The analysis of long-term sustainability of public finance is based on the long-term projections of the population of the Republic of Croatia applying a scenario with medium
fertility and medium migration11 and baseline macroeconomic assumptions of future
movements, which, in comparison with the previous PEP, foresee lower real GDP growth rates in the initial period, faster reduction of the unemployment rate and the new fiscal projections for the period until 2011.
Projections have been made under the assumption that in the period under review there would be no significant changes in application of existing legislation which regulate public pension and health expenditures and that the manner of calculating and collecting social security contributions would remain unchanged. However, it should be emphasised that other factors have been considered in the projections, such as expected effects of equalisation of “new” and “old” pensioners, increase in premature old-age and disability pensions, the lowest pension levels as well as new amendments to regulations governing health care insurance, which introduce not only the changes in the methods of financing health services but also changes in
financing primary health care, hospital system and sick-leave.12 All other public revenues,
with the exception of social security contributions, as a share of GDP will stay the same, and all other expenditures, except for pension, health and interest expenditures, will retain their current share in GDP. It is furthermore important to emphasise that as of 2009 health insurance contributions will include supplementary 3% from pensions of those pensioners, whose pension is higher than an average salary.
As regards participation rates, it is assumed that behaviour patterns of individual economic agents will stay unchanged, with participation rates according to the characteristic age groups (15-24, 25-49, and 50-64) and gender remaining the same. On such assumption, it can be seen that after the year 2010 the overall participation rate will fall as a result of a growing share of the population in older age groups.
Unemployment rate is expected to fall until 2012 to reach the level of 7%, which is considered to be the structural unemployment rate, and it will remain unchanged until 2050. The growth of productivity per employee is derived from the assumptions on real GDP growth and changes in the number of employed people, which is determined by long-term demographic projections and assumed participation rates.
On the basis of the assumptions described above, a moderate decrease in revenues from pension insurance contributions is estimated: from 6.9% of GDP in 2005 to 6.3% of GDP in 2015, stabilising in subsequent years. Such decline can be explained by a gradual increase in the share of employees claiming their pension insurance under both mandatory pillars of pension insurance, with a proportion of their contributions of 15% of their gross salary paid into the first and 5% into the second pillar of pension insurance. Older employees, on the other hand, are largely covered only by the first pillar of pension insurance, with total amount of their contributions (20% of the calculation basis) being paid into the public fund. As older employees retire, the number of employees who pay only a portion of their total contribution
11 The same long-term projections of population were used in drawing up the preceding two PEPs, which the
Central Bureau of Statistics published in 2006.
(15% of the calculation basis) into the public fund will grow. The share of revenues from pension contributions is expected to stabilise at the level of 6.3% of GDP after 2015, as a result of the assumption that real growth of wage per employee is equal to labour productivity and of the contribution rate definition as a constant portion of wages, where higher first-pillar contributions for older employees are taken into account for the purpose of pension insurance contributions.
The projection results show a significant decrease in public pension expenditures 13 from
9.9% of GDP in 2005 to 7.0% of GDP in 2050, with the pensions and permanent rights of war veterans being excluded from the analysis. The share of pension expenditures in GDP is slightly higher than projected in the previous PEP, which mostly results from lower real GDP growth rates. Although the number of the aging population is increasing, the pension reform and the decrease of relative pensions paid entirely from the first pillar give rise to long-term projections of the decrease of the portion of public pension expenditures in GDP. This result is certain to high extent if the current parameters of pension calculation are maintained, i.e. wage and price indexation of pensions. It should also be noted that the projections take into account a gradual decrease in the share of those pensioners whose pensions are paid entirely from the first pillar, and the growing share of those who are paid the basic part of their pensions from the first pillar and the other part from the second, which is going to be paid from individual capitalised pension funds.
An increase of public expenditures in the health care system is projected from 6.2% of GDP in 2005 to 13.7% of GDP in 2050. Such growth is a result of the estimated pure effect of aging population and rising health expenditures in line with productivity growth as well as on the basis of expected effect of the new health care reform and growing development costs for the health sector, especially with respect to expenditures for medicines and new technologies continually developed in the field of medicine. The expenditure growth arising from the pure aging effect is a result of a growing share of the population in older age groups who absorb relatively large amounts of health expenditures. In addition to the effect of aging population, it is also assumed that health expenditures for each age and gender group will grow in line with GDP per employee, which means that they will only follow the current trends in economy and society as a whole. However, since salaries of medical personnel are one of the major expenditure items of the health care system, it can be assumed that health expenditures will grow at the same rate as compensation of medical personnel, which in turn is expected to grow at the same rate as average wages in the economy in general, which are in this case equal to the labour productivity growth, i.e. GDP per employee.
In terms of health expenditures, interest should also be mentioned, which is expected to fall from the level of 2.2% of GDP in 2005 to 1.2% of GDP in 2050. The described movements of respective revenue and expenditure categories will determine the trends of total revenues and expenditures in the reviewed period to a large extent.
Figure 9: Aging of Population, Health and Pension Expenditures 0 5 10 15 20 25 30 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 % o f to ta l p o p u la ti o n 6 8 10 12 14 16 18 20 % o f G D P
Population older than 65 (left) Health Expenditures (right) Pension Expenditures (right) Source: MF