Ageing population will drive up public sector debt – Deloitte
The first quarter 2012 issue of Deloitte Research’s Global Economic Outlook highlights that, in the long-term, the real problem with public sector debt has to do with changing demographics rather than a short-term decline in economic activity.
“As the number of countries with a disproportionately high number of ageing populations continues to rise, the structural and long-term impacts of this demographic trend will be the main driver of public sector debt in the future,” said Ira Kalish, director of global economics, Deloitte Research, part of Deloitte Services LP in the US.
“If current trends continue, government debts are likely to escalate to unsustainable levels with serious ramifications, such as rating downgrades as well as the decline of investor confidence in government bonds, all leading to volatility and uncertainty in bond markets.”
Deloitte Malta’s financial advisory leader Raphael Aloisio told The Sunday Times: “Deloitte’s research clearly shows that the global economic climate remains extremely uncertain and challenging.
“Malta is not immune to what is taking place on the global scene and the government is going to have to remain ahead of the game in managing both the short-term consequences of the eurozone debt crisis as well as the longer-term threats of higher pensions and increased healthcare costs.
“If we want Malta to come out of the current turmoil stronger than before, then we must ensure that 2012 is the year when we take the necessary bold decisions which will enable us face up to the inevitable short-term decline in economic activity while also laying the foundations for longer-term sustainable government expenditure.”
He said the Maltese economy has so far managed to weather the global economic storm without any major economic shock. But he warned that the storm is not yet over and failing to face up to both the short- and longer-term economic challenges that lie ahead could lead to a much longer and more painful period of suppressed economic performance.
“If we want to ensure a stronger and more sustainable economic model we cannot ill afford to make incorrect political and economic decisions at this delicate time.”
According to Standard and Poor’s projections in its Global Ageing Report 2012, for 49 developed and emerging economies, the median government debt will rise from below 40 per cent of GDP today to 245 per cent in 2050. This exponential growth will be mainly driven by age-related spending and spiralling interest payments.
“Ageing population is no longer a developed country problem,” Dr Kalish said. “Emerging countries in Asia, such as South Korea, China, and Taiwan are, in fact, facing an unprecedented growth of aging populations, potentially turning this into a severe global problem.”
According to Deloitte Research’s Global Economic Outlook, ageing populations strain exactly those areas that governments tend to spend the most money on: pensions and health. As a direct result of an ageing population, the number of pension beneficiaries goes up, the number of contributors falls, and healthcare costs rise.
The report offers two policy measures that could provide sustainability to public finances in regard to age-related spending:
Compensating for a shrinking workforce: In many countries, the employment rate of over 55-year-olds is too low. To compensate for the decrease in younger employees, this age group needs to be encouraged to remain in employment.
Increasing female employment has a similar effect.
Another lever to compensate for the shrinking workforce is to increase productivity.
The report concludes that the single most effective lever to put public pension systems on a financially sound basis is the retirement age. Linking retirement age to increases in longevity could ensure automatic and permanent fiscal sustainability.
Reforming pension and health systems and dealing with the effects of ageing on the labour market would have long-term benefits for public finances.
“While these reforms will not solve the current financial market turbulence, they could be part of the solution for the current crisis,” the report points out.
“Without addressing the underlying drivers of future government expenditure, many countries are likely to face a debt crisis 2.0 that could last for a long time and be unprecedented in its magnitude.
“However, policies that effectively tackle age-related fiscal pressures could help to restore confidence in the management of government finances,” said Dr Kalish.