All around affluent Western Europe—in leading journals and newspapers, organized conferences, national capitals, and parliamentary committees—people are talking about demography. As a general rule, whenever people are talking about demography, it is only because there is trouble in the air. So it is with Europe these days. As is widely recognized, and not just within the confines of the continent itself, Europe appears to be caught in a steadily tightening demographic vise. 

According to projections by the U.S. Census Bureau, the United Nations Population Division, and even the European Union’s own Eurostat, the region’s total population is expected to remain virtually stagnant between now and 2030. At some point in the next few years, Western Europe is projected to make the fateful shift to a “net mortality society,” at which point deaths will come to exceed births for the region as a whole on a regular basis; thereafter, only immigration can postpone the advent of indefinite population decline. 

But this overall reckoning does not speak to important structural changes also underway. Western Europe’s population of “economically active ages”—traditionally defined as ages 15 to 64—is set to peak just after 2010. It could decline by nearly 20 million (or by over 7 percent of the total European working-age population) between now and 2030, even with continuing immigration. At the same time, the region’s elderly population is set to swell. By 2030, nearly 25 percent of Western Europe’s population is projected to be 65 or older (compared with 17 percent in 2008). 

In the next few years, Europe is projected to become a ‘net mortality society,’ and deaths will exceed births on a regular basis.

There will of course be regional variations in the tempo of population aging: Ireland is expected to   remain somewhat more youthful than Italy, for example. Nevertheless, by the year 2030 the median age for Western Europe as a whole is projected to be approaching 47 years—about a decade higher than America’s median age today. 

These impending population changes have immediate and significant implications for Western Europe’s economic future. Among other things, demographic deceleration and the shift to zero population growth accentuate the “life cycle” aspects of earning, saving, and consuming in overall macroeconomic performance. Working-age people tend to earn more than they consume, while older people tend to “dis-save.” But in the years ahead, there will be many more of these “dis-savers” in Europe, and rather fewer people in the traditional “net-producer” age groups. 

Barring changes in labor-force participation, there are three main alternatives for achieving overall life-cycle balances between income and consumption in an essentially stationary population: reduced consumption (which translates either to diminished personal consumption or less public healthcare, pension support, and social services); reduced savings and investment, and thus slower growth; or reduced survival prospects for the elderly. This is hardly an attractive array of options! 

But there are additional options. While contemporary Western Europe faces many serious demographic constraints, it also enjoys some important demographic advantages. For all the population angst in Western Europe today, the region possesses a major, and economically portentous, demographic advantage that policymakers still seem to ignore. Europe’s adults are blessed by high general levels of health and very low levels of mortality. They consequently exhibit great potential to remain productive at advanced ages—perhaps even more so than their American counterparts. 

In 2003, life expectancy at birth for men in the United States was an estimated 74.7 years, while this figure was 76.0 years for the EU-15. Norway and Switzerland had male life expectancies of 77.0 and 77.9 years, respectively. Differentials in life expectancies for women run similarly in Western Europe’s favor. Female life expectancy at birth was 80.0 years in the United States compared with 81.7 in the EU-15, 81.9 in Norway, and 83.9 in Switzerland. Overall, life expectancy was approximately a year higher in Western Europe than in the United States, and three or four years higher in the region’s healthiest countries. 

Also significant, Western Europeans are more likely to survive the working years than Americans. A 20-year-old American has an 18 percent chance of dying before the age of 65; the corresponding figure is about 14 percent in Germany and less than 12 percent in Italy, Switzerland, and Sweden. 

Western Europeans have been translating all of their increased life expectancy into leisure time, and then some.

In the modern economy—where growth is increasingly generated by human resources as opposed to natural resources—health contributes to economic potential through improved physical capabilities and the processes of learning and skill retention. Good health during the working years also encourages increased investments in human capital, including education and training, which further increases productivity. In short, health equals wealth—or at least the potential for wealth. 

This health-wealth relationship stands Western Europe in good stead. Western Europe’s adults are well positioned to be highly productive, even at fairly advanced ages. Luckily for them, the present generation of Western Europeans in their third quarter-century of life is more physically robust and mentally alert than any preceding generation in the continent’s entire history. It is also the most highly educated and best-trained generation of older men and women that the continent has ever seen. Furthermore, thanks to the ongoing structural transformation of Europe’s economy—knowledge-based and service-driven development—exhausting physical labor is no longer a job requirement in a typical Western European workplace. Western Europeans are better poised than ever to continue to make contributions to their national economies at older ages. 

Research by Professor Ronald D. Lee at the University of California at Berkeley helps to illustrate how capitalizing upon healthy aging might help mitigate some of the economic pressures that Western Europe faces in the years ahead. Lee and his colleagues have estimated both per-capita labor earnings and per-capita consumption at every year of age over the life cycle for a number of modern economies.

Their estimates for European economies are not yet available, but their findings for the United States may suffice for the purpose of illustrating lessons for Europe. Earnings from labor exceed public and private consumption—meaning a person is a “net producer” as opposed to a “net consumer”—between the ages of 25 and 58, which is less than half of the average American’s lifespan. It seems reasonable to suppose that in most of Western Europe the percentage of total life years during which the average citizen is a “net consumer” rather than a “net producer” is no lower than in the United States, and quite possibly is somewhat higher.

By delaying the age at which consumption exceeds earnings—pushing it back from the fifties to the sixties or even early seventies—Western Europeans could capture some of the economic opportunities inherent in healthy aging. In the short term, this could raise overall purchasing power and make for a more prosperous society. In the medium to long term, it could increase the scope for locally financed savings and investment, and, in doing so, could potentially accelerate the pace of long-term growth.

Furthermore, pushing back the crossover point at which consumption exceeds earnings could postpone, or altogether assuage, potentially extremely tough alternatives of reduced consumption or reduced savings and investment (to say nothing of the unthinkable option of reduced survival prospects for the elderly).

By delaying the age at which consumption exceeds earnings, Western Europeans could capture some of the economic opportunities inherent in healthy aging.

Despite the strong economic case for “unlocking the value of health” through greater labor-force participation, Western Europeans have in fact been translating all of their increased life expectancy into leisure time, and then some. Between 1970 and 2004, the average length of retirement increased by over a decade for French men and by a decade for French women, fully doubling pensioned life, according to the Organization for Economic Cooperation and Development (OECD). One need not be an actuary or a demographer to see what steadily increasing life expectancies and steadily declining retirement ages must eventually mean for Western European economies.

And it’s worth noting that there is nothing “inevitable” or “natural” about the mass flight from work at older ages that has characterized continental Europe over the past generation. We can see this by comparing current European labor force participation rates with those of other affluent OECD societies outside Europe. Although the retirement age has also declined for non-European industrialized countries such as Japan, South Korea, and the United States, Western Europe’s retreat from the workforce is especially sharp in earlier years.

If Western Europe can manage to welcome some of its older citizens back into the workforce over the coming generation, then the region’s looming incipient decline in labor supplies can not only be fully halted, but reversed. If labor-force participation rates for men and women over 50 were simply to match the highest prevailing levels observed within the OECD for those same cohorts, the European Union’s labor force would actually grow between 2000 and 2030 by over 0.5 percent per year rather than drop by an estimated 0.2 percent if current trends prevail. This would make for a cumulative difference of about 26 percent for the entire period—and could spell the difference between long-term stagnation and long-term material advance.

Unfortunately, there are very good explanations for why today’s older Europeans have all but abandoned the workforce, even given so many reasons to remain in it. Perhaps the most obvious concerns the pervasive and hostile tax regimes in Europe.

Research by Romain Duval of the OECD suggests that the drop-off in labor participation rates after age 55 is directly influenced by implicit taxes on continuing work. The implicit tax includes both forgone transfers and pensions from the state as well as losses in increased future pensions as a result of forgoing retirement. Ending the perverse official discouragement of work is an obvious first step. 

But more must be done. Unlocking the value of health in Western Europe will require governments and voters to reexamine current policies and living arrangements—three areas of which call out for close scrutiny. The first is Western Europe’s labor markets, which are beset by rigidities, distortions, and serious inefficiencies. Modern Europe is home to a curious new sociological phenomenon—the “underworked European.” Today, for example, statistics suggest that the average German employee works 400 fewer hours than his or her American counterpart. Labor market inflexibility inhibits increases in labor-force participation. 

Affluent societies spend too little on health innovation, with European investment low compared to Japan and the United States.

Western Europe exhibits strikingly high levels of unemployment and remarkably long spells of idleness. These are the results of the high cost of hiring and firing. Far from plaguing only new entrants in the workforce, this trend has serious consequences for would-be older workers. Customary seniority rules often give older workers generous benefits packages. As a result, older workers become profit killers. Paired with the equally pernicious zero-sum way of thinking that equates giving an older worker a job with taking one away from a younger worker, the cards are often stacked against working at older ages for those who do not wish to retire. 

A second set of questions concerns education. Although the coming decades promise to see the healthiest and best-trained cohort of senior European workers ever, the region should not interpret this as a pass to rest on its laurels. Cousin to the “underworked European” is the “undereducated European.” While 37.3 percent of American adults have a post–high school degree, only 23.8 percent of Western Europeans do. Western Europe should regard investments in education as a way to support and promote its older workers. 

Finally, there is health policy. Medical and health services continue to absorb an increasing share of total expenditures in modern European economies. But the medical sector and the life science industries can be part of a critical support structure undergirding an increasingly health-dependent economy. Indeed, one can argue that investments in health (including investments in health research and innovation) are analogous to fixed investment in machinery and equipment as important drivers of national economic growth. The benefits of health improvement are enormous, even in purely economic terms. University of Chicago economists Kevin M. Murphy and Robert H. Topel estimate that the net economic value of mortality reductions and health improvements enjoyed by the American people between 1970 and 2000 equaled roughly $60 trillion. 

To continue to enjoy the economic benefits that health improvements may provide, Western Europeans will have to continue to invest in health—and some evidence suggests that affluent societies are spending far too little on health innovation. Europe’s overall levels of investment in research and development look relatively low by comparison with Japan and the United States. If European health policy can shift focus from containing the cost of medical expenditures to minimizing the cost of illness and disease, it will be that much better poised to take advantage of “healthy aging.” 

Western Europe’s demographic stagnation, or possible decline, will complicate the task of assuring continued improvements in living standards and economic well-being, but this does not mean it is destined to become a glorious rest home. From the standpoint of economic performance, Europeans can compensate for demographic challenges by unlocking the value of health, but doing so will require fundamental and perhaps unfamiliar changes both in the way people think and in the way they elect to live. Choosing to make the changes necessary to unlock the value of health is a matter that only Europeans themselves can decide upon. 

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at the American Enterprise Institute. He is co-author of “Europe’s Coming Demographic Challenge: Unlocking the Value of Health” (AEI Press).

Illustration by John Weber.