Dr Alan Barrett examines the implications of our ageing population on our health and social welfare systems
Much has been written in recent times about the fact that Ireland's population is ageing and that it will continue to do so at an increasing pace.
The context for the discussion of population ageing is most often pensions, the long-term care of the elderly and the projected increases in the cost of both.
In a recent paper, my colleague Adele Bergin and I presented the results of an exercise in which we tried to put figures on the possible size of the increase in Government spending that will be needed to cope with population ageing.
Our goal was to quantify the possible increases in spending on health and social welfare but also to factor in possible decreases in spending on education and child benefit.
While population ageing obviously implies relatively more old people, it also implies relatively fewer young people. Hence, it seemed sensible to see if any savings might offset the extra cost.
The first step in our analysis was to provide population projections out to 2050. Based on assumptions for mortality, fertility and immigration, we presented a number of scenarios, but the general picture is as follows.
At present in Ireland, about 11 per cent of the population is over 65. This will rise to 15 per cent by 2020 and to 29 per cent in 2050 (see graph).
For the various areas of spending, we came up with the following projections: social welfare spending that is focused on older people will rise from its current level of 3.1 per cent of gross national product (GNP) to 5.5 per cent in 2030 and to 9.3 per cent in 2050.
In other words, old age welfare spending will treble between now and 2050.
In contrast, social welfare spending that is focused on children (child benefit) will fall from 1.5 per cent at present to 1.3 per cent in 2050. Hence, there will be some saving here but, overall, the social welfare budget will increase dramatically.
Projecting spending on health is much more complicated. Although an ageing population means more old people, those old people will be healthier. This leads some to argue that population ageing will actually have no impact on health spending.
Even if this is true, it is highly likely that technology will increase health spending anyway so it is wise to plan for increases. We estimated that health spending could rise from 7.7 per cent of GNP today to 11 per cent in 2050.
With regard to education, spending could fall from 5.1 per cent at present to 4.4 per cent by 2050 based purely on numbers of younger people.
This is a small saving relative to the increases in health and social welfare but it is also unlikely to hold. The pressure to increase spending on education will be huge because an older population will need greater access to lifelong learning.
If we add the projected increases and decreases in spending, we arrive at a large increase in public spending and hence a need for tax increases in order to keep the government deficit from going out of control.
We estimate that a tax increase today of €5 billion, maintained at that rate in real terms out to 2050, would keep the public finances on a sustainable path. Put another way, this means that the tax burden as a share of GNP would have to rise from its current level of 29 per cent to 33.3 per cent.
While this would not be pleasant for Irish taxpayers, a 33.3 per cent tax take would still leave Ireland a relatively low-tax country when compared with many EU countries.
There are a number of additional issues which are worth mentioning here. First, the National Pension Reserve Fund is included in our analysis. While it will make a contribution to easing the age-related pressures on the public finances, it will not solve the problem entirely.
Second, our analysis also includes an immigration inflow. Again, immigration will ease the pressure by providing a younger inflow to counteract the ageing process. However, only a massive inflow could "solve" the ageing problem and an inflow on that scale is unlikely.
Third, we assumed in the analysis that older workers are just as productive as younger ones. This might not be true and so the problems of population ageing might extend to older workers as well as to older retirees.
•Dr Alan Barrett is a senior research officer with the Economic and Social Research Institute.