PROJECTIONS OF PUBLIC EXPENDITURES ON EDUCATION, HEALTH CARE, AND PENSIONS IN TEN LATIN AMERICAN COUNTRIES: Tim Miller (CELADE, Carl Mason (UC Berkeley, Mauricio Holz (CELADE, July 2009, World Bank

Key Findings ①On average, the fiscal impact of population aging will be as large in Latin America as in Europe. ②Fiscal impact of population aging varies among the 10 countries – with pension reforms playing a large role. ③Increases in health care obligations are likely to rival those of pensions. ④Population aging greatly reduces the costs of educational investments in the region.

The Economist, June 27, 2009

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.)

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

Projections for 10 countries

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

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

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.

Evolution of age-specific benefits ①No change (relative to GDP/worker). ②Reduction over time due to pension reforms. ③Move 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].

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

NicaraguaJapan Spending (% GDP) 1.7%1.6% Benefit Generosity Ratio (% GDP/worker) 6.5%16% Education Dependency Ratio Spending on Secondary Education

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

YoungestOldest PAYGO Substitutive Parallel Mixed

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

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

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