Bernard Hickey: Sickly storm brews over healthcare, pension costs

Public healthcare costs are projected to rise from 6.9 per cent of GDP in 2010 to 11.1 per cent of GDP in 2060. Photo / File

What will our health system look like in 2060 if we change none of the entitlements or the way they're paid for?

Will we be able to afford "free" public hospital care? Will we be able to subsidise doctor's visits and prescription drugs? Will we increase taxes to keep services? Or will we limit the availability of less "discretionary" healthcare and encourage people to take out more insurance?

These are questions raised by a disturbing new set of forecasts from our policymakers at seminars held in Wellington by the Treasury and Victoria University, to debate New Zealand's long-term fiscal outlook. An independent panel is examining Treasury's long-term fiscal model, given the lowering of New Zealand's economic growth potential. The results are unsettling.

With the current settings for taxes and entitlements, the ageing of our population and the higher pension and healthcare costs that generates, our budget deficit would triple to 11.8 per cent of gross domestic product by 2060, and blow out public debt to 170 per cent of GDP. Greek public debt is 165 per cent of GDP.

The scale of the deleveraging sweeping the developed world and the effects of ageing populations are pressing down on growth rates. We face decades of slow growth.

The main drivers are rising pension and healthcare costs as the percentage of the working-age population over 65 almost doubles to more than 30 per cent by 2060. The real surge in the number of retired people happens over the next 30 years, as the baby boomers born between 1946-64 retire.

By 2060 there will be four pensioners for every nine younger adults (aged 18-65). Two taxpayers will have to pay for the pension and healthcare costs of one pensioner.

We are belatedly having the debate about pension costs but we have yet to have one about healthcare. Public healthcare costs are projected to rise from 6.9 per cent of GDP in 2010 to 11.1 per cent of GDP in 2060. Pension costs are forecast to almost double to 8 per cent of GDP. Once costs for other beneficiaries and interest costs are paid, there will be no money left for education, police or the justice system.

So what choices are voters going to consider? Means-testing of public healthcare? Increased tax rates? Should we invest even more in primary healthcare to avoid high secondary healthcare costs? Should our health system embark on a huge efficiency drive, possibly involving offshore or private outsourcing?

These questions are deeply uncomfortable ones, but they cannot be ignored for long.