An Overview of the Budgetary and Political Implications of Population Ageing

1. An Overview of the Budgetary and Political Implications of Population Ageing Dr. Alan Barrett Farrell Grant Sparks Consulting 16 January 2004

2. Purpose of the presentation • The issue of population ageing is receiving increasing attention • While much of Europe is already experiencing the phenomenon, Ireland’s ageing will occur after 2025

3. In this presentation, I want to do the following: • To outline the population projections • To consider the “known” negative budgetary implications (certainly social welfare, health more complicated) • To ask if there are any offsetting pluses (education, infrastructure) • To consider possible impacts on tax revenues • Then I’ll conclude on budgetary issues • Finally, I will look at possible implications for the political preferences of the electorate

4. The population projections • In 2000 almost 425,000 aged over 65 • By 2030, this is forecast to be 818,000 • By 2050, this is forecast to be 1.1 million • As % of the population, the over 65s will move from 11% to 24% • The old-age dependency ratio will rise from 18.7 to 44.2

5. The GNP projections • Budgetary value are expressed as % of GNP so need to say a word about long-term projections • Population taken from the Eurostat projections • Assume participation rates and unemployment rates • Assume productivity growth rates • Not trying to capture year-on-year fluctuations

6. Implications for Social Welfare • Current spend is about 9% of GNP • If payments indexed to nominal earnings, spend in 2050 would be 11.8% • If lowest payment set at 30% of average industrial earnings and other payments adjusted, 2050 value would be 14% • By linking payments to CPI, problem is eliminated

7. Implications for Health • Using a rule of thumb that 65+s use 4 times the amount of health services, spending could rise from around 7.6% to 9.5% • However, this misses two offsetting influences • Future 65+s may be healthier than today’s • Big driver of health spending is technology; a focus on aging may miss the big picture

8. Approach to Education Projections • Spending is taken at each of the three levels • This is then indexed to the number of students, based on population and participation rates • Also need to index to nominal earnings to account for unit cost increases • Capital is not projected, but held constant

9. Baseline: Participationconstant

10. Alternative Scenario 1: Life-long learning • What if there is an increase in the 25-44s going to third level? • Consistent with the notion of Life-long learning • Particularly relevant in an ageing society • If participation in that group goes from 1.1% to 5.5%, third level spending would go from 0.75% of GNP in 2050 to 1.18% • Any saving that might arise quickly disappears

11. Alternative Scenario 2:NAPS target on participation • Target: those completing upper second level to rise to 90% by 2006 • Impact on second level spending is minor but this may be misleading if marginal cost is high • Should assume that some of the increase will move onto third level • Projection suggests third level spending of 1.36% of GNP in 2050 • Again, the reduction in any saving is seen

12. What about tax revenues? • It could be that spending patterns differ by age group – implications for indirect revenues • Older people will tend to earn less and so pay tax at lower marginal rates • Analysis suggests that revenues could fall by between 5 and 14% but these are worse-case scenarios • True effect is likely to be small

13. What about infrastructure? • Currently spending around 5% of GNP • Most developed economies spend between 2 and 3% • Crucial question is when will our “infrastructure deficit” be bridged • If it is bridged by 2025, the spending can be re-directed • But will it take longer???

14. Concluding on Budgetary Issues • Overall, there will be pressures • National Pension Reserve Fund is only a partial solution • Least painful route is to ensure GNP increases • This has to be achieved by increasing productivity and participation, including that of older workers • But optimal approach will be incentives rather than compulsion • Final point – different implications of deficits in an ageing population

15. Population Ageing and Public Preferences • Taking example of education spending • Three sources of evidence from the US to suggest that there may be a link • Analysis of opinion polls • Analysis of school-financing referenda • Regression analysis of variation in education spending across US counties

16. Why those points may not apply • Altruism – may not vote based on narrow self-interest • Self-interest – older people will need a productive labour force to pay for their pensions and health care • In Ireland, perception of the link between taxes and the individuals who benefit may be closer than in the US because of greater centralisation

17. However, this is not an “all or nothing” question but one of degree • At the margin, will extra money go into pensions or education in a society that is 25% 65+ • More generally, what are the issues which will be of relatively greater concern to older people?