Minister Donohoe publishes Population Ageing and the Public Finances in Ireland Report

The scientific evidence is clear and unambiguous: people are living longer, while fewer babies are being born in Ireland; in short, Ireland’s population is ageing.
This natural process is set to accelerate over the medium- and longer-term.
While Ireland’s demographic structure is relatively favourable at present, shifting demographics in the coming decades will result in a slower pace of economic expansion and increased age-related public expenditure.
On the public finance implications, the evidence is also clear: slower revenue growth and rising expenditure will put significant pressure on the public finances.
There are currently around 4 persons of working age to support each person aged 65 and over. This number is expected to fall to just over 2 by 2050.
Age related expenditure is set to be €17 billion higher, in 2050, in today’s terms, than in 2019 (€22 billion by 2070).
Revenue increases will not be sufficient to fund all of these expenditure pressures.
Simulations show that, in a hypothetical scenario in which there were no further policy responses, the fiscal costs associated with population ageing would add around 20 percentage points to the debt-to-GNI* ratio by 2050. Beyond 2050, the fiscal position is expected to deteriorate significantly, with the debt-to-GNI* ratio reaching 180 per cent by 2070.
Policy reforms such as linking the State Pension Age to life expectancy could significantly reduce the cost burden.

The Minister for Finance, Paschal Donohoe has today (Friday) published a report entitled Population Ageing and the Public Finances in Ireland. This is the second publication by the Department on the impact of population ageing on the public finances, following the publication of the first report in September 2018.

The purpose of the analysis set out in the report is to highlight the likely economic and budgetary impacts of demographic change in Ireland over the coming decades. The analysis set out attempts inter alia to quantify the likely budgetary costs of population ageing in order to inform the appropriate policy response. While Ireland’s demographic structure is relatively favourable at present, a projected shift in the demographic composition of the Irish population means Ireland will have one of the most rapidly ageing populations in the EU over the coming decades. This will lead to a slower pace of economic growth and put significant pressure on the public finances.

The composition of Ireland’s population is set to change significantly over the coming decades. The old-age dependency ratio in Ireland – the number of retirees as a fraction of the number of workers – is set to nearly double over the next 30 years, from 24 per cent at present to 47 per cent by the middle of this century (53 per cent by 2070). To put it another way, there are currently around 4 persons of working age to support each person aged 65 and over; by 2050, the equivalent figure will be just over 2.

Such developments will see demand for demographically-sensitive public expenditure such as health and pensions grow, with significant costs for the State. Analysis suggests such expenditure will increase by approximately 8 percentage points of GNI* by the mid-part of the century (10 percentage points of GNI* by 2070). At the same time, as the pace of growth of the working age population slows, the rate of economic growth will moderate, as additional labour supply becomes more scarce. As a result, fiscal revenues will, evolve at a slower rate.

Significant structural reforms are, therefore, absolutely necessary to meet the fiscal costs associated with population ageing. Analysis in the report suggests that without structural reform, a large deficit will emerge and the debt ratio will move onto an unsustainable path, reaching 180 per cent of GNI* by 2070.

This analysis does not capture the significant deterioration in the public finances as a result of the Covid-19 pandemic. In these circumstances, risks to the projections presented in the document are, if anything, to the downside.

Further analysis contained in this report suggest reforms such as linking the State Pension Age to life expectancy could significantly reduce the cost burden.

While Ireland is fortunate to have the opportunity to undertake the necessary policy changes to ensure the sustainability of the public pension system before the budgetary implications of population ageing begin to impact, the window of opportunity is rapidly closing. Any delay in implementing the necessary policy interventions will inevitably raise the fiscal cost of population ageing.

Minister Donohoe said:

'Looking at the years ahead, the analysis of the impact of demographic change in Population Ageing and the Public Finances in Ireland, highlights the need for serious policy considerations in this area. In November 2020, the Government established the Commission on Pensions to examine the sustainability and eligibility issues with the State Pension and the Social Insurance Fund. As my Department’s report states, delaying policy decisions in this area has the potential to negatively impact the public finances in the years ahead, emphasising the importance of further progressing the Government’s work in this area’

Ends

Note to Editors

The report builds on work undertaken by the Department of Finance in conjunction with other Finance Ministries in the European Union, together with the European Commission through the Ageing Working Group (AWG) to update long-term age-related expenditure projections for inclusion in the 2021 Ageing Report, published in May 2021.
The European Commission’s Ageing Report is also published every three years.
The pension projections, used in this report, have been compiled by the Department of Finance, and have been endorsed by the European Commission and members of the AWG following an extensive peer review process. The projections are underpinned by long-term demographic projections produced by Eurostat and macroeconomic projections produced by the European Commission.
The demographic projections, which were published in early 2020, do not take account of the impact of the Covid-19 pandemic on demographic indicators, while the macroeconomic projections, which have a starting point from the European Commission’s Spring 2020 forecasts, assume a ‘V-shaped’ recovery entailing a sharp decline in output in 2020 followed by a return to strong economic growth in 2021, with no long-term structural impact. In other words, because the focus of the analysis is on long term issues, short-term fluctuations – even large fluctuations – do not affect the long-run trajectory.
Analysis on the impact of population ageing on the key fiscal ratios is based on the fiscal position as of end-2019. As such, this analysis does not take into account the significant deterioration in the public finances as a result of the Covid-19 pandemic.
For the purpose of the analysis in this document, the working age population is defined as the population aged 20-64 and the old-age population is defined as the population aged 65 and over. This in line with standard international definitions, although it is recognised inter alia that many individuals continue working beyond the age of 65.
In this report, age-related expenditure is defined as the sum of public expenditure on pensions, healthcare, long-term care and education.
In November 2020, the Government established the Commission on Pensions to examine the sustainability and eligibility issues with the State Pension and the Social Insurance Fund. The analysis and projections outlined in this report formed the basis of the Department of Finance’s submission to the Commission on Pensions. The Department’s submission is available at: https://www.gov.ie/en/publication/c199e-department-of-finance-submission-to-the-commission-on-pensions/ .
Figures based on data up to early-July 2021

Population Ageing and the Public Finances in Ireland

Population Ageing and the Public Finances in Ireland - Summary