01 Jul 2005

Can we Afford to Live Longer in Better Health?

Ed Westerhout / Frank Pellikaan

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European Network of Economic Policy Research Institutes (ENEPRI) Research Report No. 10, 47 pages

This research report analyses the effects of ageing populations upon public finances. More specifically, it focuses on the implications of population ageing for acute health care, long-term care and public pension expenditures for 15 EU countries. It pays particular attention to three novel insights: i) a large proportion of health-care spending relates to time to mortality rather than to age; ii) life expectancy may increase much faster than current demographic projections suggest; and, iii) average health status may continue to improve in the future. It adopts a generational accounting model that incorporates health-care costs during the last years of life, decomposed into an acute health-care component and a long-term care component.

The projections show that gains in life expectancy increase age-related expenditure, while improved health has the opposite effect. Combined, these trends reduce health-care costs and increase pension expenditures. Their joint effect upon public finances is rather modest, however. Hence, the assessment of public finances in most EU-15 countries does not change: even if a more rapid increase in life expectancy combines with an improvement in health, current fiscal and social security institutions will be unsustainable.

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