Population ageing, taxation, pensions and health costs, CHERE Working Paper 2007/10

Secondly, declining fertility and population ageing need not imply an increase in the
resource costs associated with an increasing TDR. If the cost to the economy of a
child is greater than that of a retiree, the overall costs of dependency can be falling
even when the TDR is constant or rising, because of the changes in its composition. In
developed economies children are very costly. All need full time care for at least some
years and, depending on training and education choices, some may not enter the
labour market for at least two decades.³ On the other hand it might be argued that the
health care costs associated with ageing and greater longevity make retirees more
costly than children. Recent research in health economics however has shown that
neither the direct nor indirect effects of ageing can account for much of the sustained
rise in medical expenditure in recent decades. A number of studies argue that the
growth rates of health spending are driven primarily by rising per capita income.⁴
Others focus on the contribution of improvements in medical technology.⁵ These take
the form of innovations that increase the number and types of health problems capable
of successful treatment, and so have the effect of increasing the demand for and costs
of medical care. However, it is something of a paradox that technological innovations
which offer the possibility of curing sickness and saving lives should be regarded as a
problematic rather than beneficial development.⁶ What may make them so is a failure
of policy in the health care sector to solve the problem of structuring the health
insurance system appropriately.

Finally, and most fundamentally, the question arises of what happens to the resources
released by the falling fertility rate. Dramatizing the gap (in terms of absolute values)
between the ADR and CDR from the present time to 2047 is open to the objection that
it distracts attention from the resource implications of the reverse relationship that
held from 1961 to the present time. Given the evidence that, on average, a child is

³ This point is highlighted by Barro and Becker (1989). For an analysis using Australian data, see Apps
and Rees (2002).

⁴ See Hall and Jones (2007), Cutler and McClellan (2001) and Cutler et al. (2006).

⁵ See Newhouse (1992). The invention of new technologies may however be endogenous, as argued in
Hall and Jones (2007).

⁶ The view contrasts with the modelling of health expenditure as investment in human capital. Barro
(1996) argues that medical advances have made an important contribution to sustaining a long-term
positive growth rate. See also Nordhaus (2003) and Becker et al (2005) who conclude that increases in
longevity have contributed almost as much to welfare as increases in non-health consumption in the US
and worldwide.

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