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  • January 2013
01

Ageing populations 'could cause government debt explosion'

Open-access content Monday 21st January 2013 — updated 12.57pm, Tuesday 5th May 2020

Failing to address the pressure ageing populations are putting on public finances and economic productivity could cause advanced economies debt-to-gross domestic product ratios to increase by huge amounts, Fitch warned today.

2

The ratio of over-65s to people of working age in Organisation for Economic Co-operation and Development member countries is expected to increase from 14.2% to 34% by 2050, putting 'severe pressure' on public spending for many countries.

In Ageing costs: the second fiscal challenge, the ratings agency explained that ageing would also cause potential GDP growth to decline over the long term, exacerbating the fiscal challenge.

The rise in age-related spending is projected to average 4.1% of GDP a year by 2050 across the eurozone, an increase in spending comparable in size to that seen during the financial crisis in 2008/09 - albeit less sudden and less unexpected.

'All else equal, an expenditure increase on this scale would push up public debt ratios by huge amounts by the middle of the century,' Fitch said. Without reform, debt-to-GDP ratios could 'explode', it added.

Focusing on European Union and OECD members because they face the most severe ageing population problem, Fitch concluded that the average EU debt-to-GDP ratio could rise by 6.9% by 2020 and 119.4% by 2050 unless mitigating reforms are introduced. Japan, Ireland and Cyprus face the most urgent challenge, while Luxembourg, Belgium, Malta and Slovenia would see the biggest impact without reform.

Reforms to pension systems in Portugal, Italy and Greece have 'effectively neutralised' the long-term impact of ageing, Fitch noted. In Greece, where measures have included linking the pension age to life expectancy and freezing pensions, ageing costs are forecast to rise by just 3.2% of GDP by 2050, while the forecast increase in spending in Portugal is now just 0.2%.

However, these kind of reforms were 'politically challenging', which could make them difficult to introduce.

'Even when passed into legislation, they are not cast in stone, and are subject to the risk of policy U-turns if there is high social pressure, notably in countries with a long history of generous entitlements or those with growing "austerity fatigue" as a result of the eurozone crisis,' the report said.

'As most legislated reforms will result in state pensions becoming less generous over time, there could be a further risk to their political sustainability in the face of a greying electorate.'

This article appeared in our January 2013 issue of The Actuary .
Click here to view this issue

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