01 Jun 2005

Alternative Scenarios for Health, Life Expectancy and Social Expenditure

The Influence of Living Longer in Better Health on Health Care and Pension Expenditures and Government Finances in the EU

Frank Pellikaan / Ed Westerhout

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This report investigates the effect of population ageing on public health- and long-term care expenditures, public pensions and government finances in EU countries in the projection period 2002-50. The authors specifically consider new insights about the development of demography and health on these projections. In this regard, the view has been expressed that people may live substantially longer in the future than estimated by current demographic projections and may spend part of these additional years in better health. Both developments have obvious implications for the correct projection of public expenditures and finances. To assess the effects of living longer in better health, four core scenarios are developed: a base case and scenarios for living longer, living in better health and living longer in better health.

The analysis also contains a number of new elements. First, it includes the costs incurred during the last years of life in the projections, which will be postponed by an increase in life expectancy. Hence, the calculations in the study correct for the overestimation of future health-care expenditure that arises when no account is made for mortality-related costs. Second, the cost of mortality is disaggregated into a health- and long-term care component, which differs by age. Third, tax revenues are incorporated into the projections for government finances. With this information, the analysis is able to project government finances in the future and assess whether government finances are sustainable under current social policy rules.