The concept of Twin Budget Time Bombs reminds us that Government spending increases directly with the ageing of the population, not just with the payment of Social Security and other Government pensions but also due to the impact of health spending with people aged 65+ years.
Pension liabilities increase with longevity, and with the generosity of Government and employer pension programs, and can be predicted fairly accurately with actuarial studies. Old age pensions are usually “portable”, that is, they are paid by the country where the pensioner worked during his active life, regardless of where the pensioner and his family chooses to live after retirement.
A Portuguese pensioner, who may have worked 15 years in Portugal, 15 years in France, and 15 years in Germany, will have three small pension claims on each of those countries, which he will receive whether he lives the whole year in Portugal, or whether he chooses to spend four months visiting his grand-children in France. Similarly, the British or Dutch pensioners who choose to enjoy the fair Portuguese weather in Algarve continue to receive their home country pensions.
The Government health spending with pensioners is rather more complex. First, total health spending increases quasi-progressively with longevity. Estimates show that annual health spending with 80-year-old pensioners can reach nearly three or four times the annual health spending of active 50-year-old workers. As the annual health spending increases progressively with age and longevity, a growing proportion is paid by the Government, either through insurance and reimbursement programs like Medicare, or by exempting older pensioners and those with chronic diseases from making the out-of-pocket co-payments (isenção de taxas moderadoras e de comparticipações do utente).
Most countries have unfunded acturial pension liabilities from the Pay-as-You-Go social security pension systems. Only fortunate and prudent countries like oil-rich Norway have sizable Government pension funds. From the Government's perspective, pensioner health liabilities are even more difficult to estimate and to provision.
From the pensioners perspective, an active worker accumulates two types of “pensioner rights” for every year worked:
(1) The right to a pension-in-cash, an annuity usually adjusted by inflation, from each of the countries where he worked at least a minimum number of years (5, 10 or 15 years). Usually, workers with shorter lengths of services may choose to receive the pension and Social Security contributions paid by them and their employers as a lump-sum. For mobile pensioners, these "portable pensions" imply that the cost of this “pension in cash” falls on the countries where the pensioner worked, proportionately to the length of service in each country. See the EUlisses arrangements for portable Social Securities schemes covering EU members, plus Iceland, Liechtenstein, Norway and Switzerland.
(2) The right to nearly-free health services in old age, which can be seen to represent a “pension-in-kind”, as the Government reimburses or supports nearly all of the pensioners’ health costs. These pensioner health benefits in kind are much less portable, and the burden of these “health related costs with pensioners” fall first and foremost on the country of the residence, which may or may not be able to obtain any reimbursement from the countries where the pensioner worked.
Thus the timely question of who pays the health costs of the modern mobile European pensioners, your Government health budget or mine?
The budget impact of demographic changes can be enormous. Bu in a country like the USA, both the Social Security and Medicare health coverage programs are federal, so the federal budget continues to pay both pensions and health care for the Michigan “snow birds”, whether or not they choose to move to Florida.
In Europe, the aptly named Club Med countries (Greece, Spain, Italy, but also Portugal and France) attract both returning citizens and foreign pensioners. These older residents easily bring their pensioner rights when it comes to the “cash pension”, but not necessarily the rights to the “health pension”, thus may become a burden to the local SNS/NHS and to Government health budgets. In general, cash pensions are paid proportionately by the countries-of-work, pensioners’ health spending is paid mostly by the countries-of-residence in old age.
But this asymmetric treatment of pensioner-related Government expenditures needs to be corrected urgently, if the southern European countries are to continue to pursue their strategic vocations as the “Floridas of Europe”, even as they struggle to invert the unsustainable health spending trends which significantly aggravate their critical Government deficit and debt problems.
M.A.S.
Related artices:
TRESS Think Tank report on health care for EU pensioners,
http://www.tress-network.org/TRESSNEW/
Is there a public debt problem in France? http://blog-pfm.imf.org/pfmblog/2009/12/is-there-a-public-debt-problem-in-france.html
UK Dependency time-bomb http://www.guardian.co.uk/commentisfree/2009/feb/04/ageing-population-care
SOCIAL AND ECONOMIC DIMENSIONS OF AN AGING POPULATION http://socserv.mcmaster.ca/sedap/p/sedap12.PDF
How to account for Europe's debt
http://blog-pfm.imf.org/pfmblog/2010/02/europes-misleading-debt-figures.html
