Levels of savings If we follow the consumption smoothing theory, individual savings behavior is driven by the life-cycle: individuals tend to increase their savings as they earn more and then decrease their savings until they actually become negative when they retire and earn less, thus leading to a hump-shaped pattern for their accumulated wealth. Consequently, as the proportion of the aged population increases, private savings, as a proportion of income, should decrease. However, this decline may be gradual with the negative impact of ageing on the levels of savings prevailing in the longer run. Structure of savings In terms of structure, the fact that elderly people account for an increasing share of the population could change savings habits and have an impact on the demand for certain classes of assets. In particular, given that elderly people are more risk adverse, this could increase the already high demand for low-risk assets. Investment The standard production function exhibits two productive inputs: labour and capital. If the labour force tends to decrease or decelerate because of demography, then the production process may become more capital intensive, leading to a fall in the productivity of new capital and, in theory, a decline in the rate of capital return. Investment could be less dynamic and negatively impact potential growth. This would in turn have an adverse impact on the real interest rate, so that domestic savings and investments would balance.
I must stress here that France has a specific advantage: its population is expected to keep on growing fast for some decades thanks to a relatively high fertility rate and a dynamic migration policy; while our German neighbours for instance are on a decreasing trend. Overall, based on European Commission projection trends, we estimate that the expected decline of 1.5% in the working age population in the European Union between 2010 and 2020 could take 1 percentage point off its potential output. But there are ways to offset this evolution. A rise in the participation rates of the young, seniors and women is one of them. Pension and labour market reforms implemented in Europe are certainly a step in the right direction and should be further pursued. BIS central bankers’ speeches  1  Provided that the necessary reforms are implemented and that some changes in working habits are made, we expect that the euro area will be able to cope reasonably well with the expected fall in the population and working age population over the long run, notably in terms of the potential growth rate. Nevertheless, ensuring that public spending dynamics remain sustainable in the face of population ageing will continue to be a challenge, given the current debt situation in Europe. 2. Impact on savings and investment  How are savings likely to evolve, both in terms of levels and structure?