Tuesday 21 November 2017

Brendan Keenan: Strange demographics point to pension and health time bomb

'There will need to be major changes over the next 10 years to handle that situation' (file photo)
'There will need to be major changes over the next 10 years to handle that situation' (file photo)
Brendan Keenan

Brendan Keenan

More bad news. The fertility rate has fallen to 1.9 children per female, which is less than the 2.1 average needed to keep the population stable.

OK, it's not exactly breaking news. The figure fell below that key number in the 1990s, but rose above it for much of the 2000s, before falling back again in the last few years. It is also the longest of long-term issues, so there is no great urgency. That, perhaps, is part of the problem.

One has only to look around Europe to see that it should not be endlessly long-fingered. Several countries, especially Germany, face astonishing falls in their population over the next few decades. With hindsight, it seems surprising that, decades ago, governments did not try harder to keep their populations stable.

Not that it is easy to do. Changes in the fertility rate are not well understood. Much of it is social, rather than purely financial, but policy must come into it somewhere and Ireland is unusual in the degree of incentives it offers to those who have children.

The main one is child benefit, payable at €140 per month per child. That is a substantial amount, especially for those on low incomes. A family with three children, on half average earnings, will see their income substantially improve when benefit is taking into account.

Research suggests it is the single most effective anti-poverty measure and the main reason such a family is the most lightly taxed in the OECD: they are actually net beneficiaries of the system.

There are economies of scale in child-rearing, making the benefit for the third child and beyond worth more in net terms, even if no longer in cash terms. Against that is the inexplicably high cost of childcare in Ireland. Government inertia on this question does not suggest any serious intent to get back above that critical stability birth rate.

There is understandable confusion between the fertility rate and the birth rate. While the former - babies per mother - is now lower than that of France; the latter - babies per 1,000 of the population - at 13.5, is the highest in the EU.

That reflects past fertility rates - we have more women of child-bearing age - and migration flows.

Those past fertility rates also mean the largest group of the Irish population is the 30-39 age group - prime working and reproduction age. Ireland's population will remain much younger than the EU average.

Unusually too, it is expected to grow (although so is that of the UK). In the ground-breaking analysis of future demand for healthcare, the ESRI estimates that the population will grow by up to one million by 2030 - an increase of more than 20pc.

The combination of these trends means the proportion of old people will also rise faster than the EU average. One has to do a little bit of thinking to realise that this is perfectly compatible with having the youngest population overall. Nevertheless, the expected 90pc increase in those aged over 80 will be an enormous challenge, even though they will represent less than 3pc of the total population.

The more new young hands which arrive, either through childbirth or immigration, the better when it comes to the cost of an ageing population. But mere numbers are far from the end of the story.

The bare bones of it were laid out in the 2017 KPMG review of the finances of the social protection system carried out every five years. It is based on the assumption that the five people at present working for every person over 66 will have declined to three by 2030.

There will need to be major changes - astonishing changes - over the next 10 years to handle that situation; never mind the one facing the two workers for every person over 66 in 2050.

There has been one undoubtedly major change, with the increase in the retirement age to 67 from 2021 and 68 in 2028. That alone would increase the proportion of people at work by 17pc, but it assumes that everyone will work to the new limits and that is far from certain.

Given the reaction to the change, it is even less certain that any further extension to 70 years will be possible. People put a low value on the distant future, which is part of the difficulty, although 2030 is no longer the distant future.

Close though it is, by then pension costs will have doubled from current levels to €12bn. That would be €3bn more than the present levels of the PRSI take.

Small wonder, a cynic might say, that the Government's budgetary arithmetic has suddenly become very vague about the medium term. That deficit figure will be more than one per cent of national income.

Given that the contortions in this year's Budget amounted to one tenth of that, and that things will deteriorate alarmingly after 2030, present politics seem to have discounted the future more or less entirely.

Look further ahead and projections for national income become fuzzier even than those for population. With a smaller ratio of workers, what matters is the growth in their output per person - productivity. In his influential book, 'The Rise and Fall of American Growth', Robert J Gordon argues that the future technology will not produce the gains in productivity which transformed developed economies over the last 100 years.

If the social protection system is under stress, things look worse in the Irish health system. The ESRI report forecast up to 37pc more demand for public hospital services, 27pc extra GP visits, and an increase of around 50pc for long-term and intermediate care places.

Reading and listening between the lines, since no-one seems to want to speak openly, it becomes clear that those who manage and work in the health service think it needs another €1bn a year or so to deliver existing demand. This in what is already just about the most expensive system in the EU.

With all the other pressures, it seems unlikely that such funds will be available. It is even more unlikely that even the existing €18bn would be available if, as has so often been recommended, the system were entirely publicly financed. Britain's 'free' NHS is just about the lowest spender in Europe, which is hardly coincidence.

The social protection issue is essentially about transferring income from some groups to others, however politically implausible.

The health system is different. It is inherently implausible that, as structured, it can do what will be required.

The demographics would suggest they are more likely to destroy it than that the health system will be able to adjust to them.

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