Lesson 9 — Population Ageing & Old-Age Income Security & Healthcare 1 Fiscal Implications

Poverty-line method definition

Measures elderly adequacy by comparing income to ~66–67% of median household income.

Poverty-line method pros

Simple and objective to apply.

Poverty-line method cons

Relative measure; may overstate inadequacy in rich or unequal countries.

Elderly income vs GDP & CPI measure

Compares elderly income growth to real GDP and inflation to assess if elderly fall behind.

Elderly income ratio definition

Average elderly household income divided by average income of total population.

Meaning of falling elderly income ratio

Elderly are falling behind working-age population incomes.

Replacement rate definition

Post-retirement income divided by pre-retirement income.

Replacement rate adequacy benchmark

Around 70% replacement is considered adequate.

Replacement rate limitation

Cannot compare across households with different preferences, dependents, and living costs.

Why traditional support weakened

Industrialisation, mobility, and low fertility reduced family support reliability.

PAYG pension definition

Current workers finance benefits for current retirees.

PAYG sustainability issue

Ageing reduces workers per retiree, making PAYG fiscally unsustainable.

Self-funded pension definition

Individual accounts where benefits depend on personal contributions.

Self-funded system issues

Low earners save too little; transition for older cohorts extremely costly.

Pension reform: coverage

Goal of expanding pension system coverage to near 100% participation.

Pension reform: contributions

Raise contribution rates and restrict early withdrawals.

Pension reform: early retirement

Remove incentives that encourage early labour force exit.

Pension reform: retirement age

Increase legal pension eligibility age gradually.

Pension reform: multi-pillar systems

Shift toward mixed PAYG and self-funded pension structures.

Ageing & health spending common view

Assumption that ageing will cause explosive fiscal increases in healthcare spending.

Why ageing-health link unclear

Correlation exists but causality unclear: spending may increase longevity.

Key driver of health spending: technology

New diagnostics and treatments increase health costs more than ageing does.

Key driver: income & education

Higher demand for preventive and lifestyle-related care raises costs.

Key driver: provider incentives

Supplier-induced demand and high insurance coverage inflate utilisation.

Health spending conclusion

Non-demographic factors drive most of healthcare cost growth; ageing matters but less.

Cost containment: private responsibility

Shift part of costs to individuals/families with targeted support.

Cost containment: productivity

Boost economic and system productivity to keep healthcare affordable.

Cost containment: regulation

Government controls prices, capacity, and technology diffusion.

Cost containment: gatekeeping

Require GP referral to limit unnecessary specialist/hospital visits.

Cost containment: prevention

Focus on disease prevention and chronic management to reduce acute care costs.

Cost containment: means-testing

Target subsidies to needy households to reduce wasteful spending.

Fiscal challenge of ageing

More elderly + fewer workers → shrinking tax base and rising beneficiary load.

Budgetary adjustment

Cut or slow non-age-related spending (e.g., defence, arts, recreation).

Behavioural adjustment

Encourage longer working lives and higher older-age LFPR.

Household adjustment

Promote elderly self-reliance and shift consumption toward essential health needs.

Asian Tigers elderly share by 2050

East Asia about 40%, China ~31%, Southeast Asia 22–28%.

Pension outlays East Asia

Coverage expansion raises pension spending from ~5.3% to ~10% of GDP.

Healthcare spending: ageing only

Rises from about 2.5% (1995) to ~3.3% (2025) under demographic effects.

Healthcare spending with tech etc.

Increases further to about 4.3% (2025) with non-demographic factors.

Education spending under ageing

Lower fertility reduces youth numbers but higher tertiary enrolment raises costs.

Overall fiscal burden finding

Under realistic assumptions fiscal pressure more than doubles due to ageing + modernisation.