Spending on health and pensions to pose ‘greatest fiscal challenges’

Spending on health and pension is likely to pose the greatest challenge to fiscal sustainability in advanced economies in the coming decades, according to the Economic and Social Research Institute (ESRI).

In a report published yesterday, the economic think-tank said public pension spending among OECD countries, including Ireland, was projected to increase from 8.4 per cent of GDP in 2010 to 11.4 per cent in 2050.

Spending on health, which is already one of the largest public spending items, is expected double from an OECD average of 1-1.5 per cent to 2-3 per cent of GDP during the same period.

The twin effects of these budgetary pressures, combined with a post-financial crisis slowdown in growth, pose serious threats to fiscal sustainability.

One possible way of addressing long-term spending pressures in the pension system was to delay the retirement age and impose increased penalties on early retirement, the report said.

While Ireland’s recent fiscal programme made increasing the retirement age a key priority, there was potential for further reform pensions.

Citing a recent OECD review of the Irish pensions industry, it said the Government should consider a structural change in the State pension scheme.

This would involve moving to either a universal basic pension or a means-tested basic pension - complemented with either mandatory or auto-enrolment with opt-out in private pension schemes.

Reforms to health and long-term care spending could also ease some of the mounting budgetary pressures in the Irish economy, the report said.

"In Ireland, health reforms are necessary to improve access to primary care and ensure that the financing system is based on incentives that are aligned to fairness and efficiency," economist Rossana Merola, one of the report's authors, said.