Standard & Poor’s Ratings Services’ hypothetical scenario analysis, which covers the period from 2010-2050, finds that governments’ fiscal burdens will increase significantly over the coming decade, with the highest deterioration in public finances likely to occur in Europe and other advanced G20 economies, such as Japan and the US.
These countries’ high existing social protections and rapidly worsening demographic profiles leave them with little room to maneuver in managing their health care spending compared with emerging economies, where demographics and economic growth are still slightly more favorable.
“Population aging will lead to profound changes in economic growth prospects for countries around the world as governments work to build budgets to face ever greater age-related spending needs,” said Standard & Poor’s credit analyst Marko Mrsnik.
“Governments’ main policy actions so far have consisted of increasing pension outlays; however, we believe that getting a firmer grip on rising health care spending is at least equally important.”
While pensions look set to remain the biggest expense item in the budgets of advanced G20 economies, health care will likely be the fastest growing expenditure in the coming decades.
Without policy changes, health care spending in a number of advanced economies, such as Germany, the US, the UK, France and Japan will increase by around 6  percent of GDP by 2050. We project that health care costs for a typical advanced economy will stand at 11.1 percent of GDP by 2050, up from 6.3 percent of GDP in 2010.
The projected growth in health care costs as a percentage of the total increase in age-related spending in the coming decades illustrates the challenging upward trend in health care spending. It represents the majority of the total increase in age-related spending in more than half of the G20 advanced economies. It exceeds 60 percent in a large number of countries, including Germany, the UK, the US, France, Japan, Canada, Italy, and others. Nondemographic factors such as the costs of evolving technology and treatment coverage are the main drivers of future rises in health care spending.
“This is yet another indicator that, in general, policymakers have focused more on reforming other areas of age-related spending--particularly pensions--to improve the long-term sustainability of social protection systems, while the health-care related challenges have not yet been appropriately addressed,” Mrsnik added.
“There are benefits to continuous and early implementation of health care reforms. If governments change the trajectory of public health care outlays soon enough, it could help spread the burden of adjustment across generations of taxpayers and voters. As the demographic profile of electorates ages further in the coming years, the political climate for reforming pension and health care spending may become even more difficult than it is now.”