Tim Miller (CELADE, Tim.Miller@cepal) Carl Mason (UC Berkeley, CarlM@demog.berkeley)

1. PROJECTIONS OF PUBLIC EXPENDITURES ON EDUCATION, HEALTH CARE, AND PENSIONS IN TEN LATIN AMERICAN COUNTRIES: 2005-2050. Tim Miller (CELADE, Tim.Miller@cepal.org) Carl Mason (UC Berkeley, CarlM@demog.berkeley.edu) Mauricio Holz (CELADE, Mauricio.Holz@cepal.org) July 2009, World Bank

2. Key Findings • On average, the fiscal impact of population aging will be as large in Latin America as in Europe. • Fiscal impact of population aging varies among the 10 countries – with pension reforms playing a large role. • Increases in health care obligations are likely to rival those of pensions. • Population aging greatly reduces the costs of educational investments in the region.

3. The Economist, June 27, 2009

4. Long-run budget projections • Impacts of demographic changes are profound, but not observed in the short-run. • Mindful of population aging, several governments have recently begun to issue long-run projections of their budgets: European Union, United States, Australia, New Zealand, United Kingdom. • The aim of this paper: long-run projections of public expenditures on education, health care, and pensions for 10 Latin American countries. (Not budgets.)

5. Strong age pattern in government spending -> demographic changes have large fiscal impacts.

6. Projections for 10 countries

7. The Projection Model Combine NTA age-profiles of benefits with CELADE population projections.

8. Equation 1.Expenditures/GDP can be expressed as product of demography and policy. BENEFIT GENEROSITY RATIO FOR EDUCATION, HEALTH, AND PENSIONS Benefits per person ÷ GDP per working-age person DEMOGRAPHIC DEPENDENCY RATIO FOR EDUCATION, HEALTH, AND PENSIONS At-risk Population ÷ Working-age Population

9. Equation 2. [Adding age detail] • E(t)/GDP(t) = Sum over x { b(x,t) * P(x,t)/P(20-64,t) } • b(x,t) = age-specific benefits relative to GDP/working-age adult. Taken from NTA project. • p(x,t) = population at age x in year t. Taken from CELADE.

10. Evolution of age-specific benefits • No change (relative to GDP/worker). • Reduction over time due to pension reforms. • Move toward or beyond current benefit levels in OECD countries, as GDP/worker rises in the 10 countries (@ 2.5%/year). [Can also view OECD targets as expansion of benefits currently enjoyed by top 20-40% of income distribution to everyone].

11. Public spending on education as share of GDP Population aging greatly reduces the costs of educational investments.

12. Spending on Secondary Education

15. Youngest Oldest

16. Public spending on pensionsas share of GDP Pension reforms have shifted costs away from public sector.

19. Parallel Parallel Mixed Mixed PAYGO PAYGO PAYGO PAYGO Substitutive Substitutive Youngest Oldest

20. Public spending on health careas share of GDP Increases in health care obligations will rival those of pensions.

24. Youngest Oldest

25. Fiscal impact of population aging Projected to be as large in Latin America as in Europe.

26. Youngest Oldest

28. Future steps… • Budget projection? • Education as investment? • Beyond averages? • Probabilistic projection? • An NTA-approach?