Ageing populations ‘could cause government debt to explode’

21 Jan 13
Fast-ageing populations could push up advanced economies’ debt by ‘huge amounts’ by 2050 unless pension systems are reformed and labour market productivity is increased, Fitch said today.

By Nick Mann | 21 January 2013

Fast-ageing populations could push up advanced economies’ debt by ‘huge amounts’ by 2050 unless pension systems are reformed and labour market productivity is increased, Fitch said today.

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.

It will also reduce growth to over the long term, exacerbating the fiscal challenge, the ratings agency said in Ageing costs: the second fiscal challenge.

The rise in age-related spending is projected to average 4.1% of gross domestic product a year by 2050 across the eurozone, an increase in spending comparable in size to that 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, warning that – without reform – debt to GDP ratios for many countries could ‘explode’.

The report, which focuses on European Union and OECD members, concludes that the average EU debt-to-GDP ratio could rise by 6.9% by 2020 and 119.4% by 2050 unless mitigating reforms were introduced.  Japan, Ireland and Cyprus face the most urgent challenge, while Luxembourg, Belgium, Malta and Slovenia face the biggest impact without reform.

The agency noted that reforms to pension systems in Portugal, Italy and Greece had ‘effectively neutralised’ the long-term impact of ageing. In Greece, measures including linking the pension age to life expectancy and freezing pensions mean costs are forecast to rise by just 3.2% of GDP by 2050. In Portugal, the estimated increase is only 0.2%.

Fitch noted, however, that 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 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.’

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