Annual age related Govt spending to rise by €16bn by 2050

Annual Government spending that is dependent on age will be €16bn higher by 2050 than it is today because of Ireland’s ageing population, new research has found.

The analysis, conducted by the Department of Finance, found by the middle of the decade, annual age-related expenditure will have risen from 22% of Modified Gross National Income or GNI* now, to 28%.

“Although a range of pensions and healthcare reforms have been implemented, these reforms will not be sufficient to offset the fiscal pressures associated with an ageing population,” the report concluded.

“The Future Ireland Fund is also being established to help alleviate some of these pressures but it is clear that further reforms are needed.”

“These could include reforms to the pension, healthcare and long-term care systems, restraint in non-age-related expenditure and/or tax increases.”

The report adds that given the scale of the challenge, the response is likely to need a combination of several policy changes.

“To put it another way, absent any additional reforms, the analysis in this document shows a significant financial burden being passed from the current to future generations,” it said.

While healthcare currently accounts for the biggest share of age-related spending here, in the medium to long-term, pension spending is projected to be the largest component in the future.

The increase in age-related expenditure between now and mid-century is set to be larger in Ireland than in any other EU member state.

The report noted that currently the pension system here involves the burden of financing the ageing population falling on the next generation.

It said that at the moment, there are four people of working age for each retiree, but this is set to fall to two workers per retiree by 2050.

The analysis said that while there are several options to reduce the burden on future taxpayers, there is no silver bullet given the scale of the challenge.

Instead, it concludes, reforms will be needed.

“The optimal approach is a better alignment of the state pension age with life expectancy – the current arrangements were designed at a time when life expectancy was much lower than it is today,” the report said.

“Increasing retirement savings is also part of the solution. For instance, higher pension contributions – including via auto-enrolment – will help partly fund future pension payments.”

“Higher levels of public saving have an important part to play: running budgetary surpluses and accumulating financial assets in the Future Ireland Fund will partly offset some of the burden on future tax-payers.”

“Finally, reforms that enhance the growth potential of the economy – boosting labour force participation rates, raising productivity levels – will help generate additional revenues.”

The Minister for Finance said the analysis published by his Department highlights the scale of the challenge an ageing population presents to the public finances.

“In Ireland today, we have a relatively favourable demographic profile, the median age of 39 is the second youngest in the EU and we have the highest share of the population age 19 years or under and the second lowest share of the population age 65 and over,” said Michael McGrath.

“However, this is set to change significantly over the coming decades. The ratio of the number of people of working age to those over the age of 65 puts the forthcoming changes in perspective.”

“Today this ratio stands at around 4 but by 2050 it will fall to just 2. Ireland’s pay-as-you-go pension system means that the burden of financing an ageing population will fall on the next generation.”