from the deterioration of the initial budgetary position (5.0 p.p.), while the co mponent of the long-term 
cost of ageing has increased less markedly (0.6 p.p.). The extension of the projection period from 2050 (in the 2006 report) to 2060 does not affect the sustainability gap. 
The Dutch government debt in 2009, the base year 
of the analysis, stood at 57.0% of GDP and is forecast to increase to around 63% of GDP in 2010. The structural primar y balance is forecast to 
decrease slightly from 0.0% in 2009 to -1.6% in 2010. Currently, Dutch debt is both below the EU 
average and the 60% ceiling set by the Maastricht criteria, however the decrease of its structural primary balance may widen the sustainability gap of its public finances. 
18.2. OVERALL ASSESSMENT 
The Netherlands appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is well above the EU  average, mainly as a 
result of a relatively high increase in pension and long-term care expenditure as a share of GDP over the coming decades. The budgetary position in 
2009 compounds the budgetary impact of population ageing on the sustainability gap.  
High primary surpluses over the medium term and 
a further reform of the social security system aimed at curbing the subs tantial increase in age-
related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.18.1:  Determinants of fiscal sustainability (The 
Netherlands) 
NL
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, The Netherlands 
 
127  
  
Table VII.18.1:  Summary table (The Netherlands) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 16.4 16.5 16.7 16.9 17.1 17.2 17.2 16.9 16.6 0.2
Working age population (15-64) % of total 67.4 67.2 65.6 64.5 62.6 60.2 57.5 58.4 57.8 -9.7
Old-age dependency ratio (65+/15-64) 21.5 22.8 27.1 30.7 34.9 40.0 46.8 45.6 47.2 25.7
Participation rate (15-64) 78.7 78.8 79.4 79.5 79.5 79.7 81.0 80.4 80.2 1.6
 - Older workers (55-64) 53.3 53.4 55.3 56.1 56.2 55.8 57.5 57.8 57.6 4.2
Unemployment rate (15-64) 3.2 6.2 3.0 3.0 3.0 3.0 3.0 3.0 3.0 -0.2Real potential GDP (growth rate) 1.7 0.9 1.7 1.5 1.3 1.2 1.5 1.5 1.3 -0.4
Expenditure projections
Pensions 6.6 6.5 7.2 7.8 8.4 9.3 10.3 10.3 10.5 4.0
Benefit ratio 43.8 41.8 41.6 41.1 40.6 40.4 40.4 40.7 40.5 -3.2
Health care 4.8 4.9 5.1 5.3 5.4 5.6 5.8 5.9 5.8 1.0
Long-term care 3.4 3.5 3.8 4.1 4.6 5.4 6.8 7.7 8.1 4.7
Education 4.6 4.6 4.5 4.4 4.3 4.4 4.5 4.5 4.4 -0.2Unemployment benefits 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 -0.1
Total age-related expenditure 20.5 20.5 21.5 22.6 23.9 25.6 28.5 29.4 29.9 9.4
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 1.7 0.0 -1.6
Public debt 58.2 57.0 63.1 75.5 93.9 121.0 202.2 312.1 450.3
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 6.7 2.7 9.4 4.0 0.9 4.6 -0.2 -1.4
Crisis scenario: lost decade 7.3 2.7 10.0 4.3 0.9 4.9 0.0 -1.4
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 5.2 1.6 0.0 3.7 6.9 1.9 5.0 0.6 6.5
Crisis scenario: lost decade 5.8 1.6 0.0 4.1 7.5 2.0 5.6 0.6 6.9
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 6.9 0.2 0.0 -0.2 -0.4 1.1 -0.3
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.4 0.0 0.3 : 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.3 -0.3 0.5 1.1 0.9 -3.3
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 39.8 39.3
 (End year 2050) 1.3 7.0 5.0 0.6S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
19.  AUSTRIA 
 
 
128 19.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure Austria has a sustainability gap (S2) of 4.7% of GDP, which is below the EU average (6.5% of GDP). This means that to put public finances on a sustainable path, Austria should improve its structural prim ary balance in a durable 
manner by 4.7% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. Alternatively the social protection system would have to be reformed to decelerate the planned increase in age-related expenditure. 
The Austrian sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (1.6% of GDP), below th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (3.1% of GDP) is 
close to the EU average (3.2% of GDP). The long-
term cost of ageing is driven by an increase in 
pension, health-care and long-term care expenditure (by 1.0 p.p., 1.4 p.p. and 1.2 p.p. respectively in 2060 relative to 2010),  
In the 2006 Sustainability Report, the S2 gap was 
0.3% of GDP. The difference between that report and the current results (4.4 p.p.) stems both from the deterioration of the initial budgetary position (2.5 p.p.) and the increase in the long-term cost of 
ageing (2.1 p.p.). The extension of the projection period from 2050 (in the 2006 report) decreases the sustainability gap by 0.1 p.p.  
The Austrian government debt in 2009, the base 
year of the analysis, stood at 70.4% of GDP and is forecast to increase to around 75% of GDP in 2010. The structural primar y balance is forecast to 
decrease from -0.2% in 2 009 to -0.6% in 2010. 
Austrian debt is close to the EU average but clearly above the 60% ceili ng set by the Maastricht 
criteria which may also pose risks for the long-term sustainability of its public finances. 19.2. OVERALL ASSESSMENT 
Austria appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing in Austria is close to the EU  average. The budgetary 
position in 2009 compounds the budgetary impact of population ageing on the sustainability gap. Moreover, the current level of gross debt, which is above the Treaty reference value, adds to the sustainability risk.  
In addition, there is a risk that current policy will 
not be applicable for the long term as a decrease in pensions' benefit ratio is forecast (from 55% in 2007 to 39% in 2060). This decreasing benefit ratio may put some pressure on Austrian public finances and may thus pose risks to the long-term sustainability of public finances. 
Improving primary surpluses over the medium 
term and further reforms to the social security system aimed at curbing th e increase in age-related 
expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.19.1:  Determinants of fiscal sustainability (Austria) 
AT
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Austria 
 
129  
   
Table VII.19.1:  Summary table (Austria) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 8.3 8.4 8.6 8.7 8.9 9.0 9.1 9.1 9.0 0.7
Working age population (15-64) % of total 67.5 67.5 67.2 66.3 64.6 62.2 59.2 58.3 57.2 -10.3
Old-age dependency ratio (65+/15-64) 25.0 26.0 27.4 29.2 32.7 38.1 46.0 48.3 50.6 25.6
Participation rate (15-64) 74.8 75.3 75.8 75.9 75.7 76.4 77.9 77.5 77.6 2.8
 - Older workers (55-64) 40.0 40.8 45.7 49.6 51.1 52.1 56.1 56.0 55.4 15.4
Unemployment rate (15-64) 4.4 7.1 4.3 4.3 4.3 4.3 4.3 4.3 4.3 -0.1Real potential GDP (growth rate) 1.6 1.1 1.9 1.9 1.6 1.5 1.5 1.5 1.5 -0.1
Expenditure projections
Pensions 12.8 12.7 12.8 13.0 13.4 13.8 13.9 14.0 13.6 0.9
Benefit ratio 54.9 54.2 53.0 51.8 50.6 49.4 46.3 42.7 38.5 -16.4
Health care 6.5 6.6 6.8 7.0 7.2 7.4 7.8 8.1 8.0 1.5
Long-term care 1.3 1.3 1.3 1.4 1.5 1.7 2.0 2.4 2.5 1.2
Education 4.8 4.5 4.3 4.1 4.1 4.2 4.2 4.2 4.3 -0.5Unemployment benefits 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.0
Total age-related expenditure 26.0 25.7 25.8 26.2 26.9 27.7 28.6 29.3 29.0 3.1
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 0.8 -0.2 -0.6
Public debt 62.5 70.4 75.2 84.8 97.4 116.7 170.4 245.3 337.8
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 4.0 -0.7 3.3 1.0 1.4 1.2 -0.2 -0.6
Crisis scenario: lost decade 5.3 -0.7 4.6 2.1 1.4 1.3 -0.1 -0.6
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 3.8 1.5 0.2 2.2 4.7 1.6 3.1 0.3 4.5
Crisis scenario: lost decade 5.3 1.5 0.2 3.6 6.1 1.7 4.4 0.5 5.3
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 4.7 0.6 -0.8 -0.5 -0.5 4.4 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.6 0.0 0.4 : 0.8
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.2 0.1 0.3 -0.8
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 44.5 45.0
 (End year 2050) 0.3 4.8 2.5 2.1S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
20.  POLAND 
 
 
130 20.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected changes in age related expenditure Poland has a sustainability gap (S2) of 3.2% of GDP, which is significantly below the EU average (6.5% of GDP). Th is means that to put 
public finances on a sustainable path, Poland should improve its structur al primary balance in a 
durable manner by 3.2% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure.  
The Polish sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (4.4% of GDP), above th e EU average (3.3% of 
GDP). In contrast, the sustainability gap is mitigated by the required adjustment given the long-term cost of ageing is negative (-1.2% of GDP) and clearly below th e EU average (3.2% of 
GDP). The negative long-term cost of ageing is mainly driven by a decrease in pension expenditure (by -2.1 p.p. in 2060 relative to 2010), while health care and long-term care contribute to the long-term cost of ageing positively (increasing by 0.8% and 0.7% of GDP respectively). 
In the 2006 Sustainability Report, the S2 gap was  
-0.2% of GDP. The difference between that report and the current results (3.4 p.p.) stems from both the deterioration of the initial budgetary position (1.9 p.p.) and the increase in the long-term cost of 
ageing (1.5 p.p.). The extension of the projection period from 2050 (in the 2006 report) decreases the sustainability gap by 0.1 p.p.  
The Polish government debt in 2009, the base year 
of the analysis, stood at 53.6% of GDP and is forecast to increase to around 60% of GDP in 2010. The structural primar y balance is forecast to 
improve from -3.1% in 2009 to -2.8% in 2010. Polish debt is both below the EU average and the 60% ceiling set by the Maastricht criteria. However large continuing structural primary deficits may pose some risk for the long-term 
sustainability of public finances. 
20.2. OVERALL ASSESSMENT 
Poland appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is among the lowest in the EU but the budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.  
In addition, there is a risk that current policy will 
not be applicable for the long terms as it involves a sharp decrease of the benefit ratio of pensions in Poland until 2060, which may pose risks to the long term sustainability of public finances.  
Improving primary surpluses over the medium 
term would contribute to reducing the risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.20.1:  Determinants of fiscal sustainability (Poland) 
PL
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Poland 
 
131  
  
Table VII.20.1:  Summary table (Poland) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 38.1 38.1 38.1 38.0 37.6 37.0 35.2 33.3 31.1 -7.0
Working age population (15-64) % of total 70.8 71.5 70.0 67.0 64.6 63.9 62.7 56.8 52.5 -18.3
Old-age dependency ratio (65+/15-64) 19.0 19.0 21.9 27.2 32.9 36.0 41.3 55.7 69.0 50.0
Participation rate (15-64) 63.3 64.0 65.1 66.1 67.6 67.6 65.4 65.5 66.3 3.0
 - Older workers (55-64) 32.1 33.0 35.5 34.9 41.8 48.1 47.9 46.2 46.5 14.4
Unemployment rate (15-64) 9.6 12.1 5.9 5.9 5.9 5.9 5.9 5.9 5.9 -3.7Real potential GDP (growth rate) 4.9 3.2 3.1 2.5 2.5 2.0 0.5 0.3 0.5 -4.4
Expenditure projections
Pensions 11.6 10.8 9.6 9.7 9.7 9.4 9.2 9.1 8.8 -2.8
Benefit ratio 56.2 59.4 53.7 50.9 47.7 43.7 35.9 28.6 23.6 -32.6
Health care 4.0 4.1 4.3 4.4 4.5 4.6 4.8 4.9 5.0 1.0
Long-term care 0.4 0.4 0.4 0.5 0.5 0.6 0.7 0.9 1.1 0.7
Education 4.4 3.7 3.3 3.2 3.2 3.2 2.9 2.9 3.2 -1.2Unemployment benefits 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 -0.1
Total age-related expenditure 20.5 19.1 17.6 17.8 18.0 17.9 17.7 17.9 18.1 -2.4
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -3.1 -3.1 -2.8
Public debt 47.2 53.6 59.7 80.4 93.6 108.9 155.7 225.5 318.4
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario -1.2 0.1 -1.1 -2.1 0.8 0.7 -0.6 -0.4
Crisis scenario: lost decade -1.5 0.1 -1.4 -2.2 0.8 0.7 -0.7 -0.4
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 2.9 4.2 0.0 -1.2 3.2 4.4 -1.2 0.3 1.1
Crisis scenario: lost decade 2.9 4.2 0.0 -1.4 3.1 4.5 -1.4 0.3 0.9
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 3.2 0.4 -0.3 -0.1 0.0 0.5 0.4
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.9 0.2 0.5 2.1 0.9
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.2 0.0 0.1 -0.4
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 34.4 33.1
 (End year 2050) -0.2 3.3 1.9 1.5S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
21.  PORTUGAL 
 
 
132 21.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure Portugal has a sustainability gap (S2) of 5.5% of GDP, which is   below the EU average 
(6.5% of GDP). This means that to put public finances on a sustainable path, Portugal should improve its structural prim ary balance in a durable 
manner by 5.5% of GDP. In principle, this adjustment could take place via an increase in revenues or cuts in expenditure. Alternatively the social protection system would have to be reformed to decelerate the planned increase in age-related expenditure. 
The Portuguese sustainability gap is compounded 
by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (3.7% of GDP), above th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (1.9% of GDP) is 
below the EU average (3 .2% of GDP). The long-
term cost of ageing is main ly driven by an increase 
in public pension and health care expenditure (by 1.5 p.p. and 1.8 p.p. respectively in 2060 relative to 2010), while long-term care contributes to the long-term cost of ageing by a lesser amount (increasing by 0.1 p.p.). 
In the 2006 Sustainability Report, the S2 gap was 
10.5% of GDP. The difference between that report and the current results (4.9 p.p.) stems from the decrease in the long-term cost  of ageing (-5.1 p.p.), 
at the same time, the initial budgetary position has remained stable. The extension of the projection period from 2050 (in the 2006 report) increases the sustainability gap by 0.1 p.p.  
The Portuguese government debt in 2009, the base 
year of the analysis, stood at 75.4% of GDP and is forecast to increase to around 81% of GDP in 2010. The structural primary balance is forecasted to improve from -2.4% in 2009 to -1.8% in 2010. Portuguese debt is above both the EU average and the 60% ceiling set by the Maastricht criteria which may together with the ongoing structural 
primary deficits pose risks for the long-term sustainability of public finances. 
21.2. OVERALL ASSESSMENT 
Portugal appears to be at medium risk with regard to the long-term sustainability of public finances. While the long-term budgetary impact of ageing is somewhat higher than on average in the EU, 
enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing. Moreover, the current level of gross debt is above the Treaty reference value.  
In addition to overall figures, there is a risk that 
current policy will not be applicable for the long term as the benefit ratio of pensions is forecast to decrease. This might put some additional pressure on the long term sustainability of public finances. 
Improving primary surpluses over the medium 
term and further reforms to the social security system aimed at curbing th e increase in age-related 
expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.21.1:  Determinants of fiscal sustainability (Portugal) 
PT
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Portugal 
 
133  
  
Table VII.21.1:  Summary table (Portugal) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 10.6 10.7 10.9 11.1 11.2 11.3 11.5 11.4 11.3 0.7
Working age population (15-64) % of total 67.3 66.9 66.1 65.5 64.7 63.5 60.2 56.9 56.3 -10.9
Old-age dependency ratio (65+/15-64) 25.6 26.6 28.6 30.7 33.2 36.6 44.6 53.0 54.8 29.1
Participation rate (15-64) 74.1 75.2 76.1 76.1 76.3 76.4 76.4 76.6 76.3 2.2
 - Older workers (55-64) 54.5 56.9 61.1 63.5 65.0 67.0 67.4 67.5 67.8 13.3
Unemployment rate (15-64) 8.1 9.8 6.9 6.2 6.2 6.2 6.2 6.2 6.2 -1.9Real potential GDP (growth rate) 0.4 0.1 2.1 2.1 2.1 2.5 1.8 1.2 1.4 1.0
Expenditure projections
Pensions 11.4 11.9 12.1 12.4 12.6 12.6 12.5 13.3 13.4 2.1
Benefit ratio 46.3 49.0 48.2 47.2 45.3 42.3 36.7 34.5 32.7 -13.6
Health care 7.2 7.3 7.5 7.6 7.8 8.0 8.5 8.9 9.1 1.9
Long-term care 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.1
Education 4.6 4.5 4.4 4.3 4.2 4.1 4.0 4.2 4.3 -0.3Unemployment benefits 1.2 1.1 1.0 0.9 0.8 0.8 0.8 0.8 0.8 -0.4
Total age-related expenditure 24.5 24.9 25.0 25.2 25.5 25.7 26.0 27.4 27.8 3.4
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -0.9 -2.4 -1.8
Public debt 66.4 75.4 81.5 113.6 134.2 156.1 203.9 282.9 389.9
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 2.8 0.1 2.9 1.5 1.8 0.1 -0.4 -0.2
Crisis scenario: lost decade 4.2 0.1 4.3 2.6 1.7 0.1 -0.2 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 4.7 3.4 0.3 1.0 5.5 3.7 1.9 0.4 3.0
Crisis scenario: lost decade 5.9 3.6 0.3 2.1 6.8 3.8 3.1 0.5 4.2
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 5.5 0.7 -0.5 -0.2 -0.4 3.0 0.3
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.7 0.0 0.5 : 0.8
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.0 0.1 0.0 -0.1
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 37.8 36.0
 (End year 2050) 10.5 5.4 0.0 -5.1S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
22.  ROMANIA 
 
 
134 22.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Romania has a sustainability gap (S2) of 9.1% of GDP, which is significantly above the EU average (6.5% of GDP).  This means that to put public finances on a sustainable path, Romania should improve its structural primary balance in a durable manner by 9.1% of GDP. In principle, this adjustment  could take place via both 
an increase in revenues and cuts in expenditure. Alternatively, the social protection system (in particular public pensions and health care) would have to be reformed to decelerate the projected increase in age-related expenditure. 
The Romanian sustainability gap is compounded 
by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (4.3% of GDP), above th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of agei ng (4.9% of GDP) is also 
above the EU average (3 .2% of GDP). The long-
term cost of ageing is main ly driven by an increase 
in pension expenditure (by 7.4 p.p. in 2060 relative to 2010), while health care also contributes to the long-term cost of ageing (increasing by 1.3 p.p.). 
The Romanian government debt in 2009, the base 
year of the analysis, stood at 18.2% of GDP and is forecast to increase to around 23% of GDP in 2010. The structural primar y balance is forecast to 
improve slightly from -3.7% in 2009 to -3.1% in 2010. Romanian debt is both below the EU average and the 60% ceiling set by the Maastricht criteria, however the continuing structural primary deficits may widen the sustainability gap of its public finances. 
22.2. OVERALL ASSESSMENT 
Romania appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is above the EU average according to the projections made in 
2009. The budgetary position in 2009 compounds the budgetary impact of  population ageing on the 
sustainability gap.  
Improving the primary balance over the medium 
term and further reforms to the social security system would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.22.1:  Determinants of fiscal sustainability (Romania) 
RO
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
 
Chapter VII 
Sustainability assessment per Member State, Romania 
 
135  
  
Table VII.22.1:  Summary table (Romania) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 21.6 21.3 21.1 20.8 20.5 20.0 19.2 18.1 16.9 -4.6
Working age population (15-64) % of total 69.8 70.0 69.4 67.9 66.7 66.8 62.6 57.3 53.6 -16.2
Old-age dependency ratio (65+/15-64) 21.3 21.3 22.5 25.7 29.1 30.3 40.7 54.0 65.3 44.0
Participation rate (15-64) 63.0 63.9 64.7 64.8 64.2 62.4 60.8 60.5 61.3 -1.7
 - Older workers (55-64) 42.4 44.6 46.3 47.1 50.9 48.2 45.6 44.2 45.4 3.1
Unemployment rate (15-64) 6.4 7.7 6.0 6.0 6.0 6.0 6.0 6.0 6.0 -0.4Real potential GDP (growth rate) 5.1 3.2 3.9 2.9 2.2 1.6 1.1 0.3 0.3 -4.7
Expenditure projections
Pensions 6.6 8.4 8.5 8.8 9.4 10.4 12.6 14.8 15.8 9.2
Benefit ratio 29.4 40.0 41.4 42.2 42.5 42.5 39.0 36.6 36.6 7.2
Health care 3.5 3.6 3.7 3.8 3.9 4.1 4.4 4.7 4.9 1.4
Long-term care 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Education 2.8 2.5 2.4 2.3 2.3 2.2 2.1 2.2 2.3 -0.5Unemployment benefits 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.0
Total age-related expenditure 13.1 14.7 14.8 15.1 15.8 17.0 19.3 22.0 23.2 10.1
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -7.2 -3.7 -3.1
Public debt 13.6 18.2 22.7 66.3 91.3 125.1 220.6 390.4 633.8
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 8.5 0.0 8.5 7.4 1.3 0.0 -0.2 -0.1
Crisis scenario: lost decade 9.6 0.0 9.6 8.5 1.3 0.0 -0.1 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 6.9 4.1 -0.4 3.2 9.1 4.3 4.9 0.8 5.4
Crisis scenario: lost decade 7.6 4.2 -0.4 3.8 9.9 4.3 5.6 0.9 6.0
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 9.1 0.5 0.0 -0.3 0.5 0.3 -0.7
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.5 0.0 0.3 2.1 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.0 0.0 0.0 0.0
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 29.5 28.9
 (End year 2050) : 8.7 : :S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
23.  SLOVENIA 
 
 
136 23.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Slovenia has a sustainability gap (S2) of 12.2% of GDP, which is clearly above the EU 
average (6.5% of GDP).  This means that to put 
public finances on a sustainable path, Slovenia should improve its structur al primary balance in a 
durable manner by 12.2% of GDP. In principle, this adjustment could take place via both an 
increase in revenues a nd cuts in expenditure. 
Additionally, the social protection system (in particular public pensions and health and long-term care) would have to be reformed to decelerate 
the projected increase in age-related expenditure. 
The Slovenian sustainability gap is compounded 
by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (3.9% of GDP), above th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (8.3% of GDP) is 
clearly above the EU aver age (3.2% of GDP). The 
long-term cost of ageing is mainly driven by an increase in pension expenditure (by 8.5 p.p. in 2060 relative to 2010), while health care and long-term care also contribute less but still significantly to the long-term cost of ageing (both increasing by 1.7p.p.). 
 In the 2006 Sustainability Report, the S2 gap was 
7.3% of GDP. The difference between that report and the current results (4.9 p.p.) stems mainly from the deterioration of the initial budgetary position (3.8 p.p.), while the co mponent of the long-term 
cost of ageing has increased less markedly (0.6 p.p.). The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.6 p.p. 
The Slovenian government debt in 2009, the base 
year of the analysis, stood at 29.3% of GDP and is forecast to increase to around 35% of GDP in 2010. The structural primar y balance is forecast to 
decrease slightly from -3.3% in 2009 to -3.4% in 2010. Slovenian debt is both below the EU average 
and the 60% ceiling set by the Maastricht criteria, however the decrease of its structural primary 
balance may widen the sustainability gap of its public finances.  
23.2. OVERALL ASSESSMENT 
Slovenia appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is well 
above the EU average, ma inly as a result of a 
relatively high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.  
High primary surpluses over the medium term and 
a further pension reform aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.23.1:  Determinants of fiscal sustainability (Slovenia) 
SI
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Slovenia 
 
137  
  
Table VII.23.1:  Summary table (Slovenia) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 2.0 2.0 2.1 2.1 2.0 2.0 2.0 1.9 1.8 -0.2
Working age population (15-64) % of total 70.1 69.5 68.1 65.4 63.5 61.9 58.9 54.7 53.8 -16.4
Old-age dependency ratio (65+/15-64) 22.7 23.9 26.2 31.2 36.2 40.8 49.4 59.4 62.2 39.5
Participation rate (15-64) 71.4 71.8 72.5 73.4 72.6 71.7 70.8 71.6 71.9 0.6
 - Older workers (55-64) 34.5 36.7 42.9 48.8 49.5 49.5 49.3 48.3 49.1 14.6
Unemployment rate (15-64) 4.9 7.4 4.7 4.7 4.7 4.7 4.7 4.7 4.7 -0.2Real potential GDP (growth rate) 3.9 2.2 3.2 2.6 1.4 0.8 0.7 0.8 1.1 -2.8
Expenditure projections
Pensions 9.9 10.1 10.6 11.1 12.0 13.3 16.1 18.2 18.6 8.8
Benefit ratio 40.9 40.7 39.9 39.0 38.2 38.1 38.4 38.6 38.6 -2.3
Health care 6.6 6.8 7.1 7.3 7.5 7.8 8.2 8.4 8.5 1.9
Long-term care 1.1 1.2 1.3 1.4 1.6 1.8 2.2 2.6 2.9 1.8
Education 5.1 4.8 4.8 4.9 5.0 5.0 5.0 5.3 5.6 0.4Unemployment benefits 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.0
Total age-related expenditure 22.9 23.1 24.0 24.9 26.2 28.0 31.7 34.8 35.8 12.8
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -1.3 -3.3 -3.4
Public debt 22.8 29.3 34.9 74.0 108.6 158.8 311.1 540.2 831.6
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 12.5 0.1 12.7 8.5 1.7 1.7 0.7 -0.1
Crisis scenario: lost decade 15.8 0.1 15.9 11.7 1.6 1.8 0.8 -0.2
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 9.2 3.8 -0.3 5.7 12.2 3.9 8.3 1.1 8.4
Crisis scenario: lost decade 11.8 3.9 -0.3 8.2 15.1 4.0 11.1 1.4 10.5
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 12.2 0.1 -0.3 -0.5 -0.2 1.0 :
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.6 -0.1 0.4 0.4 1.4
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.2 0.4 0.2 -1.1
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 38.0 38.4
 (End year 2050) 7.3 11.6 3.8 0.6S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
24.  SLOVAKIA 
 
 
138 24.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Slovakia has a sustainability gap (S2) of 7.4% of GDP, which is above the EU average (6.5% of GDP).  This means that to put public finances on a sustainable path, Slovakia should improve its structural prim ary balance in a durable 
manner by 7.4% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system (in particular public pensions and health care) would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Slovak sustainability gap is compounded by 
the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (4.5% of GDP), above th e EU average (3.3% of 
GDP). In parallel, the required adjustment given the long-term cost of ag eing (2.9% of GDP) is 
slightly below the EU av erage (3.2% of GDP). The 
long-term cost of ageing is mainly driven by an increase in pension expenditure (by 3.6 p.p. in 2060 relative to 2010), while health care also contributes to the long-term cost of ageing (increasing by 2.1 p.p.). 
In the 2006 Sustainability Report, the S2 gap was 
3.0% of GDP. The difference between that report and the current results (4.4 p.p.) stems from the deterioration of the initial budgetary position (3.7 p.p.), while the component of the long-term cost of ageing has increased less ma rkedly (0.2 p.p.). The 
extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.5 p.p. 
The Slovak government debt in 2009, the base 
year of the analysis, stood at 32.3% of GDP and is forecast to increase to around 36% of GDP in 2010. The structural primar y balance is forecast to 
improve slightly from -3.7% in 2009 to -3.3% in 2010. Slovak debt is both below the EU average and the 60% ceiling set by the Maastricht criteria, 
however the continuing structural primary deficits may widen the sustainability gap of its public finances. 
24.2. OVERALL ASSESSMENT 
Slovakia appears to be at high risk with regard to the long-term sustainability of public finances. The long-term budgetary impact  of ageing, which is 
slightly below the EU average, is mainly due to a relatively high increase in pension expenditure during the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing. 
Improving the primary balance over the medium 
term and further reforms to the social security system would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.24.1:  Determinants of fiscal sustainability (Slovakia) 
SK
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Slovakia 
 
139  
  
Table VII.24.1:  Summary table (Slovakia) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 5.4 5.4 5.4 5.4 5.4 5.3 5.1 4.9 4.5 -0.8
Working age population (15-64) % of total 72.0 72.5 71.5 69.0 67.0 65.9 63.4 57.0 52.7 -19.3
Old-age dependency ratio (65+/15-64) 16.5 16.9 19.2 23.8 28.5 32.3 40.0 55.5 68.5 52.0
Participation rate (15-64) 68.8 70.3 71.8 72.9 73.4 72.8 70.5 70.4 71.2 2.4
 - Older workers (55-64) 39.4 47.0 49.6 50.3 53.4 55.1 53.8 52.6 52.8 13.4
Unemployment rate (15-64) 11.1 12.1 8.6 6.2 6.2 6.2 6.2 6.2 6.2 -4.9Real potential GDP (growth rate) 5.6 3.9 4.2 3.4 2.3 2.0 0.5 0.2 0.5 -5.1
Expenditure projections
Pensions 6.8 6.6 6.3 6.3 6.9 7.3 8.3 9.4 10.2 3.4
Benefit ratio 45.2 45.8 44.5 43.3 42.2 41.0 37.9 34.9 33.1 -12.0
Health care 5.0 5.2 5.4 5.7 6.0 6.2 6.7 7.1 7.2 2.3
Long-term care 0.2 0.2 0.2 0.2 0.3 0.3 0.4 0.5 0.6 0.4
Education 3.1 2.8 2.4 2.2 2.2 2.2 2.1 2.1 2.3 -0.8Unemployment benefits 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 -0.1
Total age-related expenditure 15.2 14.9 14.5 14.5 15.4 16.1 17.5 19.2 20.4 5.2
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -3.5 -3.7 -3.3
Public debt 27.6 32.2 36.3 64.9 87.0 115.5 207.5 354.6 561.2
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 5.5 0.0 5.5 3.6 2.1 0.4 -0.6 -0.4
Crisis scenario: lost decade 5.4 0.0 5.4 3.5 2.0 0.4 -0.5 -0.4
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 5.7 4.3 -0.3 1.6 7.4 4.5 2.9 0.7 4.0
Crisis scenario: lost decade 5.8 4.4 -0.3 1.7 7.4 4.6 2.8 0.7 3.9
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 7.4 0.4 -0.1 -0.1 0.3 0.4 -0.4
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.0 -0.7 -0.1 0.4 1.0 0.6
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 0.0 0.0 -0.2
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 29.4 32.1
 (End year 2050) 3.0 6.9 3.7 0.2S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
25.  FINLAND 
 
 
140 25.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Finland has a sustainability gap (S2) of 4.0% of GDP, which is significantly below the EU average (6.5% of GDP) .  This means that to 
put public finances on a sustainable path, Finland should improve its structur al primary balance in a 
durable manner by 4.0% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Finnish sustainability gap is mainly due to the 
required adjustment given the long-term cost of ageing (4.5% of GDP), which is above the EU 
average (3.3% of GDP) . In parallel, the 
sustainability gap is mitigated by the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is negative (-0.5% of GDP) clearly below the EU average (3.2% of GDP). The increase in the long-term co st of ageing is mainly 
driven by pension and long-term care expenditure (increasing by 2.6 p.p. and 2.5 p.p. respectively in 2060 relative to 2010), while the ratio of health care expenditure to GDP increases by 0.8 p.p.  
In the 2006 Sustainability Report, the S2 gap was  
-0.9% of GDP. The difference between that report and the current results (4.9 p.p.) stems mainly from the deterioration of the initial budgetary position (4.6 p.p.), while the co mponent of the long-term 
cost of ageing has increased by 0.1 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.2 p.p. 
The Finnish government debt in 2009, the base 
year of the analysis, stood at 39.7% of GDP and is forecast to increase to around 46% of GDP in 2010. The structural primar y balance is forecast to 
decrease slightly from 2.1% in 2009 to 0.8% in 2010. Finnish debt is both below the EU average 
and the 60% ceiling set by the Maastricht criteria.  
25.2. OVERALL ASSESSMENT 
Finland appears to be at low risk with regard to the long-term sustainability of public finances. While the long-term budgetary imp act of ageing is higher 
than on average in the EU, the budgetary position 
in 2009 with a structural surplus together with large assets accumulated in the public pension system significantly offset the long-term budgetary impact of ageing.  
Improving primary surpluses over the medium 
term and further reforms to the social security system aimed at curbing th e increase in age-related 
expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.25.1:  Determinants of fiscal sustainability (Finland) 
FI
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
   
Chapter VII 
Sustainability assessment per Member State, Finland 
 
141  
  
Table VII.25.1:  Summary table (Finland) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 5.3 5.3 5.4 5.5 5.5 5.6 5.5 5.4 5.4 0.1
Working age population (15-64) % of total 66.5 66.4 63.4 61.0 59.3 58.2 58.2 57.5 56.4 -10.0
Old-age dependency ratio (65+/15-64) 24.8 25.7 31.7 36.8 40.6 43.9 45.1 46.6 49.3 24.5
Participation rate (15-64) 75.8 75.3 77.0 78.4 78.5 78.6 78.8 79.1 79.1 3.3
 - Older workers (55-64) 59.4 57.9 61.9 66.5 67.0 66.1 67.8 68.5 67.7 8.3
Unemployment rate (15-64) 6.9 9.3 5.8 5.8 5.8 5.8 5.8 5.8 5.8 -1.1Real potential GDP (growth rate) 2.4 1.1 1.9 1.7 1.5 1.5 1.6 1.5 1.5 -0.9
Expenditure projections
Pensions 10.0 10.7 11.8 12.6 13.4 13.9 13.6 13.3 13.4 3.3
Benefit ratio 49.1 51.2 52.0 52.1 52.0 51.7 50.2 48.3 46.9 -2.3
Health care 5.5 5.6 5.8 6.0 6.1 6.3 6.5 6.5 6.5 1.0
Long-term care 1.8 1.9 2.2 2.4 2.7 3.1 3.9 4.2 4.4 2.6
Education 5.7 5.4 5.3 5.2 5.3 5.4 5.4 5.3 5.4 -0.3Unemployment benefits 1.2 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 -0.2
Total age-related expenditure 24.2 24.7 26.0 27.2 28.5 29.7 30.4 30.2 30.5 6.3
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 4.3 2.1 0.8
Public debt 33.4 39.7 45.7 35.5 44.4 61.3 111.1 172.6 248.7
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 5.4 0.5 5.9 2.6 0.8 2.5 0.0 -1.5
Crisis scenario: lost decade 5.7 0.5 6.1 2.8 0.8 2.6 0.0 -1.5
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 2.6 -0.8 -0.3 3.7 4.0 -0.5 4.5 0.3 5.5
Crisis scenario: lost decade 3.1 -0.8 -0.3 4.2 4.5 -0.4 4.9 0.3 5.8
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 4.0 0.6 -0.3 -0.2 -0.3 0.9 -0.2
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.3 -0.5 0.2 0.5 : 0.8
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.1 -0.1 0.2 0.9 0.4 -1.9
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 42.8 44.5
 (End year 2050) -0.9 3.8 4.6 0.1S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
26.  SWEDEN 
 
 
142 26.1. OVERVIEW OF THE RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  Sweden has a sustainability gap (S2) of 1.4% of GDP, which is significantly below the EU average (6.5% of GDP) .  This means that to 
put public finances on a sustainable path, Sweden should improve its structur al primary balance in a 
durable manner by 1.4% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The Swedish sustainability gap is mainly due to 
required adjustment given the long-term cost of ageing (1.6% of GDP), which is below the EU 
average (3.3% of GDP). In parallel, the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (0.2% of GDP) and clearly below the EU average (3.2% of GDP). The increase in the long -term cost of ageing is 
mainly driven by long-term care expenditure (increasing by 2.2 p.p. in 2060 relative to 2010), while the ratio of health care expenditure to GDP increases by 0.7 p.p. At the same time, the GDP share of pension expenditure is expected to fall by 0.2 p.p. 
In the 2006 Sustainability Report, the S2 gap was  
-1.1% of GDP. The difference between that report and the current results (2.9 p.p.) stems mainly from the deterioration of the initial budgetary position (3.3 p.p.), while the co mponent of the long-term 
cost of ageing has decreased by 0.8 p.p. The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.5 p.p. 
The Swedish government debt in 2009, the base 
year of the analysis, stood at 44.0% of GDP and is forecast to increase to around 48% of GDP in 2010. The structural primar y balance is forecast to 
decrease from 0.9% in 2009 to -0.5% in 2010. Swedish debt is both below the EU average and 
the 60% ceiling set by the Maastricht criteria.  
26.2. OVERALL ASSESSMENT 
Sweden appears to be at low risk with regard to the long-term sustainability of public finances. The long-term budgetary imp act of ageing is lower 
than the EU average. Th e budgetary position in 
2009 with a primary surplus contributes to the reduction of gross debt and a considerable amount of public assets will help finance part of the increase in pension expenditure.  
Maintaining sound government finances with 
continued surpluses would contribute to limiting risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis. 
Graph VII.26.1:  Determinants of fiscal sustainability (Sweden) 
SE
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Source:  Commission services. 
 
Chapter VII 
Sustainability assessment per Member State, Sweden 
 
143  
   
Table VII.26.1:  Summary table (Sweden) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 9.1 9.3 9.6 9.9 10.1 10.3 10.5 10.7 10.9 1.8
Working age population (15-64) % of total 65.6 65.3 63.1 61.8 60.9 60.2 59.5 59.0 56.9 -8.7
Old-age dependency ratio (65+/15-64) 26.4 27.8 31.5 33.7 35.5 37.4 40.8 41.9 46.7 20.3
Participation rate (15-64) 79.2 79.9 81.9 82.2 82.0 81.9 82.0 82.4 82.5 3.3
 - Older workers (55-64) 73.2 73.1 75.0 75.5 75.9 75.5 76.0 77.1 76.6 3.4
Unemployment rate (15-64) 6.1 10.4 5.9 5.9 5.9 5.9 5.9 5.9 5.9 -0.2Real potential GDP (growth rate) 2.6 0.4 2.2 1.9 1.9 1.7 1.9 1.7 1.7 -0.9
Expenditure projections
Pensions 9.5 9.6 9.5 9.4 9.4 9.5 9.4 9.0 9.4 -0.1
Benefit ratio 49.3 48.1 44.7 41.0 38.6 36.6 33.5 31.4 30.1 -19.1
Health care 7.2 7.3 7.4 7.5 7.6 7.7 7.9 8.0 8.0 0.8
Long-term care 3.5 3.5 3.5 3.7 4.0 4.4 5.0 5.3 5.8 2.3
Education 6.0 5.8 5.5 5.5 5.6 5.7 5.7 5.6 5.8 -0.3Unemployment benefits 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 -0.1
Total age-related expenditure 27.2 27.1 26.7 26.9 27.5 28.2 28.8 28.8 29.7 2.6
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance 3.4 0.9 -0.5
Public debt 38.0 44.0 47.2 31.4 29.9 32.2 45.7 64.0 93.1
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 2.4 0.3 2.7 -0.2 0.7 2.2 0.0 -0.8
Crisis scenario: lost decade 4.0 0.3 4.3 0.4 0.6 2.8 0.5 -0.8
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 0.5 -0.1 -0.3 0.8 1.8 0.2 1.6 0.1 3.1
Crisis scenario: lost decade 1.9 0.0 -0.3 2.1 3.4 0.2 3.1 0.2 4.4
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 1.8 0.3 -0.1 -0.2 -0.3 1.5 -0.1
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.1 -0.5 0.1 0.3 : 0.7
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.2 -0.2 0.4 0.8 0.6 -1.7
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 47.9 49.8
 (End year 2050) -1.1 1.4 3.3 -0.8S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 
27.  UNITED KINGDOM 
 
 
144 27.1. OVERVIEW OF RESULTS 
The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on the 2009 commissions services' spring forecast, and the projected increases in age related expenditure,  the United Kingdom has a sustainability gap (S2) of 12.4% of GDP, which is clearly above the EU av erage (6.5% of GDP).  
This means that to put public finances on a sustainable path, the United Kingdom should improve its structural prim ary balance in a durable 
manner by 12.4% of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate th e projected increase in 
age-related expenditure. 
The sustainability gap in the United Kingdom is 
mainly due to the initial budgetary position, i.e. the required adjustment to stabilise the debt ratio is positive (8.8% of GDP), clearly above the EU average (3.3% of GDP). In parallel, the required adjustment given the l ong-term cost of ageing 
(3.6% of GDP) is above the EU average (3.2% of GDP). The increase in the l ong-term cost of ageing 
is mainly driven by pension and health-care expenditure (increasing by 2.5 p.p. and 1.8 p.p.  respectively in 2060 relative to 2010). 
In the 2006 Sustainability Report, the S2 gap was 
4.9% of GDP. The difference between that report and the current results (7.5 p.p.) stems from the deterioration of the initial budgetary position (7.0 p.p.), while the component of the long-term cost of ageing has actually decreased (-0.5 p.p.). The extension of the projection period from 2050 (in the 2006 report) to 2060 increases the sustainability gap by 0.9 p.p. 
The UK's government debt in 2009, the base year 
of the analysis, stood at 68.4% of GDP and is forecast to increase to around 82% of GDP in 2010. The structural primar y balance is forecast to 
decrease slightly from -7.8% in 2009 to -9.2% in 2010. Currently, UK's debt is slightly below the EU average but above the 60% ceiling set by the Maastricht criteria, however the dramatic size of 
its structural primary deficit poses an additional risk to the sustainability of public finances. 
27.2. OVERALL ASSESSMENT 
The United Kingdom appears to be at high risk with regard to the long-term sustainability of public finances. Although the contribution of an ageing population is not amongst the most problematic, the UK's budgetary position poses severe risks to the sustainability of public finances. 
Reducing the primary deficit, would contribute to 
reducing the high risks to the long-term sustainability of public finances.  
Graph VII.27.1:  Determinants of fiscal sustainability (United 
Kingdom) 
UK
S2(0...15)
IBP(-2...9)
LTC(-1...13)
Debt 2009(10...113) Debt 2060(-26 ...898)Assets 2007(15...113)S1(-1...12)
Note on interpretation: See Graph VII.1.1 for Belgium. 
Data on assets: not available 
Source:  Commission services. 
 
 
Chapter VII 
Sustainability assessment per Member State, United Kingdom 
 
145  
  
Table VII.27.1:  Summary table (United Kingdom) 
Underlying assumptions 2007 2010 2015 2020 2025 2030 2040 2050 2060Change      
2007 - 2060
Population (millions) 60.9 62.0 63.8 65.7 67.5 69.2 72.0 74.5 76.7 15.8
Working age population (15-64) % of total 66.4 66.3 65.1 64.0 63.1 61.8 60.8 60.5 58.7 -7.7
Old-age dependency ratio (65+/15-64) 24.1 24.7 27.1 28.6 30.4 33.2 36.9 38.0 42.1 18.0
Participation rate (15-64) 75.6 75.7 76.9 77.2 77.0 77.5 78.5 78.6 78.7 3.1
 - Older workers (55-64) 59.7 58.6 62.6 64.1 64.7 65.8 70.3 71.3 71.1 11.4
Unemployment rate (15-64) 5.3 9.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 0.1Real potential GDP (growth rate) 2.0 0.9 2.4 2.0 2.0 2.1 2.1 1.9 1.8 -0.2
Expenditure projections
Pensions 6.6 6.7 6.8 6.9 7.2 7.6 8.0 8.1 9.3 2.7
Benefit ratio 34.6 34.6 34.5 34.9 35.0 34.5 34.2 35.8 37.1 2.5
Health care 7.5 7.6 7.8 8.0 8.1 8.4 8.9 9.2 9.4 1.9
Long-term care 0.8 0.8 0.9 0.9 1.0 1.0 1.1 1.2 1.3 0.5
Education 3.8 3.8 3.7 3.8 3.8 3.9 3.8 3.7 3.8 -0.1Unemployment benefits 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.0
Total age-related expenditure 18.9 19.2 19.4 19.8 20.3 21.1 22.1 22.4 24.0 5.1
2008 2009 2010 2020 2025 2030 2040 2050 2060
Structural primary balance -3.3 -7.8 -9.2
Public debt 52.0 68.4 81.7 159.8 212.7 271.3 406.1 559.9 759.2
Cost of ageing
Net age-
related 
expenditurePension 
taxationGross age-
related 
expenditurePensions Health careLong-term 
careUnempl. and 
EducationProperty 
income
Baseline scenario 4.8 0.0 4.8 2.5 1.8 0.5 0.0 -0.3
Crisis scenario: lost decade 5.7 0.0 5.7 3.2 1.7 0.5 0.2 -0.3
Sustainability Indicators
(End year 2060) S1 IBP DR LTC S2 IBP LTC Cost of delay RPB
Baseline scenario 10.8 8.6 0.2 2.0 12.4 8.8 3.6 0.7 4.5
Crisis scenario: lost decade 11.7 8.8 0.2 2.7 13.3 8.9 4.4 0.8 5.2
Sensitivit
y to chan ges in assum ptions S2
BaselineHigher life 
expectancyHigher 
labour 
productivityOlder 
workersTotal 
EmploymentZero migration Interest rate
AWG scenarios 12.4 0.7 0.0 -0.1 0.0 3.1 -0.1
Pure AgeingConstant 
Health 
StatusDeath-
related CostsIncome 
ElasticityEU12 Cost 
ConvergenceLabour 
Intensity
Scenarios for health-care 0.2 -0.7 -0.4 0.5 : 0.6
Pure AgeingConstant 
DisabilityImproved 
DisabilityDecrease in 
Informal Fast growth in 
unit costsSlow growth in 
unit costs
Scenarios for lon g-term care 0.0 0.0 0.1 0.1 0.1 -0.4
Comparison with SR 2006 S2 2006 S2 2009 Tax burden 2008Average 2000-
07
IBP LTC 38.5 37.5
 (End year 2050) 4.9 11.4 7.0 -0.5S2Change in age-related expenditure 2010 - 2060 (% points)
Difference from the baseline scenario (% points)
Difference due to S1
Source:   Commission services. 
 

Chapter A.I 
Deriving the sustainability indicators 
  
1. DERIVING THE SUSTAINABILITY INDICATORS 
 
148 0. Notations  
tis the index for the year. 
0tthe last year before the long-term projection. 
tD (adjusted) gross debt relative to GDP. 
tPB structural primary bala nce relative to GDP.  
tPB∆ change in structural primary bala nce compared to the base year t t PB PB PB ∆+=0  relative to 
GDP. In addition change in structural primary balan ce equals a sum of a change  in structural primary 
balance due to a change in age related expenditure and a change in property income 
t t t PI ageingPB PB ∆+ ∆=∆ ) ( . 
t ageingPB ) (∆ change in structural primary balance due to development in age related expenditure 
compared to the base year   relative to GDP, i.e. t ageingPB ) (∆  does not reflect development in 
property  income flows over the projection horizon. 
tPI property income relative to GDP. 
tPI∆  change in property income compared to the base year  relative to GDP. 
rdifferential between the nominal interest ra te and the nominal GDP growth rate i.e. GRr++=+111  
where R and G are respectively the nominal interest ra te (or discount rate) and the nominal growth rate. 
1. Deriving the S1 and S2 indi cator under the assumption of co nstant growth rate/interest rate 
differential(35) 
i. The inter-temporal budget constraint and the S2 indicator  
There is no agreed definition on what constitutes a sustainable position for the public finances. One can 
however impose that the debt (relative to GDP) remains bounded at any time in the future so that it does not follow an explosive path. This implies (see proof in appendix) that the discounted value of future structural primary balances should cover the current level of debt, i.e.:  
 
0
)1(100 0=
+−∑∞
+=−
ttttt
trPBD       ( 1 )   
This condition is referred to as the inter-temporal budget constraint or the solvency condition.  Given 
an initial debt, an interest-growth differential assu mption and a future path of the structural primary 
                                                           
(35) It is also supposed to be strictly positive. 
Chapter A.I 
Deriving the sustainability indicators 
 
149 balance, condition (1) may not be fulfilled. The S2 indicator is thus the change in the structural primary 
balance for every future year that ensures that condition (1) is true. In order to decompose the change in the primary balance to two parts corresponding to population ageing and the change in property income 
received by the general government  r,  formula (2)  substitutes 
tPB∆ for t t PI ageingPB ∆+ ∆ ) ( .  
444434444214444434444421
Ettttt
Dttttt
t trageingPBr
rPIr PB rD S ∑ ∑∞
+=−∞
+=−+∆−
+∆−−=
1 10 2
00
00 0)1() (
)1(     (2)  
S2 is a sum of two different terms. The first te rm (D) is a condition concerning the initial budgetary 
position and a present value of future income flows from property income: if the structural primary balance (relative to GDP) remains unchanged in the fu ture, the intertemporal budget constraint condition 
simply says that the structural pr imary balance should be equal to "apparent real" interest paid on the 
current level of debt adjusted by the present value of future property income flows. In that case, the level 
of debt would remain stable as a GDP. Indeed, debt  relative to GDP increases by the difference between 
nominal interest rate and the nominal growth rate. If the structural primary balance compensates for this increase, the debt relative to GDP will remain stable. (D) is the distance between current structural 
budgetary primary balance and the debt-stabilizing primary balance .  
The second term (E) is a condition concerning future developments in the property income adjusted 
structural primary balance: the bi gger the decrease of the structural  primary balance, the higher the 
immediate raise in the structural pr imary balance should be to fully compensate those changes. (E) is a 
synthetic measure of the time-varyi ng future changes in the property income adjusted primary balance 
expressed as a constant change in th e primary balance as a share of GDP. 
ii. The S1 indicator The S1 indicator is the change in th e structural primary balance for ever y future year that is required to 
reach a debt ratio in 2060  of 60% of GDP. The calculations below are valid for any date T in the future 
and for any level of debt 
TD. 
4443444214434421
4444434444421
CT
titiT
titii
BtTT t
AT
titiT
titii
t t
rrageingPB
rD Dr
rrPI
PB rD S
∑∑
∑∑
+=−+=−
−
+=−+=−
++∆
−
−+−
+
++∆
−−=
11
11
1
0000
00
0000
0 0
)1(1)1() (
1 )1() (
)1(1)1(   (3) 
As for S2, the S1 indicator is a sum of several terms. Contrary to S2, S1 also as sumes that debt reaches a 
certain level of debt; the first term only ensures that  debt as a share of GDP will remain at its starting 
level at a certain point in  time. Additional effort measured by th e second term (B) is therefore necessary 
to ensure that the debt w ill reach 60% of GDP in 2060. It tends to be large if the desired level of debt is 
small, the period of time given to reach this debt level is short or the initial debt is large. For countries 
with a lower initial level of debt, the term (B) is negative and reduces the sustainability gap. 
The last term (C) is a condition concerning future developments of the structural primary balance due to 
age related expenditure. It is slightly different from th e term (E) in the S2 indicat or because S1 only takes 
into account changes in the struct ural primary balance up to 2060, wh ich in most cases, underestimates 
the cost of ageing. 
European Commission 
Sustainability Report - 2009 
 
150 iii. Comparison of S1 and S2 
The two indicators are in fact very  close and the S1 indicator can be seen as a finite version of the 
intertemporal budget constraint. Indeed , if the debt requirement is set at a very distant date in the future, 
the two indicators S1 and S2 will be very close. 
Given that D PB rDAt t=−=
0 0    ;     0⎯⎯→⎯⎯→⎯∞TB     ;     ErPBr C
ttttt T=+∆⎯⎯→⎯∑∞
+=−⎯→⎯∞
100)1( 
 2 1 ),( S DTST
T⎯⎯→⎯⎯→⎯∞
 (4) 
In practice, given the not so distant requirement ( 2060) and the low differential between interest and 
growth rates, S1 and S2 are different.  
Table 1 sums up the calculations of S1 and S2.  Table 1. comparison of S1 and S2 
 Current budgetary position and 
the present value of future property income flows  Debt 
requirement in 2060  Long-term changes in the primary 
balance due to change in age related expenditure 
S1= 
∑∑
+=−+=−
++∆
−−=T
titiT
titii
t t
rrPI
PB rDA
11
0000
0 0
)1(1)1( + 1)1() (
0
−+−=TT t
rD DrB
 +
∑∑
+=−+=−
++∆
−=T
titiT
titii
rrageingPB
C
11
0000
)1(1)1() (
 
S2
= ∑∞
+=−+∆−−=
100 0 0)1(ttttt
t trPIr PB rDD
 +0  +∑∞
+=−+∆−=
100)1() (
ttttt
rageingPBr E  
)) ( )( 1(2060 ageingPB C ∆−−+= α α (5) 
Two different reasons may lead S1 to be greater than S2:    
- The debt requirement  will increase S1 if the initial level of debt is above 60% and decrease S1 
otherwise: nothing similar is imposed in the calcula tions of S2. Therefore high-debt countries, i.e. 
countries whose debt is above 60% in 2005 or at the end of the programme period, may have a higher S1 than S2. For instance, the debt requirement will increase S1 by around ¾% point of GDP, for a country with an initial adjusted gross debt level of 100%(
36).  
- The other difference between the two indicators comes from the horizon over which future changes in 
the primary balance  are taken into account: over the period up to 2060 in the case of S1 and over infinite 
horizon in the case of S2. In EU countries, the overall budgetary impact of ageing is usually increasing 
over the next decades so that the maximum budgetary impact happens towards the end of the period. In 
that case, the change in the primary balance is high er in 2060 than it is on average over the period 2010-
                                                           
(36) If the difference between the intere st rate and growth rate is 1.5%. 
Chapter A.I 
Deriving the sustainability indicators 
 
151 2060: the impact of changes in primary balances is then larger in S2 than in S1(37). However, some 
countries have enacted a large pension reform that is  progressively implemented so that the increase in 
public expenditure reaches its maximum in the middle of the period before being significantly reduced afterwards. Those countries may exhibit a higher S1 than S2.  
To sum up, S2 should be in most cases greater than S1  except for countries where the initial level of 
debt is substantially higher than 60% and/or the increase in expenditure due to ageing is lower in 
2060 than on average over the period up to 2060 .  
iv. The required primary balance Instead of presenting public finance imbalances as a ga p towards a sustainable situation, it is also possible 
to present the resulting target in terms of primary bala nce (the required primary balance) that would result 
from a budgetary consolidation in the medium-term that ensures sustainability. The required primary balance can be calculated for both indicators (though the Commission regularly calculates the required primary balance for the S2 indicator). 
∑∞
+=−+∆−=+=
12
00 0 0 0)1( ttttt
t t trPBr rD S PB RPB  (6) 
Formula (6) shows that the RPB is a more stable indicator than the sustainability indicator. Indeed, it only 
depends on the current level of debt, the projected budgetary change over the long-term and the interest rate/growth rate differential. These data typically ch ange infrequently, e.g.  if a pension reform is 
implemented or if the future outlook on demography, potential growth or interest rate are changed. By contrast, sustainability gap are also sensitive to change s in the current structural primary balance, which 
are more common. 
2. Deriving the S1 and S2 indicator under the assu mption of time-varying growth rat/interest rate 
differential 
The interest-growth rate differential has so far been a ssumed constant. This is not the case in the current 
EU framework to assess public finance sustainability. The real interest rate is constant for all EU25 
countries and equal to 3% while GDP growth projections are country-specific.  
Lets introduce 
) 1)...( 1)( 1(1 ; j i i ji r r r + ++=+ α   if ji≤and 1 otherwise. 
The dynamics of debt is: ∑
+=+ +− =t
titii t t t t PB D D
1;1 ;1
00 0α α ; 
The inter-temporal budg etary constraint is: ∑∞
+= +=
1 ,1 0 00
ti i ti
tPBDα 
                                                           
(37) Formally (E) can be written as a weighted average of (C) and the change in primary balance in 2060 (see annex). 
European Commission 
Sustainability Report - 2009 
 
152 The S2 indicator is: 
∑∑
∑∞
+= +∞
+= +
∞
+= +∆
−− =
1 ,11 ,1
1 ,12
0 00 0
0
0 00
1 1
ti i tti i ti
t
ti i ttPB
PBDS
αα
α(2bis) 
In the case where the interest rate/g rowth rate differential and the struct ural primary balance are constant 
after a certain date (here 2060): 
444444434444444214444444444434444444444421
Eti t i tti t i tiDt
ti t i tti t i ti
t ti i tt
rrageingPB ageingPBPB
rrPI PI
rD
S
∑∑∑∑
∑
+= +∞ ++= +∞∞
++= +∞ ++= +∞∞
+
+ += +
+∆+∆
−−
+∆+∆
−
+=
2050
1 2050,1 ,12050
1 2050,1 ,12050
1 2050,1 ,12050
1 2050,1 ,1
2050,1 20502050
1 ,12
0 0 00 0 00
0 0 00 0 0
0 0 00
1 1) ( ) (1 1 1 1
α αα αα αα α
α α
  (2ter) 
S1 is such that ∑
+=+ + + − =T
tiTi i T t t T S PB D D
1;1 1 ;1
00 0) ( α α  
444434444214342144444443444444421
CT
tiTiT
tiTii
BT
tiTiT t
At T
tiTiT
tiTii
T
tiTiT t tT
tiTiT
tiTii
T
tiTiT
tiTii
t T
tiTiT T t t
ageingPBD D
PBPIDageingPB PI
PBD D
S
∑∑
∑ ∑∑
∑∑∑
∑∑
∑
+=++=+
+=+
+=++=+
+=+++=++=+
+=++=+
+=++
∆
−−
+−∆
−−=∆
−∆
−−−
=
1;11;1
1;1
1;11;1
1;1;11;11;1
1;11;1
1;1;1
1
00
00
0
00
00 000
00
0
00 0
) ()1 () (
αα
α αα
αααα
αα
αα
 (3bis) 
 
Box 1. Proofs 
Equation 1 
Let’s suppose the debt (relative to GDP) remains bounded at any time in the future.  
It means that M∃ such as M r PB r D Dt
tiit
itt
t t <+ −+= ∑
+=− −
100
0)1( )1(  
Chapter A.I 
Deriving the sustainability indicators 
 
153 So 0)1( )1()1(
0 0
00
1⎯⎯→⎯+<+=+ +⎯→⎯
− −
+=−∞∑t
tt tttt
tii
i trM
rDr PB D  because r is strictly positive. 
0 )1(
1) (
00
0= + −∑∞
+=−−
titi
i t r PB D    (1) 
Equation 2 
The S2 indicator is the change in the structural primary ba lance compared with the base year for every 
future year that ensures that condition (1) is fulfilled.  
Mathematically, it can be written: ∑∞
+=−++=
12
00 0)1(ttttt
trS PBD  (1).  
Since the discount rate is strictly positive,r r tttt1
)1(1
100=
+∑∞
+=−. 
∑ ∑∞
+=−∞
+=−+∆++=
++=
10 2
12
00
00 0)1( )1( ttttt t
ttttt
trPB
rPB
rS
rPB
rSD  
∑∞
+=−+∆−−=
10 2
00 0)1(ttttt
t trPBr PB rD S    (2). 
Equation 3 
The calculations are made for any date T in the future and for any target level of debt in the future. The 
dynamics of the debt can be written: 
∑ ∑
+=− −
+=−+∆−+ −+=t
tiit
iitt
tittt
t t r PB r PB r D D
1 10 000
0)1( )1( )1(   
1Sis such that T tD D=  
∑∑
∑
+=−+=−
+=−−
++∆
−−
+−+=T
tiiTT
tiiT
i
t T
tiiTTtT
t
rr PB
PB
rD r DS
11
11
00
0
00
0
)1()1(
)1()1( 
Given 
rrr rtT T
tiiT
tiiT 1 )1()1( )1(0
0 01
1−+=+=+− −
= +=−∑ ∑ 
European Commission 
Sustainability Report - 2009 
 
154 ∑∑
+=−+=−
−−
++∆
−−−+−+−+=T
tiiTT
tiiT
i
t tTT t ttT
t
rr PB
PBrrD rD rD r rDS
11
1
00
0 00 00
0
)1()1(
1 )1()1( 
∑∑
+=−+=−
−
++∆
−−+−+−=T
tiiTT
tiiT
i
tTT t
t t
rr PB
rD DrPB rDS
11
1
00
00
0 0
)1()1(
1 )1() ( 
∑∑
+=−+=−
−
++∆
−−+−+−=T
titiT
titii
tTT t
t t
rrPB
rD DrPB rDS
11
1
0000
00
0 0
)1(1)1(
1 )1() (    (3) 
Equation 5 
) )( 1(
)1(1)1(1
)1(1)1(1)1( )1(
)1(1)1(
)1(
11 111 1
11
1
000
00000
00
0000
00
T
ttttTttt TT
titittttTttttT
ttttt
ttttttttt
ttttt
PB C
rrPB
rC
ErrPB
rPB
rrPB
rPBr E
∆−−+=
++∆−
+=++∆+
+∆
−=
++∆
−=
+∆−=
∑∑ ∑∑∑ ∑
∑∑
∑
∞
+=−∞
+=−
+=−∞
+=−∞
+=−
+=−
∞
+=−∞
+=− ∞
+=−
α α 
3. Deriving the cost of a delay indicator 
It provides an estimate of the cost  of delay in making a complete ad justment according to the old S1 and 
the S2 indicators. It further assumed a constant intere st rate-growth rate differential. The cost of a delay 
with non-constant interest rate for the currently used indicators, S1 and S2, are given here.  
S1 indicator:  
The expression for the cost of delay using the S1 indicator is: 
)11
1(11
50
1 ;11 ;1
1 2050
1 ;12050
1 ;1
1'
1
0 00 0
0 00 0
∑∑
∑∑
++= ++= +
++= ++= ++= =
delay tt t tdelay
tt t t
delay tt t ttt t tS SS
αα
αα 
S2 indicator: 
If the adjustment is made today, ∑∞
+= ++=
1 ;12
0 00
tt t tt
tS PBDα 
Chapter A.I 
Deriving the sustainability indicators 
 
155 If the adjustment is postponed in 5 years then, ∑ ∑∞
++= +∞
+= ++ =
delay tt t t tt t tt
tS PBD
1 ;1'
2
1 ;1 0 0 0 00α α 
Relationships between the two indicators: 
50,150
1 ;150,150
1 ;1
2
1 ;11 ;1
2'
21 11 1
11
0 00 0
0 00 0
α αα α
αα
∞ ++= +∞ += +
∞
++= +∞
+= +
++
= =
∑∑
∑∑
rrS S S
delay tt t ttt t t
delay tt t ttt t t  
The cost of the delay is proportional to the initial tax ga p indicator. If r is constant, the former formula is 
significantly reduced:delayr S S )1(2'
2+=  
4. Deriving the equivalence between sustainabilit y indicators – a 'flow' measure - and implicit 
liabilities/debt – a 'stock' measure 
Section II.3.2 showed that the sustainability indicators can also be expressed as the stock of net implicit 
liabilities, or, net implicit debt under certain assumptions . In particular, if for both the sustainability gap 
measure and the net implicit debt measure it is assumed that they: (i) have the same starting point, i.e. the structural primary balance of general government; (ii)  have the same discount rate; (iii) they have the 
same coverage of future government commitments (i.e. age-related expenditures evolving in line with demographic developments); and, (iv) they take into  account that government's ab ility to receive the same 
revenues as a share of GDP as today, the S2 sustaina bility indicator less the current level of debt can be 
expressed as the current stock of net implicit debt. Specifically, one can define the net implicit liabilities 
of the general government, 
0tID , as the discounted future structural primary balances, or equivalently the 
net present value of future primary deficits: 
0tID=∑∞
+=−+−
100)1( ttttt
rPB i.e. the net present value of non-
financed future public spending. 
In this case, the S2 can be rewritten as  
) (
)1(0 0
00 0
12 t t
ttttt
t ID Dr
rPBr rD S +=
+−=∑∞
+=− 
One can express the level of implicit debt as a function of S2 and current level of debt, showing that those 
two measures are indeed equivalent. 
0 02
t t DrSID −=  
This definition of net implicit debt covers all future imbalances linked to age-related social spending on 
pensions, health-care, long-term care, education and unemployment. It is however not limited to those five expenditure items. The starting point is defined for the total general government sector, which also 
includes other items. If the current structural primary balance is lower than the debt-stabilizing structural primary balance, it is also included in this definition of the implicit debt. By contrast, if the current structural primary balance is larger than the debt-s tabilizing primary balance, it means that the general 
government is in the process of accumu lating assets and/or reducing debt. 
European Commission 
Sustainability Report - 2009 
 
156 In the calculation of S2 sustainability gap, explicit de bt and net implicit debt are given equal importance. 
It should be borne in mind that the value of net implicit debt depends on the long-term projections and strongly on the discount rate. It is therefore not as "observable" as the current level of debt is. 
It should be noted that implicit debt is even more sensitive to the interest rate than the sustainability 
indicator. Indeed, sustainability indicators are bounded, because the impact ageing reaches a maximum (at the latest in 2060, after which the primary deficit is kept constant). The intuition behind the result is 
straightforward. If a country is expected to expe rience a maximum increase of  5% of GDP of public 
spending, current adjustment to cove r this increase is necessary less than 5%, as the interest rate/growth 
rate differential is positive. In general, the lower th e interest rate, the higher the overall increase will be. 
By contrast, implicit debt is not bounded. In the extreme where the interest rate is very close to the growth rate (or equivalently r is close to zero), the implicit debt can be  very large. Changing the assumptions for 
the interest rate can therefore give rise to a larger variation in the 'stock' meas ure (implicit debt) measure 
compared with the 'flow' measure (sustainability indicators). 
Chapter A.II 
Revenue projections 
  
1. REVENUE PROJECTIONS 
 
158 1.1.1. Taxation of pensions 
In assessing the sustainability gap(s), most 
government revenues are assumed to stay constant as a share of GDP. Two components of revenues are explicitly modelled however. These are property income and direct tax revenues from pensions in Member States where this is possible. 
An ageing population is likely to affect the tax 
revenues received by government as pension income is not distributed and therefore taxed in the same way as other income and as it may not be taxed in the same way either. Across the Member States there is a range of tax arrangements for pensions, and a number of countries are in a transition period where the tax treatment of pension funds in changing.  
For public schemes, an ageing population can have 
an ambivalent effect on the receipts from tax revenues. On the one hand, the government receives tax from pensions drawn. On the other hand, pensions received are usually lower than wages (leading to a benefit ratio of less then 1), meaning that pensions will be taxed at lower marginal – and average – rates of tax in progressive systems. The change in both these 
components is considered.  
For countries with a significant private system, tax 
revenues are affected both  in terms of their size 
and their timing. Over their working life, individuals first become net contributors to a private pension system while they later become net receivers of pension income. In terms of the tax incidence of the part of their income that is saved in the form of the pension, a typical EET system (
38) effectively leads to a deferral of the 
payment of tax from the time when individuals earn their income to the time when the consumed it. In addition, the overall tax paid in an EET system may be lower as pension contributions grow (which may occur as individuals anticipate having to save more to ensure that their now longer retirement years ar e adequately funded), as 
                                                          
 
(38) An EET system is one where contributions to the pension 
fund out of wages are exempt  from income tax, capital 
gains by the fund are exempt from tax, but pensions drawn 
are taxed as income. Such a system operates in many EU 
countries for example in Germany (Riester plan). the marginal tax they are exempt from in the years 
they contribute is higher than rate they pay when they draw their pensions. Moreover, there may also be an overall fall in revenue if private pension saving crowds out other saving, which is normally undertaken out of taxed income. 
Given the differences between the pension and tax 
systems in the Member States, the data available and the countervailing effects of ageing on the pension system, the projections in this report model the evolution of the tax received from pensions using a simple model that can accommodate a range of differences. The model is based on the average personal income tax rate on pensions observed in recen t years, the elasticity of 
income tax and the evolution of the average (public and private) pensions taken from the Ageing Report. The average tax rate is modelled to 
evolve according to:                   
)
loglog log
)1(1( log log
0000
00
⎟⎟
⎠⎞
⎜⎜
⎝⎛⎟⎟
⎠⎞
⎜⎜
⎝⎛−⎟⎟
⎠⎞
⎜⎜
⎝⎛
−+⎟⎟
⎠⎞
⎜⎜
⎝⎛=⎟⎟
⎠⎞
⎜⎜
⎝⎛
WPWP
WP
PT
PT tt
ttε
where T is the average income tax paid by 
pensioners, P the average pension, W the average wage in the economy and ε the elasticity of 
personal income tax.   
The average income tax paid by pensioners is set 
to zero for countries where pensions are not (or are 
only minimally) taxed. The average pension used may be public, private or both, depending on the system in place in a given Member State and on the data available. Data on private pension projections and on their tax treatment are not available in all countries that have a significant private component to their pension system.  
For countries where a si gnificant change in the 
pension or tax system is envisaged, there is no explicit modelling of tax revenues from pensions. This is the case, for example, for Hungary where a new pension formula and a new system of pension taxation will be introduced in 2013.  
The model generates constant revenues from 
pensions if there is no expected change in the benefit ratio. This is also the case for countries 
Chapter A.II 
Revenue projections 
 
159 with flat tax system ( ε=1) (39). The model only 
forecasts significant changes in revenues from pension taxation for Member States where the 
benefit ratio 
⎟
⎠⎞⎜
⎝⎛
WPis expected to change 
significantly and the personal income tax system is 
reasonably progressive ( ε is greater than 1). 
The analysis is not undertaken for Germany, 
Estonia, Greece, Cyprus, Slovenia and the United Kingdom, and only the public pensions are modelled in Belgium, the Czech Republic and 
Romania. For most remaining countries, the effects are small (within 0.7% of GDP), with the exception of Denmark, Luxembourg and the Netherlands which are expecting to see an increase in tax revenues of 1.2, 1.9 and 2.7% of GDP respectively, between 2010 and 2060. Austria is the only country for whic h a decrease in tax 
revenues is anticipated.  
1.1.2. Property income  
Property income is the income received by the 
owner of an asset (whether financial or physical) in return for providing funds for other agents. Governments will typically both make and receive such payments. They pay interest on their debt and receive rent for the assets  they own. Government 
receipts from other sources are, broadly speaking, 
a function of the tax bases and the rates chosen by the government. Property income differs in that it is determined by the market rather than policy. For this reason, in assessing the sustainability gaps, property income received by governments is explicitly modelled in a way that is different to other receipts, albeit using simplified assumptions. 
Property income received by the Member States is 
mainly composed of interest received from deposits, bonds and loans;  dividends r eceived from 
shares and withdrawals from the income of quasi-corporations; and rents on land and subsoil assets. Projecting these forward in a detailed way requires forecasting the return on these assets, their future value and the purchases and sales of these assets. 
In order to model the progression of property 
income, it is assumed that there is no stock-flow 
                                                          
 
(39) For example Estonia has an estimated elasticity of 1.1 
owing to the flat income tax system. adjustment, meaning that government debt is only 
driven by the general government balance and there is no net sale or purchase of financial assets in the future. Rather than staying constant as a share of GDP, the default position is therefore for these assets stay constant in nominal terms rather than as a share of GDP. The implication is that 
where the government recei ves property income, 
this income is used to reimburse debt through its contribution to the general government balance, rather than to purchase other assets. When short-term assets (such as bonds) mature, they are therefore implicitly assumed to be replaced with other bonds of the same nominal value. 
The stock of assets which generate income for 
Member States' governments is not always known. By making the no stock-flow adjustment assumption, the evolution of property income can be modelled just using assumptions about the rate of return on assets in the future relative to now. In modelling the rate of return, a distinction is made between income received from bonds, equity and 
rents.  
For bonds, the rate of return of 5% is applied from 
2012 on; before, the yield of a 10-year government bond is used. As data on the return from equities are only available on distribu ted returns, so that the 
value reported in national accounts in the starting year may only be a fraction of the overall return on equity; the remaining fraction would be representing a valuation effect. As a simplifying assumption, the dividend-to-GDP ratio is assumed to be constant over time, thereby assuming continuing valuation effects. For rent from land and subsoil assets, it is assumed that the ratio of rents-to-GDP will remain constant over time, except in the cases of Denmark and the Netherlands, where the (substantial) stock of subsoil assets is assumed to be exhausted by 2050 and the level of rent to GDP is modelled to return into line with the average of other Member States. 
Given these assumptions, the projected path of 
property income over time only depends on the stock of bonds held at the start of the projection period given the level of income received from property. The higher are bo nd holdings, the steeper 
the decline in property  income over time. 
Table A.2.1 shows the evolution of property 
income used in the estimation of the sustainability 
European Commission 
Sustainability Report - 2009 
 
160 gaps. It shows that this income is expected to fall 
over time for all Member States, with the most significant falls being for Denmark, the Netherlands and Finland. In the Finish case, this is driven by the high level of bond holdings by the government, which contribute about half of the country's significant re ceipts from property.  
Table A.II.1.1:  Property income (% of GDP) 
change
2007 2010 2020 2030 2040 2050 2060 2010-60
BE 0.62 0.59 0.55 0.51 0.48 0.45 0.44 -0.15
BG 1.49 1.42 1.32 1.25 1.21 1.19 1.17 -0.25
CZ 0.83 0.74 0.63 0.55 0.50 0.46 0.44 -0.30
DK 1.74 1.61 1.39 1.10 0.89 0.71 0.64 -0.97
DE 0.74 0.71 0.66 0.60 0.56 0.52 0.50 -0.21
EE 1.53 1.43 1.24 1.17 1.14 1.12 1.10 -0.33
IE 1.06 1.02 0.97 0.93 0.90 0.89 0.88 -0.15
EL 0.92 0.87 0.79 0.73 0.70 0.67 0.65 -0.22
ES 1.02 0.95 0.83 0.73 0.67 0.64 0.61 -0.35
FR 0.78 0.75 0.71 0.66 0.62 0.60 0.58 -0.18
IT 0.61 0.59 0.54 0.50 0.47 0.45 0.44 -0.15
CY 0.72 0.62 0.42 0.28 0.21 0.16 0.14 -0.48
LV 0.70 0.64 0.56 0.52 0.50 0.49 0.48 -0.17
LT 0.57 0.51 0.42 0.37 0.34 0.32 0.31 -0.19
LU 1.64 1.46 1.13 0.95 0.83 0.75 0.69 -0.76
HU 0.91 0.88 0.77 0.74 0.72 0.71 0.70 -0.18
MT 1.35 1.33 1.28 1.25 1.23 1.21 1.20 -0.13
NL 2.58 2.44 2.13 1.79 1.48 1.21 1.16 -1.29
AT 1.47 1.38 1.22 1.05 0.93 0.84 0.78 -0.59
PL 1.31 1.19 0.98 0.89 0.84 0.81 0.79 -0.40
PT 0.73 0.70 0.64 0.57 0.52 0.49 0.47 -0.23
RO 0.95 0.91 0.81 0.79 0.77 0.77 0.76 -0.15
SI 0.72 0.68 0.62 0.58 0.56 0.54 0.53 -0.15
SK 1.52 1.40 1.22 1.13 1.09 1.06 1.04 -0.36
FI 4.43 4.15 3.76 3.34 3.04 2.83 2.68 -1.46
SE 2.50 2.36 2.16 1.92 1.76 1.65 1.57 -0.79
UK 0.72 0.67 0.55 0.48 0.43 0.40 0.37 -0.29
Source:  Commission service