SANJEEV GUPTA Deputy Director Fiscal Affairs Department International Monetary Fund. July 15, 2016 Colombo

Transcription

1 The Fiscal Consequences q of Aging g g SANJEEV GUPTA Deputy Director Fiscal Affairs Department International Monetary Fund July 1, 1 Colombo Outline Motivation Long-term trends, demographic uncertainty and fiscal sustainability Fertility Longevity Policy options to address fiscal challenges of aging populations Policies that affect demographics and labor markets Reforms to age age-related related spending programs Conclusions

2 Motivation Why focus on long-term trends? P t of cou untries with ne egative popula ation growth Population is already shrinking in many countries and populations are aging Shrinking populations pose a formidable fiscal challenge World More Less developed developed should start now so that they will be gradual and lasting Reforms World 1 spending projected to reach levels incompatible with fiscal sustainability Old-age de ependency rattio Age-related Age related 7

3 Why focus on long-term trends? This presentation makes three major contributions to the debate: 1 Uses 1. J l 1 UN population pop lation projections to help project health and July pension spending for over 1 countries. It presents spending projections to 3. Reviews potential options to address these fiscal pressures, including migration Demographic Uncertainty, and Fiscal Sustainability

4 Long-term trends Th prospect off aging, The i shrinking h i ki populations, l i and d hi higher h age-related l d expenditure di Population aging will have a large direct impact on public spending 1 1 More developed Less developed changes will also affect fiscal sustainability through their impact on growth Demographic tage poin nts of GDP 3 7 The impact of demographic uncertainty on fiscal sustainability Demographic Past projections are surrounded by substantial uncertainty projections have been subject to large errors countries: crude birth rate (births per 1,) countries: crude mortality rate (deaths per 1,) Proj 19 Proj 199 Proj Proj 1 Proj Actual

5 Fertility After declining for over 1 years, fertility rates are projected to increase slightly in the more developed economies over 1 For the less developed economies, the projections assume a continued but gradual decline in fertility rates Fertility rate countries countries Fertility rate Lower fertility scenario impact of lower fertility rates on fiscal variables is significant Old-age dependency rratio UN Low fertility scenario ntage points off GDP The. 1

6 Longevity Longevity improvement is expected to slow down in the more developed economies For the less developed economies, the projections suggest continued improvements in longevity 7 countries countries Higher longevity scenario Improvements in longevity can also have an important fiscal impact Higher g longevity g y scenario Old-age dependency ratio ta age points of GDP. -. 1

7 Policy Options to Address Fiscal g of Challenges Shrinking Populations Overview of policy options Categories of potential policy responses to the fiscal challenges posed by population trends: 1. Policies to raise fertility rates?. Labor market policies 3. - Allowing greater migration - Raising labor force participation Reforms to age-related spending programs - Increasing retirement ages - Addressing the growth of age-related costs 1

8 Fertility rates? Increase fertility rates Old-age dependency y ratio ntage points off GDP - 1 Allowing greater migration Allow higher migration Old-age O depen ndency ratio Pe ercentage points of GDP 1 - Pensions (left axis) Health (left axis) Old-age dependency ratio (right axis) 1

9 Raising labor force participation I Increase labor force participation of women. ntage points off GDP Raising labor force participation II Increase labor force participation of older workers ntage points o of GDP

10 Addressing the growth of age-related costs I Increase retirement age by years over 1- ntage points o of GDP Addressing the growth of age-related costs II Lower excess cost growth ntage points o of GDP

11 Implications The fall in fertility and eventual decline in world population are part of the transition to a sustainable growth path Nevertheless, shrinking populations pose a grave fiscal threat Demographic and age-related spending projections are surrounded by substantial uncertainty There is no escape from reforming entitlements Migration and labor market policies can ameliorate the impact of aging in the more developed economies Given the magnitude of the fiscal challenge, reforms should start now but be g gradual 1