Navigating financial stability in an ageing world

Prepared by Sándor Gardó, Benjamin Klaus, David Kurig and Manuela Storz^[1]

Published as part of the Financial Stability Review, May 2025.

The number of older people in the EU has increased markedly in recent decades and is projected to go on rising. This trend may pose challenges to financial stability given the adjustments needed in both the real economy and the financial sector to adapt to the demands of an ageing society. Building on the extensive body of literature examining the impact of population ageing on the real economy, this special feature investigates the channels through which population ageing could elevate financial stability concerns in the financial and non-financial sectors, bearing in mind possible interdependencies across sectors. Comprehensive policy actions appear warranted to meet the challenges posed by an ageing population to financial stability. These can range from boosting productivity growth and labour force participation rates to ensuring the sustainability of pension systems by increasing market-based retirement savings, also in the context of the developing capital markets union.

1 Introduction

Lower birth rates and increasing longevity worldwide could have significant implications for financial stability. Developments in medical science and improved living conditions have increased life expectancy, allowing people to stay healthy for longer. In addition, declining birth rates have led to decelerating population growth in the 21st century, with advanced economies experiencing the most pronounced effects. While Asia and America are projected to undergo a slowdown in population growth during the second half of this century, the EU is projected to face a population decline from the next decade (Chart C.1, panel a). A steady projected increase in life expectancy and significantly lower birth rates will continue to underpin this trend in the coming years (Chart C.1, panel b). As a result, the demographic structure of the population in the EU is changing rapidly towards an increasing share of older people. This contrasts with the predominantly younger population of the previous century (Chart C.1, panel c). The ongoing demographic shift could affect both the real economy and the financial sector, with implications for financial stability. This special feature starts by providing a brief review of the literature on the implications of population ageing for productivity, labour supply and capital accumulation, before delving into its ultimate impact on financial stability.

Chart C.1

Population growth is expected to slow across the globe, with a combination of lower birth rates and increased life expectancies resulting in an ageing population

a) Global population, by region	b) Births and life expectancy in the EU	c) EU population pyramid
(1960-2100, billions)	(1960-2050; millions, years)	(1960, 2050; percentage of population)

2 Population ageing: a trend reshaping economic dynamics

Existing research indicates that population ageing may cause labour productivity and labour supply to decline. In particular, it has been shown that older people engage less in entrepreneurship and innovation, as reflected, for example, by fewer patent applications.^[2] However, productivity losses appear to vary across sectors and seem more pronounced in occupations for which automation is less feasible.^[3] That said, some research has also found that age-diverse teams tend to be more productive and people are recording significant professional achievements at older ages now than in the past.^[4] There has also been research highlighting the factors that could mitigate productivity loss in an ageing society. Targeted policies such as promoting lifelong learning among an ageing workforce are an example.^[5] A shrinking and ageing population will likely also lead to a further decline in labour supply.^[6] Alongside a contracting workforce, older individuals also tend to work fewer hours.^[7] This can be particularly challenging for firms, as labour shortages put upward pressures on wages and weigh on competitiveness. Targeted labour market policies that also incentivise the participation of older individuals in the workforce could play an important role in mitigating these effects.

Lower labour productivity and a shrinking workforce can pose risks to potential growth. Potential growth is influenced by capital, labour and total factor productivity. With declining labour productivity and a shrinking labour force, advancements in automation and robotics have become an important factor in sustaining overall productivity levels and potential growth.^[8] Enhancing capital productivity, in particular by successfully integrating technologies, can compensate for a shrinking workforce and declining labour productivity.

Population ageing will also change aggregate savings and investment demand, with an impact on real interest rates. According to the lifecycle hypothesis, people tend to accumulate savings up until they retire, after which they draw down these savings gradually. Increasing longevity prompts them to save more to ensure financial security in their later years. As such, real interest rates are likely to decrease as the population ages, given the rising supply of savings in the economy.^[9] Moreover, lower productivity and reduced labour supply exert further downward pressure on real interest rates. However, this trend may be counteracted once larger cohorts of the population begin to shift from saving to consumption during their retirement, adding to upward pressure on interest rates from structural factors such as technological progress and investment needs.^[10] Given these counteracting forces, the overall impact on interest rates could vary over time, depending on which channel prevails.

Against this backdrop, the next part of this special feature investigates how population ageing affects financial stability. Demographic ageing influences financial stability in various ways, both directly and indirectly. Changes in economic growth, productivity and real interest rates will shape the overall macro-financial environment in which the financial sector operates, requiring changes to the business models and structures of financial intermediaries (Figure C.1). Ageing-related risks are evolving both over time and across sectors. Such risks have a clear time dimension, as financial stability vulnerabilities will continue to build up in the absence of remedial policy action. In addition, demographic changes and increased longevity are intensifying the cross-sectional dimension of systemic risk, with growing interlinkages between the financial and non-financial sectors possibly cascading into broader societal challenges. Building on the sectoral approach taken in the ECB’s risk identification framework,^[11] this special feature seeks to offer an overview of the systemic financial stability risks that can arise in the context of population ageing.

Figure C.1

Population ageing affects the financial and non-financial sectors alike, with repercussions for financial stability

3 Non-financial sector impacts: squaring the circle of life?

Sovereigns

Population ageing poses significant fiscal challenges for euro area sovereigns via higher ageing-related costs and a shrinking tax base. On the one hand, a growing number of retirees implies ageing-related spending rising from levels which are already high, including on pensions, health care and long-term care (Chart C.2, panel a). On the other hand, a shrinking working-age population may result in lower personal income tax revenues and lower social security contributions.^[12] At the same time, elderly individuals consuming less may serve to reduce revenues from indirect taxes and may ultimately translate into a broader erosion of the tax base via lower GDP growth.^[13] This combination of expenditure- and revenue-related pressures could lead to persistently high fiscal deficits. If unaddressed, these could threaten fiscal sustainability and diminish sovereigns’ flexibility by reducing the fiscal space available to respond to other near-term structural challenges associated with climate change, defence spending and digital transformation.

Chart C.2

Ageing-related costs represent a major long-term concern for the sustainability of public finances

a) Projected ageing-related costs under baseline and risk scenarios in the euro area	b) Average interest rate-growth differential and dependency ratio	c) Simulated euro area general government debt levels with and without ageing costs
(2025-70, percentages of GDP)	(x-axis: 2024, percentages; y-axis: 1999-2024, percentages of GDP)	(2025-50, percentages of GDP)

Persistent fiscal pressures may jeopardise sovereign debt sustainability over the medium to long term. In particular, higher dependency ratios are associated with higher interest rate-growth differentials (Chart C.2, panel b) – a key metric in sovereign debt sustainability analysis. This widening gap is likely due to two main factors: first, the anticipated rise in future debt levels, which elevates default risks and consequently drives up the interest rates that governments must pay on their debt; and second, the slowing economic growth observed in ageing populations.^[14] Countries with already high public debt levels could therefore find it more difficult to service and reduce debt as ageing-related costs rise and revenues decline. Looking ahead, simulation results for the euro area as a whole indicate that ageing-related costs could prove detrimental to debt dynamics under a no-policy-change scenario (Chart C.2, panel c). Ageing-related costs are therefore expected to negatively affect long-term fiscal debt sustainability in most euro area countries, as they present a key obstacle to maintaining or reducing debt levels.^[15] This could also prompt market participants to reassess risks to more vulnerable sovereigns and could lead to increases in borrowing costs.

Euro area sovereigns need a comprehensive strategy to mitigate the budgetary impacts of ageing. This strategy would include reforming pension systems to keep ageing-related costs in check, updating tax systems to counter a shrinking tax base, restructuring healthcare and long-term care services to manage rising demand, and adjusting labour and migration policies to ensure greater labour force participation.^[16] In addition, fiscal policy could be adjusted to support economic activity through a more growth-friendly composition of public finances.

Non-financial corporations

As the population ages, non-financial corporations may encounter challenges associated with labour scarcity and skills shortages. Alongside an increasing share of older workers in the total labour force, a higher number of retiring workers than new labour market entrants results in a reduction in the overall size of the labour force (Chart C.3, panel a). This can make it more difficult for firms to fill open positions, especially in sectors already facing labour shortages and in countries that do not benefit from immigration of younger workers.^[17] At the same time, it may not be easy to replace the valuable skills and experience typically accumulated by older workers during their careers. A skills gap may thus emerge in the labour market, affecting firms’ ability to grow and innovate.^[18]

In addition, higher labour costs and reduced productivity may impair firms’ efficiency, although technological advances could partly mitigate this effect. Labour costs typically rise as the workforce ages, given the prevalence of long-term contracts and the greater experience of that older cohort. Higher labour costs may also reflect increased competition for workers in the context of a shrinking labour force. This may lead to tighter profit margins and may weigh on firms’ competitiveness.^[19] In addition to declining labour productivity, the tendency of older employees to work fewer hours could give rise to operational challenges for firms, especially in the services sector (Chart C.3, panel b). Moreover, older people tend to have lower cognitive functioning than their younger peers. That said, cognitive abilities at older ages have improved over time, although notable differences persist across countries, depending on socioeconomic conditions.^[20] Productivity gains stemming from technological advances, notably including the more widespread use of artificial intelligence, could partially offset the associated declines in firms’ operational efficiency.^[21] However, the impacts would probably be uneven across different sectors, depending on their exposure to and adoption of artificial intelligence (Chart C.3, panel c). In sectors in which labour shortages and productivity losses are not effectively addressed, declining profitability may exert downward pressure on affected firms’ stock prices, which may have broader financial stability implications.

To address the challenges posed by an ageing workforce, it is essential to improve productivity and increase labour force participation. Appropriate initiatives could be aimed at maintaining the productivity levels of older workers through mandatory retraining programmes and training on new technologies.^[22] In addition, measures could be implemented to enable more women to participate in the labour force, enhance the integration of the unemployed into the workforce and promote flexible working arrangements. Furthermore, limiting incentives to opt out of the workforce by taking early retirement could bridge the gap between statutory and actual retirement ages. In addition, offering tax incentives that encourage individuals to continue working beyond the statutory retirement age could help to raise workforce participation. Finally, immigration can help to temporarily cushion the impact of an ageing society on labour markets.

Chart C.3

As the population ages, firms may face labour and skills shortages, higher labour costs and reduced productivity, which could be partly offset by technological advances

a) Projected growth in old-age worker share and working population	b) Hours worked and hourly earnings, by sector of economic activity	c) Share of firms using AI and their contributions to gross value added, by sector
(2022 vs 2070; x-axis: percentages, y-axis: percentage points)	(2022; left-hand scale: hours, right-hand scale: €/hour)	(2024, percentages)

Households and residential property markets

In line with declining incomes, households tend to consume less and to save less towards the end of the lifecycle. This is not surprising, as pensions do not fully replace what people earn during their active working lives. A smaller income stream during retirement, in turn, translates into lower levels of saving and consumption (Chart C.4, panel a). To smooth consumption needs and maintain living standards, however, households tend to tap into the wealth they have accumulated over time (Chart C.4, panel b). There are also notable shifts in the pattern of household consumption over the lifecycle, with an increasing emphasis on services such as health care and leisure and a declining interest in durable goods. These compositional changes may, in turn, exert additional pressure on firms’ profitability in those sectors that face structurally lower demand for their products and services due to population ageing, which can potentially lead to greater financial stability risks.

Chart C.4

Ageing households face reduced income, impacting their consumption and saving levels, yet hold higher net wealth, owning the bulk of real and financial assets

a) Annual median savings and consumption in the euro area, by age group	b) Euro area households’ median gross annual income and net wealth, by age group	c) Distribution of home ownership rates across the euro area, by age group
(2021, € thousands)	(2021, € thousands)	(2021, percentages)

In addition to a declining total population, reduced demand for houses from older individuals may exert downward pressure on house prices. Throughout their lifetimes, individuals tend to accumulate real estate assets, resulting in an increased likelihood of homeownership, though this trend persists only up to a certain stage (Chart C.4, panel c).^[23] With rising longevity, demand for property and, by extension, house prices are likely to decline, which could have an impact on households through wealth, income and collateral effects, as well as on banks through lower valuations of real estate holdings. Declines in collateral values could increase perceived lending risk, leading to higher household borrowing costs.^[24] That said, real estate holdings tend to decrease among the very elderly as demand increases for old-age accommodation such as retirement or nursing homes.^[25] Downward pressures on house prices are likely to be uneven across regions, being higher in rural areas than in large cities given the ongoing long-term trend of urbanisation. Regions that are particularly attractive to the elderly for relocation or are popular vacation destinations may experience an increase in property prices.

4 Financial sector impacts: demographic dividend or tax?

Banking sector

Population ageing is expected to affect the banking sector by reducing loan demand and straining interest margins. As individuals age, their financial behaviour shifts: younger people typically take on debt to build up real and financial assets. These assets grow until retirement, after which they are gradually consumed while debt declines (Chart C.5, panel a). With older people borrowing less and prioritising asset preservation, declining demand for mortgages may exert pressure on banks’ net interest margins.^[26] At the same time, ageing-driven excess liquidity depresses the natural interest rate and flattens the yield curve, posing challenges to maturity transformation more generally.^[27]

Opportunities could arise from a shift towards fee-based income driven by wealth management, M&A advisory and new lending products. As the corporate workforce ages, demand for succession planning and M&A advisory services will rise, benefiting banks. Asset and wealth management will grow as individuals seek retirement planning and decumulation strategies.^[28] Older customers require specialised financial products such as reverse mortgages^[29] and annuities but often prefer in-person banking services.^[30] This preference is evident in countries with older populations, where the less widespread use of online banking and the lower number of card transactions (Chart C.5, panel b) result in high fixed costs associated with maintaining branch networks.

Opportunities come with new risks like sectoral exposure concentration, longevity risks and search-for-yield behaviour, which banks need to address. Corporate loan portfolios might face much greater exposure to health care and services for the elderly.^[31] Reverse mortgages introduce longevity risk, which exposes a bank to the risk that borrowers might live longer than expected and hence outlive their financial resources. Margin compression might increase risk taking to boost yields.^[32] Despite these challenges, and potentially partly driven by the shorter operational horizons of banks, most euro area banks fail to mention population ageing in their annual reports, unlike sectors such as health care, real estate or insurance (Chart C.5, panel c).

Chart C.5

Population ageing may impact banks’ business models, potentially requiring them to maintain costly branch networks, yet banks seem unprepared to meet this challenge

a) Median assets and debt of euro area households, by age group	b) Population aged 65+ vs online banking penetration and card transactions	c) Mentions of ageing in euro area firms’ annual reports across economic sectors
(2021, € thousands)	(2022, 2024; percentages of total population, bubble size: number of card transactions per 100,000 inhabitants)	(2005-24, number of mentions)

Financial markets

Population ageing can change households’ investment behaviour, affecting the demand for and prices of financial assets in markets over time. Aggregate investment needs and preferences are directly linked to the relative share of younger people who wish to build up their savings and therefore invest. By contrast, elderly people wish to keep or spend their savings, possibly even divesting during retirement. As younger and older households want to buy or sell different asset types at the same time, the demand from these cohorts can have opposing effects on prices, making it difficult to predict the aggregate impact.^[33]

Rising life expectancy can incentivise households to invest more in financial markets so they can grow their savings and supplement future retirement income. Households in many euro area countries are increasingly investing their savings in financial markets. While these investments are exposed to market risk, well-diversified investment portfolios can allow households to grow their financial assets and earn higher returns than they would from traditional bank savings. Increased life expectancy, which is also associated with higher incomes and better living conditions, allows households to accumulate more financial assets, of which they tend to allocate more to bonds and equities (Chart C.6, panel a). Aided by the digitalisation of services, financial investments have become more popular among younger cohorts, as they can provide them with additional income after retirement and reduce their dependency on government pensions.

Chart C.6

Financial investments tend to increase with higher life expectancy, but older investors prefer safer assets

a) Share of market investments in financial assets and life expectancy in the euro area	b) Euro area households’ safe asset and equity holdings, by age cohort
(2021, percentage of total financial assets, years; size of bubble: median financial assets per household)	(2021, percentage of total assets, percentage of households)

An ageing population will likely increase the demand for bonds, as older investors tend to be more risk-averse. Investors adjust their portfolio compositions as they grow older. Younger cohorts try to grow their savings by investing more in comparatively riskier equities that offer higher average returns. By contrast, older households allocate their investments to less risky investments that provide a more stable return (Chart C.6, panel b). Where the risk-averse preferences of older cohorts of investors dominate, structurally higher demand for safer assets can lower equity valuations and make it more challenging for corporates to obtain market-based funding. As an ageing population becomes more risk-averse, investment in riskier financial assets such as equities or high-yield corporate debt may decline structurally. This could exert downward pressure on the prices of such assets. Comparatively riskier borrowers, such as smaller corporates, will have to offer higher returns to attract investors, making their market-based funding more expensive.

The retirement of the baby boomer generation could lead to higher divestment over the coming years, although the impact on financial markets is likely to be limited. Households that have currently accumulated a significant amount of savings are expected to divest parts of their wealth to fund their retirement. While this divestment can lead to a decline in asset prices in markets, the risk of a potentially disruptive, wider asset sell-off appears limited. Among the boomer generation, financial investment tends to be concentrated in wealthier households that have less need to sell their assets and are instead expected to transfer these assets to their heirs at some point.

Improving European capital market integration is important to help future generations build up retirement savings and support investment. Reducing capital market fragmentation and advancing the capital markets union could improve access to financial markets for households and firms in the euro area and facilitate risk sharing across countries. It would also mitigate several potentially adverse financial stability impacts associated with an ageing population. First, it would provide households with better opportunities to invest, diversify and grow their savings for retirement, which also reduces their need for financial support from governments. Second, improved capital markets can more efficiently channel the ample household savings in the euro area to corporates, providing them with better access to market-based funding to meet their investment needs.

Insurance corporations and pension funds

Resilient insurance corporations and pension funds (ICPFs) are important for retirement funding in an ageing population. Although small compared with government-sponsored pay-as-you-go plans, payouts from pension funds and life insurers are an important form of retirement funding for many households in the euro area (Chart C.7, panel a).^[34] For younger generations, these forms of funded pension plans – also as an indirect, additional form of financial market investment – will likely become more relevant as higher old-age dependency ratios make unfunded government pensions less certain. In their role as financial intermediaries, ICPFs are also large investors in euro area financial markets, so their resilience plays a pivotal role in preserving stability in the wider euro area financial system.

Traditional pension and insurance products that offer a guaranteed return have become less profitable as life expectancy has increased and bond yields have declined. Offering a guaranteed payout for life exposes ICPFs to both interest rate risk and longevity risk. To manage these risks, ICPFs that offer such payouts invest in long-dated bonds to reduce their duration gap and adjust payout levels to match rising life expectancy. With bond yields declining since the 1980s and retirement periods becoming longer, guaranteed returns have fallen and are thus less attractive for both ICPFs and policyholders. Although rising interest rates have improved the funding positions of ICPFs in recent years, claims on life insurance policies have increased and may start to outpace collected premiums (Chart C.7, panel b).

Chart C.7

Life insurers and pension funds provide additional means of retirement funding, while adjusting their business models to an ageing population

a) Euro area retirement payouts, by type	b) Euro area life insurers’ claims and premiums	c) ICPF liabilities, by type of product
(2023, € billions)	(2018-24, € billions)	(2020 vs 2024, percentages of life insurance reserves/pension provisions)

ICPFs have started to shift towards defined contribution products, transferring their risk to policyholders. Over the past few years, ICPFs have increased their share of products with lower or no guaranteed returns, as in the case of defined contribution (DC) pension schemes and unit-linked insurance products (Chart C.7, panel c). Under DC and unit-linked schemes, the building-up of retirement savings depends more directly on financial market performance and the investment risk is shifted to the policyholders.^[35]

ICPFs’ investments are changing as they offer fewer guaranteed payout products, which could lead to structurally lower demand for long-maturity bonds. As investment risk is transferred to policyholders, ICPFs are allocating a larger share of portfolios to equities and investment fund shares (Chart C.8, panel a). They thereby reflect the fact that younger households need to build up savings for retirement through diversified and comparatively riskier investments. This could boost equity financing, support growth in the investment fund sector and potentially provide a counterweight in markets to older retail investors becoming more risk-averse. But it may also imply less demand for long-maturity bonds (mostly sovereign bonds). ICPFs in several euro area countries have traditionally allocated sizeable shares of their portfolios to domestic sovereign debt (Chart C.8, panel b). A decline in these holdings could put further pressure on sovereign financing costs, notably in countries with higher debt levels where this home bias tends to be more pronounced.

Chart C.8

ICPFs are shifting away from products offering guaranteed payouts, reducing their exposure to declining returns and longevity risk but also their sovereign bond holdings

a) Investment portfolio composition, by type of life insurance and pension fund scheme	b) ICPFs’ domestic sovereign bond holdings and sovereign debt levels
(2024, percentages)	(Q4 2024; x-axis: percentage of total assets, y-axis: percentage of GDP)

5 Conclusion

This special feature takes stock of the broader financial stability implications of population ageing in the euro area. As population growth slows and longevity increases, the proportion of elderly individuals in Europe is rising. Examining the systemic risks associated with these demographic changes, this special feature explores the sectoral channels of transmission as well as the interplay between the real economy and the financial sector.

An ageing population could pose several risks to financial stability. Population ageing is expected to result in lower levels of labour supply and labour productivity, which could weigh on firms’ profitability and subdue economic growth. Governments are facing higher levels of ageing-related expenditure on items such as pensions and health care, while a lower number of working-age individuals and less economic growth could reduce tax revenues. Deteriorating corporate fundamentals and, in turn, rising concerns over sovereign debt sustainability could undermine financial stability. Financial markets and institutions are at the same time also directly affected by population ageing. Shifts in household demand for financial services may pose risks to the traditional business models of banks, life insurers and pension funds. Additionally, older individuals may show more risk-averse behaviour in financial investments. If their reduced demand for riskier assets is not offset by additional investment from younger generations – either in the form of direct investments or through increased demand via ICPFs – this could result in lower equity valuations and less favourable market-based financing conditions for corporations. Such financial sector impacts could in turn feed back into the real economy, limiting the funding available for investments needed in response to demographic change.

Comprehensive policy responses are essential to address the challenges posed by population ageing and to take advantage of the opportunities presented. Reforms in pension systems and labour markets are needed to manage rising ageing-related costs and maintain a stable tax base. Encouraging technological advancements and fostering a culture of lifelong learning within the workforce could help mitigate productivity losses and support economic growth. Immigration can also temper the impact and help address some of the challenges posed by population ageing. Policymakers also need to ensure that healthcare and long-term care services become more innovative so they can meet growing demand from an ageing population. By implementing targeted policies, governments could alleviate fiscal pressures and uphold financial stability in the face of demographic change. Encouraging euro area households to participate in financial markets could help to advance the integration of European capital markets and facilitate the building-up of retirement savings for future generations. It could in turn ease the pressure on increasingly unsustainable pay-as-you-go government pension systems and foster growth by channelling savings towards real economy investments.