By Frank Pellikaan & Ed Westerhout
Rising longevity, low fertility and declining disability have serious implications for public finances. Although alternative assumptions on longevity and disability may alleviate or increase the pressure on public finances, public finances will become unsustainable if policy reforms fail to occur.
The world is on the eve of huge demographic changes. Worldwide, fertility rates are, from a historical perspective, very low. Mortality rates continue to decline. These changes will have serious implications for government budgets. As pension and health care systems are often organized on a pay-as-you-go basis, they are vulnerable to structural demographic change. In many cases, in order to avoid losing control over government finances, these systems will therefore have to be reformed; this may imply an increase of contributions, a lowering of benefits, or a combination of both. Obviously, any of these reforms may affect the economy and the balance between generations.
This contribution assesses the relevance of these changes and their likely effects. It starts with a discussion of demographic and also epidemiological changes. Next, it describes the research we did on the likely fiscal and macroeconomic implications of these changes. Furthermore, we dig into the policy implications of our analysis.