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A lost decade

"I think we've arrived in the new millennium with the feeling that time is slowly running out for us," says Stane Potočnik, a web designer from Ljubljana, who became a father a year ago. The children of the original baby boom generation born in the years after the World War II are now in their mid-thirties. After a turbulent decade following Slovenian independence in 1991, when the economy was shedding jobs, having children was not exactly a top priority for many young people.

When things started to brighten up on the economic front at the turn of the century and especially since Slovenia entered the European Union in 2004, a wave of optimism changed the outlook of younger generations. Energetic economic growth created an abundance of jobs, and banks were generous with housing loans.

"It certainly was the right time to think about settling down and having a family," Potočnik explains.

Getting old

It seems that he was not alone in that decision. In 2006, for the first time since 1996, there were more births than deaths in Slovenia, finally bringing the natural increase in population back to positive territory. The number of newborns has been increasing ever since, with 2009 shaping to be the best year in a decade.

Unfortunately, however, the good news ends here. Slovenia's population is ageing rapidly; if in 1990 the median age (splitting the population in two equal groups, half older and half younger than it) was 34 years, it is expected to be just shy of 42 years this year. In Ireland, in contrast, the median age is a mere 35 years.

Demographic dividend

The age structure of society has only recently been accepted as an important factor of economic growth in mainstream economics. Yet the facts are unequivocal: a demographic dividend can be reaped in a relatively narrow window when life expectation increases and fertility falls, lowering the number of dependent youngsters that need to be provided for and swelling the ranks of the working-age population. This boost to the productive capacities of the economy is said to be behind the recent economic booms in Ireland and Southeast Asia.

Yet as society ages, the process goes into reverse. When fertility rates fall low enough, the share of older people starts to rise inexorably. Moreover, the population itself starts to shrink. For the past decade, not one European country has attained the replacement level fertility rate required to keep the population at least stagnant, if not growing. Slovenia's fertility rate is among the lowest in the EU, lagging far behind that of France, which is one of the few countries in Europe flirting with the replacement threshold (see chart).

Alarm bells

It is not surprising, then, that in October the European Commission said Slovenia belonged in a group of 13 EU member states that, in contrast to the remaining 14, face a high long term risk to the sustainability of their public finances. Population ageing and low fertility make for an explosive fiscal combination; a shrinking workforce is saddled with increasingly heavy burdens stemming from pension and health care provision as the share of elderly people shots up (see chart).

In Slovenia, the state-run pay-as-you-go pension system still provides the majority of funds for retirement. With fewer and fewer workers to go around, however, either social security contributions that employees and their employers pay to finance old-age spending must rise to unsustainable levels or the budget must be tapped to make up for any shortfall.

In 2008, a quarter of EUR 4.5 bn that the state-run pension fund ZPIZ spent on pensions came directly from the budget. According to the European Commission projections, however, public finances will face an enormous strain in the future. Today, the government spends 22.9 percent of GDP on age-related services; in 2060, it will spend a whopping 35.7 percent.

Treading too timidly?

Mojmir Mrak, professor at Ljubljana's Faculty of Economics, is therefore right to point out that Slovenia has some of the most unfavourable demographics in Europe; only in Lithiuania will the age shock to public finances be greater (see chart). To avert this slow strangulation of the economy, people must be made to work longer and learn to accept lower pension entitlements. This is pension reform in short.

In 2000, a first timid step toward reforming the pension system was taken. The government decided to prolong the period used for calculation of the pension base from 10 to 18 working years, thereby lowering the average base, and to introduce tax incentives for long-term pension saving. The take up was somewhat disappointing, however, and the need for more far-reaching and unpopular measures is now all the more emphatic.

Biting the bullet

With the budget deficit ballooning and public debt reaching new heights, Prime Minister Borut Pahor has no choice: he must reform, lest the financial markets punish the country with higher costs of borrowing in a time when money is urgently needed to support the flailing economy. The government is thus thinking about raising the retirement age from 63 to 65 years, abolishing differences in retirement ages for men and women and extending the pension base calculation period to 35 years.

Trade unions are not enthusiastic. "For a very large group of workers who started working relatively young, this goal is unattainable, given the working conditions," Dušan Semolič, the leader of Slovenia's largest trade union confederation warns, suggesting that this could lead to some industrial workers having to work for 45 years. He adds that many would end up in disability retirement or on permanent sick leave.

Semolič already announced street protests against the reforms that he says may lower the future pensions by 10 percent. The protests, however, will not stop the demographic avalanche that threatens to bury the budget. The unions are barking at the wrong tree here; let's just hope that inevitable sobering up comes sooner rather than later.