- Edgardo Ruggiero, Peter Heller, Menachem Katz, Robert Feldman, Richard Hemming, Peter Kohnert, Ziba Farhadian, Donogh McDonald, Ahsan Mansur, and Bernard Nivollet
- Published Date:
- September 1986
© 1986 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
Heller, Peter S.
Aging and social expenditure in the major industrial countries, 1980–2025.
(Occasional paper. ISSN 0251–6365: no. 47) Bibliography: p.
1. Expenditures, Public. 2. Expenditures, Public—Forecasting. 3. Social policy. 4. Age distribution (Demography) I. Hemming, Richard. II. Kohnert. Peter. III. Feldman, Robert Alan. IV. Title. V. Series: Occasional paper (International Monetary Fund): no. 47.
HJ7469. H45 1986 336.3-9 86-20835
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The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1979–81 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1980/81) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
In early 1984, several members of the Fund’s Executive Board proposed that the Fiscal Affairs Department of the Fund conduct a comparative study of trends in government social expenditures, with particular attention to the implications of demographic trends in the industrial countries. A number of issues were of particular interest. What was likely to be the impact of the aging of the populations of the industrial countries on their outlays for social expenditures? Would diminished outlays for education offset increased outlays for pensions and medical care and what would be the impact on the share of social outlays in total output? What was the likely time pattern of evolution of social expenditures and would this be a significant factor to consider in the formulation of fiscal policy in the present? At the same time, the Organization for Economic Cooperation and Development (OECD) was in the process of completing a report that examined the factors underlying the evolution of social expenditures since 1960 in the OECD countries, with projections on the likely growth of social expenditure through 1990. The Fund study can be viewed as a complement to the OECD report, as it evaluates the impact of current demographic trends over the longer time frame during which the demographic structure will most demonstrably change. The focus is limited to the seven major industrial countries.
Given the significant differences that exist across countries in their social programs, seven individual country studies were made, providing detailed demographic and expenditure projections through the year 2025. Each of the countries generously provided assistance, both in the form of data and in commenting on drafts of the individual country studies. To obtain information and collect views for these papers, the staff held discussions with authorities in Bonn, London, Ottawa, Paris, Rome, Tokyo, and Washington. Officials of the OECD provided data and advice on many of the problems involved in the analysis and projection of social expenditures. Under the direction of Peter S. Heller, Chief, Government Expenditure Analysis Division of the Fiscal Affairs Department, the seven studies were carried out by Robert Alan Feldman. Menachem Katz, Peter W. Kohnert, Ahsan Mansur, Donogh McDonald, Bernard Nivollet (all members of the Fiscal Affairs Department), and Edgardo Ruggiero, a consultant. A cross-country analysis of education expenditure was also carried out by Ziba Farhadian of the Fiscal Affairs Department.
On the basis of these papers, this report was prepared by Mr. Heller, in collaboration with Richard Hemming and Mr. Kohnert of the Fiscal Affairs Department. In general, the results correspond to those in the individual country studies. In some cases, the earlier analyses were modified to ensure greater comparability in either the classification of particular expenditure categories or in the particular economic or demographic assumptions. While the study also attempts to incorporate the impact of the most recent policy measures, the paper reflects data available prior to June 1985.
In analyzing the results of this study several words of caution should be emphasized. First, there remain considerable differences across countries, both in terms of their definition of what is included in “government social expenditure” and in the relative importance of the private and public sectors in the provision and financing of social programs. For example, the private sector is extremely important in the financing of pensions in such countries as the United States, Canada, and Japan, whereas in others, such as the Federal Republic of Germany and France, the private sector’s role is limited. In the former countries, emphasis on the growth in the government’s social expenditure will significantly understate the overall resource allocational implications of the growth in the share of the elderly in the population. Consequently, more emphasis should be placed on the trends in expenditure for a country over time than differences in the ratio of expenditure to GDP across countries at any point in time.
Second, one should stress the inherent dangers in any projections extending 45 years into the future. The results are highly sensitive to the assumptions on the economic and demographic parameters and the fairly restrictive assumptions embodied in the specification of the projection model. In some areas of social expenditure, the projections are inherently more uncertain than in others. Projections that depend on forecasts of the birth rate (e.g., education) are much more uncertain than those depending on forecasts of the death rate. Similarly, the projections are particularly sensitive to the assumptions made on the likely growth of real pension benefits and on the real cost of medical and educational services. In specifying the model, it is also difficult to fully incorporate the inevitable linkages that will exist between a shrinking working-age population (such as in the Federal Republic of Germany) and the rate of labor force participation and unemployment. One also can expect that policy responses, if not already emerging, will take place to counter some of the trends implied in these projections.
Finally, it should be emphasized that the results presented in this study are projections not predictions. They cannot be seen as realistic forecasts of future developments that might be considered as probable. If social expenditures were to increase as suggested by the projections, this would threaten, if not put in jeopardy, the ability of the economy to cope with the problem of intergenerational equity in a context of steady economic growth. Thus, it would be quite surprising if the legislation pertaining to social expenditure were to remain unchanged until the year 2025. In fact, many countries have already initiated measures for adjustment in a medium-term framework, recognizing the long lead time necessary to affect expenditure in some sectors. In addition to such measures, it is to be expected that the need to develop long-term policies for strengthening productivity will gain increasing attention, not least with a view to securing the ability of social expenditure systems to cope with the challenge of an increasing burden on the active part of the population.
The authors have benefited from helpful comments by staff in the Fiscal Affairs Department and other departments of the Fund and by members of the Executive Board. However, the opinions expressed are those of the authors and do not necessarily represent the views of other staff members or of Executive Directors. Research assistance was provided by Tarja Papavassiliou. The authors are particularly indebted to the secretarial efforts of Anamaría Handford, Gail Hinds, Nita Merchant, and Marion Jacobson. The authors also wish to thank the editor, Ella Wright.