Governments everywhere facing balancing act in age related spending

Governments everywhere face a difficult balancing act between curbing public spending and providing adequate benefits to their increasingly large elderly populations.

In recent years, many governments have taken steps towards more sustainable welfare systems. Globally, there are signs that progress is being made in containing age-related spending.

But against the backdrop of a fragile global economy, the projected magnitude of the future fiscal burden means that further measures are crucial. The task of curbing public spending while also ensuring adequate cover for the increasingly costly senior population will be a major challenge.

Demographers predict the old-age dependency ratio (the number of over 65s relative to the population aged 15-64) for most countries will double by 2050. The trend towards a much greater elderly population will see pension spending rise to nearly 9% of GDP on average by 2050, but with wide variances depending on each country’s specific demographic profile. For example, by 2050 we expect total age-related public expenditures in Germany will increase to over 24.5% of GDP, compared with 20.1% in 2015.

Globally, there appears to be a relative stabilization in the long-term trajectory of pension spending. However, concerns have now shifted to pension adequacy as reduced pension benefits (introduced to control public spending) could result in poverty amongst elderly populations.

As the focus for long-term pension systems shifts from sustainability towards adequacy, we expect age-related healthcare spending to surpass retirement costs. By 2050, healthcare will become the fastest growing age-related expenditure, adding 2.3 percentage points of GDP globally between now and 2050. The costs of new medical technologies and new forms of health care delivery will be largely responsible for this increased spend.

To date, policy makers have tended to focus on pensions costs and other age-related spending, but we believe they should consider giving greater priority to improving healthcare systems and containing healthcare spending. Advanced economies are already taking steps in this direction. In emerging economies, however, the situation is more challenging as up to 80% of the population of these countries has no statutory health cover, though this may change as a result of countries’ growing income levels and an increasing demand for healthcare coverage from a larger section of the population. With a greater number of people demanding healthcare cover, growing income levels and an increasing demand for healthcare coverage from a larger section of the population could hinder government efforts to improve services or control spending.

In a simulation of the fiscal implications of population aging, S&P Global Ratings found that in a scenario where governments took no further measures to plan for aging populations, the median net general government debt ratio would triple by 2050 to above 130% of GDP from 43% currently. Emerging economies are by no means immune to this challenge: some countries, such as Brazil and China, are set to see their debt levels rise sharply unless they devise a suitable policy response.

Factoring in expected future budgetary imbalances and projected economic growth dynamics, we calculate that, under such as a "no-policy-change" scenario, more than 25% of the 58 sovereigns we've analyzed would, by 2050, have credit metrics that we currently associate with speculative-grade sovereign credit ratings ('BB+' or below), against less than 10% of this sample in 2020.

While we are not predicting that the "no-policy-change" scenario will actually unfold, these simulations of the impact on sovereign credit ratings of age-related spending illustrate the significant economic challenges posed by aging populations.

To address the needs of their senior citizens, it is our view that governments will likely need to balance two main strategies: budgetary consolidation and welfare restructuring. The extent to which governments employ these strategies will vary considerably according to their particular economic conditions.

In conclusion, an aging global population and the rising costs in aged social and healthcare will put significant pressure on government spending across both emerging and advanced economies. We believe that governments can deal with the future imbalances in two main ways, besides structural reforms aimed at raising employment for older workers and boosting economic growth. First, through a sustained consolidation in budgetary positions; second, through changes to social security and publicly funded health care systems.

Unless governments take action to adjust their social safety net costs and implement policies that boost growth, it is our view that nearly all countries will face a steep, demographically driven deterioration in their public finances. Despite the progress made to date, we believe that the projected magnitude of the future fiscal burden still requires significant further action.