Strange de­mo­graph­ics point to pen­sion and health time bomb

Irish Independent - Business Week - - BUSINESSWEEK -

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.

There will need to be ma­jor changes over the next 10 years to han­dle that sit­u­a­tion

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