PROJECTIONS OF PUBLIC EXPENDITURES ON EDUCATION, HEALTH CARE,

AND PENSIONS IN TEN LATIN AMERICAN COUNTRIES:

2005-2050.

Tim Miller (CELADE, Tim.Miller@cepal.org)Carl Mason (UC Berkeley, CarlM@demog.berkeley.edu)

Mauricio Holz (CELADE, Mauricio.Holz@cepal.org)

July 2009, World Bank

Key Findings①On average, the fiscal impact of population

aging will be as large in Latin America as in Europe.

②Fiscal impact of population aging varies among the 10 countries – with pension reforms playing a large role.

③Increases in health care obligations are likely to rival those of pensions.

④Population 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 benefitswith 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

①No change (relative to GDP/worker). ②Reduction over time due to pension reforms.③Move 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.

Nicaragua Japan

Spending(% GDP)

1.7% 1.6%

Benefit GenerosityRatio(% GDP/worker)

6.5% 16%

Education Dependency Ratio

0.26 0.10

Spending on Secondary Education

Youngest Oldest

Public spending on pensionsas share of GDP

Pension reforms have shifted costs away from public sector.

Youngest Oldest

PA

YG

O

PA

YG

O

PA

YG

O

PA

YG

O

Sub

stitu

tive

Sub

stitu

tive

Par

alle

l

Par

alle

l

Mix

ed

Mix

ed

Public spending on health careas 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?