Sick Health Systems

In Japan there are now over 25,000 centenarians; by mid-century, they will exceed 1 million. Over half of the US's 70-million baby-boomers will eventually surpass their 85th birthday. The world, in particular industrialised countries, is greying fast. Underpinning this development are better education and nourishment and, significantly, advances in medicine.

All unmitigated goods, one might say, but watch out: this all comes with a price tag. And, in our welfare societies, the bill is largely footed by the younger generations in active employment. In other words, there is an inter-generational transfer of financial resources.

Herein lies the crux of the matter: low birth rates mean fewer people paying for ever more expensive medical products to keep ever larger legions of grey-heads in good health, for an ever increasing number of years. Much has been said about the effect of this on pensions, but the future of health care seems, if anything, even more precarious. Here, so-called double ageing—steadily decreasing birth rates coupled with ever increasing life spans—is compounded by reliance on medical-technical progress that feeds on expensive product innovation rather than process-improving advances. The figures in this "business plan" surely do not add up, and a looming financial meltdown in the health-care system is all but assured.

But how exactly to take account of this? How to know how financially unviable, and how soon, the system will become? Well, use a generational accounting method, as suggested by CESifo Network researcher Bernd Raffelhüschen and his colleagues Christian Hagist, Norbert Klusen and Andreas Plate in their latest CESifo Working Paper. Take account of the finances of the generations down the road when you do your calculations, and set your budget accordingly.

That's exactly what they did for Germany, France, Switzerland and the USA. The picture resulting from their analysis is not a rosy one. If you consider the demographic effect alone, a major problem looms for all analysed countries except Switzerland. But when you consider the health-care cost increase factor, the deficit explodes to 150% of GDP for Switzerland, 210% for Germany, 250% for France, and a whopping 840% for the USA.

C. Hagist, N. Klusen, A. Plate und B. Raffelhüschen: Social Health Insurance - The Major Driver of Unsustainable Fiscal Policy, CESifo Working Paper No.1574

• Other CESifo Working Papers dealing with health care
• Other CESifo Working Papers by Bernd Raffelhüschen
• CESifo Working Papers published in the past three months