Time against us as ageing population a threat
AS if the financial crisis was not enough, rating agency Fitch warned yesterday that Ireland is among the three countries in the world facing the highest costs linked to an ageing population.
In a report on ageing, the London-based rating agency warns that Japan, Ireland and Cyprus face the largest jump in ageing costs over the next decade if nothing is done to reform the present systems in each country. The United States comes next.
Long-term ageing in economies such as Ireland's will lead to a second, longer-term fiscal shock, Fitch adds.
Populations everywhere are getting older as people live longer and have fewer children, but it seems that few countries are less prepared for this than we are.
This ageing will lead to escalating government debt-to-GDP ratios and then cause potential GDP growth to decline over the long-term, exacerbating the fiscal challenge, Fitch adds.
These worries help to explain why the troika has constantly sounded the alarm over benefits to the elderly here, such as free travel and free healthcare.
Those concerns, repeated forcefully in recent troika reports, led Finance Minister Michael Noonan to make some changes to medical cards and other benefits in the last Budget, although his reforms still fell short of troika demands.
Failure to reform the system is becoming expensive for some other countries. Fitch warns failure to reform could lead bonds to be downgraded – by five notches in some cases – and says Slovenia's failure to reform the pension system was "a key contributory factor" to the downgrade of its ratings two years ago.
Recent reforms in Portugal, Italy and Greece have effectively neutralised the long-term impact of ageing on public finances in those countries, it added.
The Fitch report is complex and nuanced. There are plenty of reasons to be optimistic about Ireland's prospects – Ireland still has a young population, the dependency ratio for the elderly remains low and private pension provision is relatively good at around 45pc of GDP (but still a quarter of what those thrifty Danes have set aside).
Fitch believes other countries face bigger threats over the long-term from their ageing population but the report, entitled 'Ageing Costs; the Second Fiscal Crisis' also makes clear that there is no room for complacency as Ireland faces up to an immediate challenge.
Economists say ageing in the West will lead to slow growth and low productivity everywhere as well as rising public spending and labour shortages. The International Monetary Fund said in a recent report on the subject that the cost of global financial crisis will be dwarfed by age-related spending.
Looking ahead to the period between now and 2050, it predicted that "for advanced countries, the fiscal burden of the crisis [will be] about 10pc of the ageing-related costs". The other 90pc will be extra spending on pensions, health and long-term care.
The UN's latest forecast says the median age for all countries is due to rise from 29 now to 38 by 2050. At present just under 11pc of the world's 6.9 billion people are over 60. Taking the UN's central forecast, by 2050 that share will have risen to 22pc (of a population of over nine billion).
That will mean that one person in three will be a pensioner in the West and nearly one in 10 will be over 80.
Last April, the IMF said that people worldwide are living three years longer than expected, and warned that governments and pension funds are ill-prepared.
To give an idea of how costly this could prove, the IMF estimated that if advanced economies were to plug the shortfall in pension savings of an extra three years immediately, they would have to stash away the equivalent of 50pc of 2010 GDP, and emerging economies would need 25pc.
These extra costs fall on top of the doubling in total expenses that countries can expect through 2050 from an ageing population. The faster countries tackle the problem, the easier it will be to handle the risk of people living longer, the IMF said.
The IMF said the steps governments can take to manage the situation of people living longer are to raise the retirement age, increase taxes to fund public pension plans and lower benefits – all steps most advanced economies are already considering.
They also could help the private sector by educating citizens better on how to prepare for their retirements and by promoting retirement products that protect people against the risk that they outlive their assets. Like so many other policy prescriptions, it is easier said than done.