Demographic changes in Latin America: the good, the bad and ...

Demographic changes in Latin America: the good, the bad and ...

The paper develops a simple, integrated methodology to project public pension cash flows and healthcare spending over the long term. The authors illustrate its features by applying it to the LAC5 (Argentina, Brazil, Chile, Colombia and Mexico), where public spending pressures are expected to increase significantly over 2015-50 due to demographic trends and rising healthcare costs. The paper simulates alternative pension reforms, including the transition from a defined benefit to a defined contribution pension system and the fiscal burden of a minimum guaranteed pension under the latter. We also analyse public healthcare outlays in the LAC5, which is likewise expected to increase significantly over 2015-50 due to ageing and the so-called excess cost growth factor of healthcare services, showing that curbing the evolution of the latter (e.g., through enhanced competition in the healthcare sector) could aid in containing spending pressures. Despite its simplicity, the methodology yields projections that compare well with other approaches. It therefore provides a good benchmark for assessing alternative reform scenarios, particularly in data-constrained countries.

All in all, to tackle the negative impact of societies’ ageing on these economies’ fiscal balance, some reforms appear necessary. Argentina and Brazil might consider an increase in the retirement age and a reduction in the indexation of benefits, which appear to be very effective reforms to address the rising level of pension spending in the authors  estimations, or a shift to a Defined Contribution (DC) system (either total or partial), following other Latin-American examples. More generally, governments will also have to deal with healthcare expenditure pressures associated with ageing and the rapid growth in healthcare costs stemming from technological innovation (as reflected in the so-called excess cost growth factor), requiring careful but expedient evaluation of alternative reform options.