Ratings agency Standard & Poor’s (S&P) warned it may downgrade “a number of highly rated” Group of 20 countries from 2015 if their governments fail to enact reforms to curb rising healthcare spending and other costs related to ageing populations.
Developed nations in Europe, as well as Japan and the United States, are likely to suffer the largest deterioration in their public finances in the next four decades as more elderly strain social safety nets, S&P said in a report.
“Steadily rising healthcare spending will pull heavily on public purse strings in the coming decades,” S&P analyst Marko Mrsnik wrote in the report.
“If governments do not change their social protection systems, they will likely become unsustainable.”
If no reforms are adopted, healthcare-related credit downgrades would likely start within three years, eventually leading to an increase in the number of junk-rated countries as of 2020, the study showed.
Healthcare will likely be the fastest-growing expenditure for developed countries, which already have high social protections and rapidly worsening demographic profiles.
For example, Japan’s population is expected to decline by 30 per cent by 2060, with two out of every five people turning 65 or older, according to official data.
Japan’s welfare spending, which includes pensions and health, is expected to reach nearly 108 trillion yen ($1.4 trillion) in the current fiscal year, around 22 per cent of GDP.
By 2025/26, spending is forecast to hit 141 trillion yen.
“Over time it must be a real problem for Japan,” said Adrian Foster, head of financial markets research at Rabobank Inter-national in Hong Kong. “There’s a call for authorities to push through fiscal reform. When you look at the government they seem to lack any real ability to respond to it.”
Falling fertility rates and a rapidly ageing population are problems facing most of Japan’s richer neighbours too. South Korea, Singapore and Taiwan have flirted with policies aimed at boosting marriage and childbirth, but with limited success.
South Korea is the most dramatic example of the trend. In the past 40 years, as its economy has boomed, it has gone from having one of the highest birth rates among developed countries to one of the lowest.
By 2050, almost 40 per cent of the population is likely to be over the age of 65.
A report released by Seoul’s Ministry of Strategy and Finance last July warned the national debt would jump to 138 per cent of gross domestic product (GDP) in 2050 as pension and health insurance costs soar, from around 34 per cent last year.
Emerging market countries, especially in Southeast Asia, have a little more room to maneuver due to more favorable demographic dynamics and economic growth, S&P said.
But even in that region the picture is changing — in Thailand, for example, the proportion of the population aged over 60 is projected to rise to nearly a quarter by 2030 from around 13 per cent now.
Asia, however, may suffer less from this demographic shift than Western nations because, by and large, the social welfare net in the region is not as extensive, Rabobank’s Foster said.
“The fact that most of Asia doesn't have the entitlement society that the West has generated means the demographic timebomb is not going to be as significant,” he added.
Demographics will not be the only factor driving up health-care costs. More expensive new technologies and broader treatment coverage may account for as much as two-thirds of the projected increase in healthcare spending, according to a study by the International Monetary Fund cited by S&P.
Pension system reforms alone would not be enough for G20 countries, S&P said in the report.
If legislation were enacted to contain future increases in age-related spending without also tackling healthcare spending, the results would be only slightly less severe than under a no-policy-change scenario.
“The probable increase in projected healthcare costs alone is so substantial that the impact of these reform efforts would not be enough to meaningfully reverse the resulting credit deterioration,” S&P said.
Australia, which has more favourable demographics than most developed nations because it can easily attract skilled migrants, illustrates the problem.
A 2010 government survey projected population ageing would push total state spending from 22.4 per cent of GDP in 2015/16 to 27.1 per cent by 2049/50 — with health accounting for two-thirds of that increase. As a result, spending would exceed revenue by 2.75 per cent of GDP in 40 years.
S&P said it was not too late for G20 countries to tackle the problem, but reforms to contain age-related spending needed be coupled with efforts to balance budgets by 2016, which would be enough to offset rising healthcare costs by 2050.
"The results of this scenario point to overall stabilization of our hypothetical sovereign ratings," S&P said, noting, however, that the number of ratings in the lower investment-grade categories would still increase.
($1 = 76.3900 Japanese yen)
(Additional reporting by Jonathan Hopfner in Seoul, Wayne Cole in Sydney and Orathai Sriring in Bangkok; Editing by Miral Fahmy and Alex Richardson)