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PROJECTIONS OF PUBLIC EXPENDITURES ON EDUCATION, HEALTH CARE, AND PENSIONS IN TEN LATIN AMERICAN COUNTRIES: 2005-2050. Tim Miller (CELADE, [email protected]) Carl Mason (UC Berkeley, [email protected]) Mauricio Holz (CELADE, [email protected]) July 2009, World Bank Key Findings ① On average, the fiscal impact of population aging will be as large in Latin America as in Europe. ② Fiscal impact of population aging varies among the 10 countries – with pension reforms playing a large role. ③ Increases in health care obligations are likely to rival those of pensions. ④ Population aging greatly reduces the costs of educational investments in the region. The Economist, June 27, 2009 Long-run budget projections Impacts of demographic changes are profound, but not observed in the short-run. Mindful of population aging, several governments have recently begun to issue long-run projections of their budgets: European Union, United States, Australia, New Zealand, United Kingdom. The aim of this paper: long-run projections of public expenditures on education, health care, and pensions for 10 Latin American countries. (Not budgets.) Strong age pattern in government spending -> demographic changes have large fiscal impacts. Projections for 10 countries The Projection Model Combine NTA age-profiles of benefits with CELADE population projections. Equation 1. Expenditures/GDP can be expressed as product of demography and policy. DEMOGRAPHIC DEPENDENCY RATIO FOR EDUCATION, HEALTH, AND PENSIONS At-risk Population ÷ Working-age Population BENEFIT GENEROSITY RATIO FOR EDUCATION, HEALTH, AND PENSIONS Benefits per person ÷ GDP per working-age person Equation 2. [Adding age detail] • E(t)/GDP(t) = Sum over x { b(x,t) * P(x,t)/P(20-64,t) } • b(x,t) = age-specific benefits relative to GDP/working-age adult. Taken from NTA project. • p(x,t) = population at age x in year t. Taken from CELADE. Evolution of age-specific benefits ① No change (relative to GDP/worker). ② Reduction over time due to pension reforms. ③ Move toward or beyond current benefit levels in OECD countries, as GDP/worker rises in the 10 countries (@ 2.5%/year). [Can also view OECD targets as expansion of benefits currently enjoyed by top 20-40% of income distribution to everyone]. Public spending on education as share of GDP Population aging greatly reduces the costs of educational investments. Spending on Secondary Education Nicaragua Japan Spending (% GDP) 1.7% 1.6% Benefit Generosity Ratio (% GDP/worker) Education Dependency Ratio 6.5% 16% 0.26 0.10 Youngest Oldest Public spending on pensions as share of GDP Pension reforms have shifted costs away from public sector. Youngest Oldest PAYGO Mixed Substitutive PAYGO PAYGO Mixed Substitutive Parallel Parallel PAYGO Public spending on health care as share of GDP Increases in health care obligations will rival those of pensions. Youngest Oldest Fiscal impact of population aging Projected to be as large in Latin America as in Europe. Youngest Oldest Future steps… • • • • • Budget projection? Education as investment? Beyond averages? Probabilistic projection? An NTA-approach?