Assessing Age-Related Pressures on the Public Finances, 2005 to 2050

October 11, 2005

News

11/10/2005



Assessing Age-Related Pressures on the Public Finances, 2005 to 2050

Alan Barrett and Adele Bergin (The Economic & Social Research Institute, Dublin)
Embargo:00:01 a.m. Tuesday 11 october 2005.

  • Ireland's population is ageing. At present 11% of the population is aged 65 and over but this proportion is projected to rise to 15% by 2020 and to 29% by 2050. The process of population ageing is occurring more rapidly than previously thought due to better than anticipated improvements in mortality.
  • Population ageing has two broad impacts on the public finances. First, as governments spend relatively more on older people through programmes such as pensions and health care, population ageing puts upward pressure on public spending. Second, as an ageing population experiences a decline in the relative size of the labour force, the tax base for funding increased spending is reduced.
  • In this paper, we estimate the size of the upward pressure on public spending as a proportion of GNP out to 2050, looking across all areas of spending.
  • We project that spending on old-age social welfare pensions (contributory and non-contributory) could rise from the current level of 3.1% of GNP to 4.2% in 2020 and to 9.3% in 2050.
  • We project that spending on health could rise from 7.7% of GNP today to 11% in 2050.
  • While reduced pressures for spending may arise in areas like education and child-benefit, any savings will be outweighed by spending increases.
  • Spending pressures of these magnitudes suggest that taxes will have to rise or spending curtailed if the public finances are to remain on a sustainable course (one of our estimates puts the tax bill at over 5 billion Euro every year out to 2050). Another possible approach will be to prolong the working life so that the tax base is increased.
  • The analysis highlights the importance of maintaining payments into the National Pensions Reserve Fund.