Alternative scenarios for health, life expectancy and social expenditure

1. WP4 Alternative scenarios forhealth, life expectancyand social expenditure Ed Westerhout Frank Pellikaan

2. FOCUS OF WP4 • Effect of ageing on health expenditure • Effect of ageing on pension expenditure • Effect of ageing on sustainability of public finances • Special emphasis on effect of living longer in better health

3. Four scenarios

4. Structure of the model • Demography • Health expenditures • Pension expenditures • Relation between health and labour participation • Relation between health and health expenditures • Government finances

5. Base case scenarioTotal expenditures EU as % of GDP

6. Base case and living longer scenario, expenditures as % of GDP

7. Base case and Living in better health scenarioexpenditures as % of GDP

8. Base case and Living longer in better health scenario, expenditures as % of GDP

9. Overview results

10. Debt Developments EUin % of GDP

11. Sensitivity tests • Effect of ageing on the change in the interest rate • Effect of ageing on change in rate of productivity growth • Effect of higher rate of growth of health care expenditures • Effect of an increase in the labour force participation rate • Worst, Best case scenario

12. Assumptions in Base case scenario • Rate of labour productivity growth (1.75%) • Nominal interest rate (5.75%), • Rate of inflation (2%) • Health expenditure grows at 1.75% annually at the individual level

13. Effect of ageing on the change in the interest rate and rate of productivity growth • INGENUE study, • Interest rate -0.5% • Rate of productivity growth -0.7% • Fehr et al. • Interest rate +4% • CPB Four Futures study • Regional communities scenario • Interest rate -1% • Rate of productivity growth -0.75% • Transatlantic market scenario • Interest rate +0.9% • Rate of productivity growth +0.3%

14. Change in sustainability gaps when we implement the predicted change in interest and rate of productivity growth from other studies

15. Health care expenditures • A lot of uncertainties surround prediction health care expenditures • Relation GDP, health care expenditures • Role of medical technology • Price developments medicines • Institutional changes • Alternative scenario with growth of health care expenditures 0.25% above GDP growth

16. Change in sustainability gaps in increasing cost scenario compared to base case scenario

17. Some other scenarios • Increase in labour force • 5% relative increase in labour force participation rate • Worst case scenario, assumptions: • Life expectancy increases by 3.2 extra years • Growth health expenditures is 0.25% higher than GDP growth • Relative decline in LFP rate by 5% • No health improvements • Best case scenario, assumptions: • Relative improvement in health by 20% • Increase in elasticity of +0.2 (relation health/health expenditures, relation health/labour force participation)

18. Change in sustainability gaps compared to base case scenario when other scenarios evolve

19. Conclusions • Living longer in better health leads to a small increase in sustainability gap. These results depend on the postulated increase in life expectancy- and health. Development of both variables is surrounded with uncertainty • Living longer in better health leads to an increase in pension expenditures, but a decline in health expenditures • The effect of an increase in life expectancy or an improvement in health on the sustainability gap is of a larger size than possible changes in the interest rate or rate of productivity growth • Ageing will lead to large sustainability problems of government finances in the EU, living longer in better health will not change this view