Some economic and fiscal implications of the demographic transition in Latin America. Tim Miller CELADE - Population Division of United Nations Economic Commission for Latin America and the Caribbean. Regional Workshop on The Economic, Fiscal, and Welfare Implications of Chronic Diseases in the Americas, November 24-25, 2009 PAHO Headquarters, Washington, DC

Three messages about Latin American demography. ①Population of Latin America is aging. ②Economic implication: A “demographic dividend” period in which the working-age population grows faster than the total population. ③Fiscal projection: Future health obligations larger than future pension obligations in Latin America.

1. Demographic transition Population aging in Latin America

Population aging: The slow revolution

2. The demographic dividend A temporary period lasting several decades in which age structure is particularly favorable for economic growth.

The impact of demographic transition on economic wellbeing. Y/N Y/W W/L L/N GDP per capita GDP per worker Proportion of working-age population with a job Proportion of population in the working-ages

The impact of demographic transition on economic wellbeing. GDP Per capita GDP Per capita Productiv ity Productiv ity Employ ment Age structure GDP per capita GDP per worker Proportion of working-age population with a job Proportion of population in the working-ages

Direct impact of demographic transition: Positive then turns Negative GDP Per capita GDP Per capita Productiv ity Productiv ity Employ ment Age structure Demographic Transition

Indirect impact of demographic transition: might be many times larger. GDP Per capita GDP Per capita Productiv ity Productiv ity Employ ment Age structure Demographic Transition Human & Financial Capital Female Labor Force Participation Bloom and Canning (2004,2007) Mason & Lee (2006) Lee & Mason (2008) CEPAL (2009a, 2009b)

Contributions of changes in age structure, productivity, and employment to annual growth of GDP/capita,

3. Long-run fiscal impact of changing age structures Increases in health obligations will rival those of pensions

National Transfer Accounts (NTAs) Cuentas Nacionales de Transferencias  A new tool for monitoring the impact of population aging on the economy.  A satellite account of National Accounts which measures economic activity by age.  International project under direction of Professors Ron Lee (UC Berkeley) and Andy Mason (U Hawaii). CEPAL/IDRC project consists of 5 Latin American countries.

AFRICAAMERICASASIA-PACIFICEUROPE KenyaBrazil AustraliaAustria MozambiqueChile ChinaFinland NigeriaCosta Rica IndiaFrance SenegalMexico IndonesiaGermany South AfricaUnited States JapanHungary Uruguay PhilippinesSlovenia South KoreaSpain TaiwanSweden Thailand 28 countries are participating in the NTA project.

The life cycle pattern of consumption is supported by large intergenerational resource flows.

Relative Consumption per Person in High and Middle Income Countries Education Health

Relative health spending per older person much higher in high income countries.

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.  Our aim: long-run projections of public expenditures on education, health care, and pensions for 10 Latin American countries.

Projection Model based on Age E(t)/GDP(t) = Sum over x { b(x,t) * P(x,t)/P(20-64,t) } b(x,t) = age-specific spending relative to GDP/working-age adult. Taken from NTA project. Move toward OECD levels as income/worker rises. p(x,t) = population at age x in year t. Taken from CELADE.

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

Large declines in school-age population relative to working-ages.

Large increases in retirement-age population relative to working-ages.

YoungestOldest

Key Fiscal 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.

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